A corporate issuer of outstanding debt securities may from time to time seek to purchase the relevant debt securities in the open market or through privately negotiated transactions to reduce their principal amount outstanding. This is a popular liability management method, particularly when the relevant securities are trading in the open market at a price below the nominal value of their principal amount.
Repurchase of those securities at the then market price would allow the issuer to reduce its indebtedness at lower costs than it would otherwise incur through a redemption of the relevant securities at their par value.
Recently the trading value of debt securities issued by many corporate issuers within the region, especially privately-owned entities, has significantly declined as a result of the financial market shock caused by the COVID-19 pandemic. This article is intended to provide a general introduction to the legal considerations that may be relevant for corporate issuers in planning a repurchase of non-convertible bonds outside the United States. However, each case is different. Issuers should consult with counsel, investment bankers and other professional advisers to carry out a careful analysis of the factors relating to the repurchase, such as applicable securities laws, tax regulations and potential litigation risks, before commencing any repurchase.
U.S. federal securities regulations
US federal securities regulations have very broad reach, which may apply to transactions conducted outside the territory of the United States. Purchases and sales of debt securities could be subject to the disclosure and anti-fraud rules of Rule 10b-5 under the United States Securities Exchange Act of 1934, or the Exchange Act, if a strong connection with the markets in the United States is presented in the transaction, such as the subject securities being listed on a U.S. national securities exchange, or the seller being located in the United States, or the U.S. telecommunication network being used in the course of the transaction.
While this rule has many applications, its most important function is to prohibit an insider, such as an officer, a director, a majority shareholder, or the issuer of securities, from purchasing the securities from existing holders of such securities without disclosing material non-public information, or MNPI, regarding the issuer and the subject securities.
Material non-public information
MNPI generally includes those material facts affecting the value of the securities known to the purchaser of such securities by virtue of his or her insider position but not known to the existing holders of the securities and the general public, which information would have affected the judgment of the sellers, such as unreleased positive financial results, upcoming known announcements by credit rating agencies or an unannounced material transaction. No matter whether the repurchases are conducted in the open market or through one-on-one privately negotiated transactions, issuers and other potential purchasers should carefully consider if they are in possession of any MNPI before the repurchase.
We would recommend an issuer to employ the following measures to minimize the risk of violating the rule:
- Avoid any repurchase within a specified period before periodical financial result or the announcement regarding a major transaction is published, i.e., blackout periods.
- Require subsidiaries and/or majority shareholders to report to the issuer before they proceed with the repurchase.
- Seek advice from professional advisers before the repurchase.
- Review the MNPI analysis and trading policies discussed above regularly.
Depending on the magnitude of the transaction and the impacts to the issuer’s financial condition, liquidity and results of operations, a bond repurchase itself can sometimes constitute an MNPI. Accordingly, it is advisable for an issuer to include necessary disclosure about potential future repurchases in its periodic filings, new offering documents with respect to the same series or class of debt securities, a press release or other public announcement that is reasonably designed to achieve the public dissemination of the relevant information in advance of such activities to alleviate potential MNPI issues.
“Creeping” tender offer
If the purchase of debt securities, in a single transaction or a series of related transactions, is deemed to constitute a tender offer, it will be subject to the regulatory and documentary requirements under the U.S. tender offer rules, such as the minimum offer open period of 20 business days (or five business days if “abbreviated tender offer” procedures apply).
Accordingly, an issuer who is contemplating a bond repurchase generally wants to structure the repurchase to fall outside the scope of the US tender offer rules.
Put in simple terms, a bond tender offer is an offer broadly made to all holders of the target securities to tender such securities at a specified price over a specified period of time.
