Official Position of HANFA Regarding Share Buyback Programs

Croatian Financial Services Supervisory Agency (HANFA), 10000 Zagreb, Franje Račkoga 6, P.O. Box 164, Croatia t: 01 6173 200, f: 01 4811 507, e: info@hanfa.hr, OIB: 49376181407, MB: 02016419, w: www.hanfa.hr

HANFA has received an inquiry regarding the application of provisions of the Capital Markets Act (Official Gazette Nos. 65/18, 17/20, 83/21, 151/2 and 85/24, hereinafter: CMA) and the Companies Act (Official Gazette Nos. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 125/11, 152/11, 111/12, 68/13, 110/15, 40/19, 34/22, 114/22, 18/23 and 130/23, hereinafter: CA) to a share buyback program of a joint-stock company (issuer of securities) listed on the regulated market of the Zagreb Stock Exchange d.d.

Essentially, the inquiry raises the question of whether there is any limitation or regulatory obstacle for a securities issuer to simultaneously adopt two share buyback programs that would be executed concurrently, with different regulated investment companies responsible for their execution (one executor engaged to manage one buyback program, and another executor engaged to manage the second buyback program). In this case, the issuer does not intend to use the exemption for buyback and stabilization programs stipulated in Article 5 of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (hereinafter: MAR Regulation).

Given that the subject inquiry points to the necessity of promoting, organizing and monitoring measures for the effective functioning of financial markets in terms of harmonizing the conduct of supervisory authorities under Article 2(2) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette Nos. 140/05 and 12/12), the following is provided.

On the basis of Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency, HANFA adopted at its Management Board meeting held on 23 September 2024 the OFFICIAL POSITION

Article 233(1) of the CA stipulates that a company (in this case, the issuer) may acquire its own shares based on the authority of the general meeting for their acquisition, which is valid for up to 5 years and specifies the conditions under which they may be acquired, in particular the maximum number of shares to be acquired, the period for which the authority to acquire shares is granted, and, if shares are acquired for consideration, the maximum and minimum value provided by the issuer. The issuer must not acquire its own shares for trading purposes. Upon each acquisition of shares, the management or executive directors of the issuer must determine that the conditions prescribed by the CA are met.

In acquiring shares under paragraph 1 of Article 233 and disposing of them, the provisions of Article 211 of the CA must be applied. In acquiring and disposing of shares, the provisions of Article 308(3) and (4) of the CA are applied mutatis mutandis. It is considered that this has been done if shares are acquired or disposed of on a regulated market.

In accordance with Article 511(1) of the CMA, HANFA is the competent authority for implementing the MAR Regulation. Among other things, Article 14 of the MAR Regulation prescribes a prohibition on trading based on inside information and unlawful disclosure of inside information, while under Article 15 of the MAR Regulation, no one may manipulate or attempt to manipulate the market. Delegated Regulation 2016/1052 details the requirements and conditions for own-share repurchases that the acquirer must meet to apply the exemption from market abuse prohibitions and trading in own shares within buyback programs and securities trading established by the MAR Regulation (specifically Article 5 of the MAR Regulation). The acquisition of own shares meeting the requirements and conditions of Delegated Regulation 2016/1052 constitutes a so-called safe harbour under Article 5 of the MAR Regulation. For an exemption provided in paragraph 1 of Article 5 of the MAR Regulation to apply to a buyback program, among other things, the buyback program must serve to fulfill obligations arising from employee share offer programs by the employer or other allocations of shares to employees or members of administrative, management, or supervisory bodies of the issuer or an affiliated company, as stated in Article 5(2)(c) of the MAR Regulation.

Article 5 of the MAR Regulation prescribes an exemption from the application of Articles 14 and 15 of the MAR Regulation in certain cases for buyback and stabilization programs.

In the case of trading in own shares within a buyback program outside the use of the benefits under Article 5 of the MAR Regulation, there is no obligation to comply with Delegated Regulation 2016/1052. In other words, an issuer that does not intend to trade its own shares in accordance with Article 5 of the MAR Regulation, under the provisions of the MAR Regulation, is not required to comply with the volume limits framework and other restrictions from Delegated Regulation 2016/1052, but is unequivocally required to comply with all obligations prescribed by the MAR Regulation provisions, including, among other things, the establishment of mechanisms, arrangements and protocols under Article 9(1) of the MAR Regulation to ensure the legitimacy of conduct during the issuer's own-share buyback activities, as well as obligations under Article 11 of the MAR Regulation concerning market research.

