The directive 2017 / 1132 / EU was issued to reform and regulate the financial markets inside the
European Union. This directive treats many different topics regarding European financial markets
including share buybacks from companies (when a company buys its outstanding shares to
reduce the number of shares available on the open market). In article 60 of the 2017 / 1132 /
EU, the commission enforces strict rules that limit the ability of a company to repurchase its shares;
the transaction must be authorized by a meeting held by the shareholders, the action taken must not
have as effect of reducing net assets, only fully paid-up shares can be acquired, the nominal value of
the shares repurchased can’t surpass a limit imposed by the Member States, which cannot be under 10
%. In case the European Commission would want to modify or delete limitations regarding share
buybacks, this article, number 60 of the directive 2017 / 1132 / EU, is the one that the commission
should amend.
The European Commission enabled this article that regulates European financial markets and in the
specific that imposed a direct limit on share buybacks to guarantee transparency inside of the markets,
the protection of investors and the correct functioning of the markets.
The limits imposed by the European Union are very useful in regulating the use of share buybacks.
They obligate companies intended to repurchase shares to disclose complete and precisely information
about the action they are committing, this information has to include the reason for the repurchase, the
amounts of shares involved in the transaction and the costs, the impact that it will have on his
finances, in addition, the company should also inform its shareholders and the public on the status of
the share buyback operation. Removing these limitations would mean less transparency inside of the
markets since all the information regarding this type of movement wouldn’t be disclosed to the
commission, shareholders and the public. Transparency is an essential factor in an economy since it
permits more fairness and integrity in a market while allowing healthy competition, surely the
removal of the regulation wouldn’t have a positive impact from this point of view. The limitations
guarantee better transparency, especially to shareholders. In fact, for an operation that involves share
buybacks to be legal, it requires the approbation and the agreements of the shareholders obtained by a
meeting. The need for their approbation secures them a say in the matter, this can be helpful in cases
where the repurchase of shares can bring important risks and can affect the value of shares in the long
term. By removing the limitations, big damage would be caused to investors, there would be less
transparency between them and the company as already said and there would be no kind of protection
in their regards since the company could act by following different interests than the shareholders one.
A company could also act against its interest if the shareholder's approbation wouldn't be needed; an
executive who in this case would have total decisional power on stock buybacks could in fact act
following only his interest. In many cases, the latter are paid by the company not only by a salary but
also in stocks, so that the executives will be more committed to the best interests of the company
having a direct financial stake in their value. This reasoning wouldn’t work if the regulations had been
taken off, in fact, even if this causes problems in the long term for the business, the executives could
decide to spend a big amount of the company’s capital on repurchasing shares so that the shares that
they own increase in value, making the only reason of buyback their profit. The removal of the
necessity of obtaining the shareholder's approbation and the obligation to disclose information could
also bring benefits. When businesses have to respect these obligations, they always run into
administrative burdens. Obtaining the investor's approval takes very much time and can cause delays
in executing buybacks that by affecting the timing of the operation affects also its effectiveness. In
addition to what is said, the announcement of a company where its intentions of repurchasing shares
are disclosed may affect its stock prices even before the operation itself and the length of this process
could even make the drop in the prices even bigger.
Another limit imposed by the European Commission when talking about share buybacks is the one
that requires member states to impose a limit on the repurchased shares that can’t be lower than 10%
of the subscribed capital. The removal of this limit would cause many effects that can be negative for
the shareholders and the market in which the company is operating. A company without a limit set
could overuse share buybacks resulting in an excessive operation that might deplete their capital and
hinder their ability to invest in growth and innovation. From the point of view of the shareholders, an
operation of this type would put in danger their equity since it would potentially dilute their
ownership. Companies could also repurchase excessively to artificially inflate the price of their stocks
causing the latter not to reflect their real value.
The removal of these limits would cause many changes within the European economy that would
certainly not follow its principles. If the aim is to promote sustainable development and at the same
time a balanced and highly competitive economy, these limits are indeed necessary. In the case of
their removal, many situations that would go against those principles would occur. If the requirement
for a company to obtain shareholder’s consent to initiate a buyback transaction were removed, those
in charge could benefit at the expense of the company and its development. This happened, for
example, when Warren Buffet was the director of 'Coca-Cola' while he owned a lot of its shares. He
admitted in an interview with 'CNBC' that during this period ‘Coca Coca-Cola’ continued to buy back
shares solely for his and other shareholder's personal profit even though this went against the
long-term interests of the company. If the 10% threshold were removed companies would overuse this
operation investing a huge part of their capital in it and as a consequence removing large sums that
should have been devoted to development and innovation. A great example of this case is Chevron, a
U.S. oil company, that back on Sept 14, 2021, announced to spend 10 billion USD in green energy by
2028. A year later, on Jan 25, 2023, management turned around and announced that they would spend
75 billion USD on stock buybacks boosting the dividends.
The commission should not amend existing regulations if it wants to pursue the goals that have been
set such as transparency in markets, fair competitiveness, sustainable social progress, and balanced
economic growth even if this would be at the expense of the profits of some stakeholders. Indeed,
examples such as those preempted, which go against the goals of the Commission, would take place if
these regulations were removed or modified.