However, the term “tender offer” is not defined in the Exchange Act and its implementation rules or by the U.S. Securities Exchange Commission. In determining whether a purchase constitutes a “tender offer” for the purpose of the Exchange Act, courts nowadays generally adopt an eight-factor test developed in the landmark Wellman case:
- is there an active and wide-spread solicitation of the target securities;
- is the solicitation made for a substantial percentage of the issuer’s securities;
- is an offer to purchase made at a premium over the prevailing market price;
- are the terms of the offer firm;
- is the repurchase conditional on the tender of a fixed number of securities;
- is the offer only open for a limited period of time;
- is the offeree of the offer pressured to sell the target securities; and
- is the offer to purchase announcement made following a rapid accumulation of the target securities.
Purchases of debt securities in the open market by the issuer or its affiliates are not usually found to be “tender offer” because most of such purchases do not meet the tender offer criteria under the Wellman test. A typical privately negotiated purchase of debt securities is unlikely to constitute a tender offer either, because in such a transaction there is usually no active and widespread solicitation; no premium is offered and the terms are normally negotiable; the purchase is not conditional on the acquisition of a specified amount of securities; no time limit is imposed; and the sellers are likely to be sophisticated.
Nonetheless, it is advisable for companies to consider employing the following approaches in order to minimize the possibility of their open market and privately negotiated purchases being considered such a non-compliant tender offer:
- refrain from any general solicitation of security holders or public announcement of the repurchase;
- contact only larger, more sophisticated institutional security holders;
- conduct the repurchase over an extended period of time without a deadline on the bondholders;
- repurchase less than 25% of the particular series or class of debt securities;
- avoid conducting any repurchase at a time when a conventional tender offer is ongoing;
- refrain from coercing the offerees to sell their securities;
- keep each negotiation of repurchases independent of one another;
- avoid imposing the same terms applicable on all sellers.
In addition to the Wellman test, courts have alternatively applied a “totality of circumstances”test focusing on statutory purpose rather than individual factors, which was developed in the Hanson case. The Hanson test turns on whether, absent the substantive and procedural protections of the U.S. tender offer regime, there is a substantial risk that security holders lack information necessary to make an informed selling decision.
The Wellman and Hanson tests were both articulated in the context of tender offers for equity securities, and no case law exists to date that applies either test to debt tenders. In light of the investor base of the international bond markets, which is primarily comprised of qualified institutional and sophisticated investors, debt repurchases should be deemed to constitute tender offers only in limited circumstances where the facts suggest the holders of the relevant securities require the protections of the U.S. tender offer rules.
EU Market Abuse Regulation
If the subject debt securities have been admitted to trading on a regulated market in the European Union, such as the London Stock Exchange, or a multilateral trading facility, or MTF, such as the Global Exchange Market of the Irish Stock Exchange, trading of such securities will be subject to the regulation of the EU Market Abuse Directive, or Directive. The Directive provides comparable protection against fraudulent or market manipulating behavior in connection with dealing in securities. Mishandling of a debt repurchase by the issuer or its affiliated purchaser could expose it to various offences including insider dealing, unlawful disclosure and market manipulation.
Under the Directive, inside information means information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
Like MNPI for purposes of the prohibitions introduced by Rule 10b-5 of the Exchange Act, inside information is information which would likely form part of the basis of the investment decisions of a reasonable investor. To assess whether a piece of information is price sensitive, companies should consider all facts available when the assessment is made, including the market impact which would be foreseeable at that moment when the information has not been disclosed. A large repurchase is likely to be price-sensitive in and of itself, requiring disclosure as well as compliance with the other requirements of the Directive (such as maintaining lists of insiders).
If an issuer believes that it is in possession of information that is likely to have a significant effect on the prices of the bonds to be repurchased, the issuer should consider announcing the information publicly before conducting the repurchase no matter in an open-market trade or through a privately negotiated transaction. It is generally accepted that information that has been disclosed to the public is no longer non-public information. That having been said, companies also need to consider its compliance with necessary wall crossing procedures and confidentiality obligations with respect to the inside information and should refrain from making the announcement and the proposed repurchase.
It is worth noting that the Directive is of very broad application, and its provisions must be followed even if admission to an MTF is done without the issuer’s consent; and that for an issuer which has multiple series of securities outstanding, actions taken in respect of one series which may impact on the value of another may trigger requirements under the Directive even where the series that is traded on the European market is not the one that is the subject of the repurchase.
Regulatory Regimes under the Securities and Futures Ordinance in Hong Kong*
Companies should pay attention to the regulatory regimes in respect of market misconduct under the Securities and Futures Ordinance, or SFO, which came into effect on April 1, 2003, if the target debt securities are listed in Hong Kong or if the purchase is executed in Hong Kong even if the securities are listed on a foreign exchange. Although enforcement actions taken so far were primarily against misconducts in dealings in stocks and futures transactions, the scope of the regime is wide enough as the term “securities” is widely defined to capture debentures, bonds and notes. Accordingly, its requirements, especially those applicable to insider dealing and disclosure of false or misleading information inducing transactions, should not be overlooked in a purchase and sale of debt securities.
New York law-governed high yield indentures and English trust deeds typically permit voluntary repurchases of bonds with no limit.
This is usually disclosed in the terms and conditions of the bonds or their summary in the offering memorandum.
Nonetheless, other financing documents of the issuer (or its affiliated purchasers) may contain restrictive covenants that limit the ability of the issuer (or the affiliated purchasers) to repurchase its own debts, especially those relating to debt obligations senior to the debt securities to be repurchased. All the necessary credit agreements, indentures, intercreditor agreements and other financing documents must be carefully reviewed to ensure that these agreements do not contain such restrictions.
Obligation to cancel and voting rights
For New York law-governed bonds, market practice has been developed that an issuer will surrender the bonds to the relevant bond agent for cancelation as soon as possible after the bonds are purchased by the issuer and/or its affiliated purchasers, even if the indenture does not explicitly create such a contractual obligation of the issuer. In addition, when holding the bonds, an issuer and its affiliated purchasers are not entitled to vote on matters concerning the issuer’s bonds or to give directions to the trustee under the indenture with only limited exceptions.
A typical English or Hong Kong law trust deed includes provisions that require the bonds be immediately surrendered for cancelation promptly after they are repurchased by the issuer and/or its subsidiaries (but not by other affiliated purchasers).
Like the approach adopted in an New York law indenture, bonds held by the issuer and its subsidiaries will not be deemed to be outstanding for purposes of casting a vote on matters concerning the bonds or giving directions to the trustee. However, the voting rights of other affiliates of the issuer sometimes are not contractually excluded under this circumstance. Companies and potential investors should pay attention the disclosure of the relevant contractual arrangements in the offering documents.
Disclosure requirements under rules of exchanges
Considerations should be given to the continuing disclosure obligations of the issuer of the related debt securities under the rules of the stock exchange on which the securities repurchased are listed:
- The Stock Exchange of Hong Kong, or HKEx requires the issuer to make an announcement as soon as possible:
if 10% or more of the same series of bonds are redeemed or canceled, and if aggregate redemption or cancelation reaches every 5% interval thereafter;
if the issuer has repurchased and cancelled all of an issue of its listed debt securities; and
where disclosure of information is necessary to avoid a false market in its debt securities.
- The Singapore Stock Exchangerequires the issuer to immediately:
announce the cancellation of the debt securities, when every 5% of the total principal amount of those securities (calculated based on the principal amount at the time of initial listing) is repurchased and cancelled; and
disclose to the Singapore Stock Exchange any information which may have a material effect on the price or value of its debt securities or on an investor’s decision whether to trade in such debt securities.
- The London Stock Exchangerequires that any purchases, redemptions or cancellations of listed debt securities must be notified to the United Kingdom Listing Authority and to the London Stock Exchange, when an aggregate of 10% of the initial nominal amount of the securities has been purchased, redeemed or cancelled, and subsequently for each 5% of the initial nominal amount acquired thereafter. They must also advise the United Kingdom Listing Authority of any new developments in its sphere of activity which are not public knowledge, and which may lead to substantial movements in the price of its securities.
- The Irish Stock Exchange (Global Exchange Market) requires that the issuer notify the exchange without delay of information regarding any redemption or repurchase and cancellation of debt securities in particular before the due date.
- The Luxembourg Stock Exchangerequires an issuer whose debt securities are admitted to trading on the MTF designated as “Euro MTF” to:
promptly publish all redemption or repayment notices as well as the nominal amount (including the pool factor, if any) of the issue still outstanding; and
communicate as early as possible to the Luxembourg Stock Exchange any information relating to events affecting the securities admitted to trading that it deems necessary to facilitate the due and proper operation of the market, including any event or information which, on the date of its publication by the issuer or on its behalf, is likely to influence the price of the securities.
Impacts on credit ratings
Issuers should consider whether a bond repurchase, or the announcement thereof, could result in rating downgrades or other negative rating actions. Rating agencies may issue a negative rating if a realistic probability of a default exists and investors receive less value than promised on the original securities as a result of the bond repurchase.
In the United States, the purchase at a discount of a solvent borrower’s debt by the borrower itself or an affiliated purchaser normally generates taxable income for the borrower in the form of cancellation of indebtedness income. There may be impacts under the tax law in other jurisdictions related to the bond buyback. Issuers are encouraged to consult with their tax advisors to find out the tax treatment in connection with the repurchase in advance.
Secondary market bond repurchase is generally considered as a straightforward and efficient liability management method, particularly when the issuer does not seek to buy back a significant amount of its outstanding bonds. Although the laws and regulations applicable to a bond repurchase may vary from one jurisdiction to another, it is not hard to discover, based on the introduction above, that non-public price sensitive information should be properly handled when a bond repurchase is contemplated. The materiality of the information needs to be assessed based on the standards under the relevant regulatory regimes after taking into consideration all related factors. We encourage issuers to seek professional advice from counsel and investment bankers whenever in doubt.
For those who are interested in other liability management methods, please refer to our earlier article 境外债券责任管理概述 (An overview of liability management of offshore bonds).
*Any reference to Hong Kong or Hong Kong SAR shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
Hong Kong, China Hong Kong SAR
Hong Kong, China Hong Kong SAR
Hong Kong, China Hong Kong SAR
The authors gratefully acknowledge the contributions of Bernice Wang (Legal Manager) and Anlei Zuo (Registered Foreign Lawyer) to this article.
 Speed v. Transamerica Corp, 71 F. Supp. 457 (D. Del. 1947).
 Wellman v. Dickinson, 475 F. Supp. 783, 823-824 (S.D.N.Y. 1979).
 Hanson Trust PLC v. SCM Corp., 744 F.2d 47 (2d Cir. 1985).
 The Market Abuse Directive continues to apply in the United Kingdom and to regulated markets in the United Kingdom during the Brexit transition period (until December 31, 2020, unless extended).
 See Market Abuse Directive, Chapter 2, Article 7.
 Based on our verbal consultation with the Listing Division of HKEx, this rule does not apply if the bonds repurchased are not cancelled.
 See Rules 37.47, 37.48 and 37.50 of Chapter 37 of the Main Board Listing Rules.
 See Rules 323 and 324 of Chapter 3 of the Mainboard Rules.
 See Rule 5.2 of the Listing and Admission to Trading Rules for Debt Securities on the Global Exchange Market of Euronext Dublin.
 See Rule 1003 of the Rules and Regulations of the Luxembourg Stock Exchange – 01/2020. If the target bonds have a denomination below EUR100,000, then the issuer should also publish as soon as possible its latest annual accounts and its latest management report.
 See Rules 903 and 904 of the Rules and Regulations of the Luxembourg Stock Exchange – 01/2020.