HANFA draws attention to the fact that when an issuer does not intend to use the exemption under Article 5 of the MAR Regulation, with which exemption Delegated Regulation 2016/1052 also applies (which, for example, allows engaging an investment company that independently and autonomously from the issuer decides on the timing of purchasing its own shares (Article 4(2)(b) of Delegated Regulation 2016/1052)), and the issuer, like any joint-stock company, conducts buybacks solely on the basis of CA provisions, it must be emphasized that such an issuer is obliged to ensure that its own-share buyback activities do not violate Article 14 of the MAR Regulation (prohibition on trading based on inside information) and Article 15 of the MAR Regulation (prohibition on market manipulation), all considering that in this case, an issuer buying back its own shares can be characterized as any other investor on a regulated market (who must consider prohibitions on manipulation and trading based on inside information) with the additional difference that the issuer, as an investor, possesses inside information related to itself, decides on its disclosure, postponement of disclosure, etc. Precisely due to the specificity of the issuer's situation when buying back its own shares outside the so-called safe harbour under Article 5 of the MAR Regulation, it is treated as any other investor on the market, so special attention must be paid to protecting against trading based on inside information.

In this regard, the European Securities and Markets Authority (ESMA) in its Questions and Answers (Q&A) of 12 November 2018, Part 7 (question q7.10/answer a7.10) regarding transactions of managers, which partially also relates to the issuer's buyback of its own shares[1], states that when buying back its own shares, the issuer must have established all measures, arrangements and mechanisms by which the own-share buyback activity can be classified as legitimate conduct under Article 9(1) of the MAR Regulation.

[1] https://www.esma.europa.eu/sites/default/files/library/esma70-145-111_qa_on_mar.pdf

The aforementioned measures, arrangements and mechanisms that need to be established may be so-called Chinese walls ensuring that persons placing purchase orders for the issuer's own shares on behalf of the issuer (e.g., treasury personnel) do not possess inside information related to the issuer, or the establishment of any other internal procedures to avoid that placing purchase orders for buying back own shares can be characterized as trading based on inside information. Furthermore, the issuer must also consider the timing of order execution and the usual pattern of behavior when placing orders; for example, a longer execution time for broker orders gives them greater freedom and independence when exposing orders on the regulated market and deciding on the timing of share purchases, thereby leaving less possibility for the issuer to influence the timing of buying shares in the context of disclosing potential inside information. Additionally, a usual pattern of placing orders, for example, continuous placement of purchase orders without significant deviations that can be linked to the timing of disclosing certain inside information, can also serve as one of the issuer's mechanisms protecting against suspicion of trading based on inside information.

Furthermore, given that two investment companies/brokers would simultaneously purchase the issuer's own shares on a regulated market, attention must be paid to ensuring that such buybacks do not significantly affect the issuer's share price, i.e., that the issuer's own activity in buying back its shares does not lead to significant price fluctuations. This is primarily the responsibility of the investment companies engaged in buying back own shares.

Regarding the engagement of brokers/investment companies, it is emphasized that investment services and activities as well as ancillary services prescribed by Article 5(1) and (2) of the CMA in the Republic of Croatia may be performed by persons listed in Article 6 of the CMA, which among others include investment companies that have received approval in accordance with the CMA.

Based on Article 48 of the CMA, HANFA maintains a register of all persons authorized to perform investment services and activities in the Republic of Croatia under the CMA provisions. The aforementioned register is publicly available and contains updated data on authorized persons, services, and activities performed by them.

Investment companies must conduct business fairly, justly and professionally when providing investment services, in accordance with the best interests of the client. Based on Article 121 of the CMA, an investment company is obliged to take all sufficient steps when executing orders to achieve the best possible outcome for the client, taking into account all criteria from Article 64 of Delegated Regulation (EU) No 2017/565. Paragraph 2 of the same article stipulates that the obligation to achieve the best possible outcome for the client is considered fulfilled when an investment company executes an order according to the explicit instruction of the client relating to the order or a specific feature of the order.

Every investor on the capital market accepts all potential risks of investing in financial instruments and choosing an investment company, thereby assuming personal responsibility.

Following the above, HANFA sees no obstacles for a securities issuer to simultaneously adopt two share buyback programs while complying with all obligations prescribed by the MAR Regulation provisions, primarily including the establishment of arrangements, measures and protocols demonstrating legitimate conduct under Article 9(1) of the MAR Regulation, and subsequently Article 11 of the MAR Regulation concerning market research, for whose execution different authorized investment companies responsible would act according to explicit instructions of the issuer, while complying with business conduct rules prescribed by the CMA.

Finally, it is noted that HANFA can provide a final assessment of the compliance of each issuer's specific conduct regarding the implementation of share buyback programs only after conducting supervision, taking into account all provisions of the MAR Regulation and other relevant legislation.

This official position is published on HANFA's website.
CLASS: 008-02/21-03/01
REFERENCE NO.: 326-01-70-72-24-14
Zagreb, 23 September 2024.
CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman