united-states securities sec
Buying back shares and insider Trading
<p>Imagine the CEO of a major corporation knows that in a few days knows the corporation will be issuing an earnings report that will be above expectations. As such, he believes the
price of the stock will go up significantly.</p>
<p>If at this point, would it be legal for the corporation to buy back some of its own shares? It seems to me that it should be.</p>
<p>Note: I live in the United States and I am asking about the laws of the United States.</p>

<p>Generally no. Trading on the basis of non-public &quot;inside&quot; information is usually a crime in the US (and in many other places as well, although the details will vary.) Exactly what constitutes &quot;inside information&quot; and an unlawful trade based on it can be complex, but if the trade is or might well have been influenced by information not publicly available, it may well be illegal.</p>
<p>Normally in such cases the company's legal counsel or compliance officer will issue a statement to relevant corporate officers that neither the company nor those officers who are &quot;insiders&quot; may trade in the company's stock until after the information becomes public and is know to the market in general. The exact terms will vary depending on the specific facts.</p>
<p>If the person making the decision to do a buyback is not aware of the non-public information, and did not consult the CEO or anyone who did know, the trade <strong>might</strong> not be unlawful. But such trades are normally approved at the Board of Directors level, so the CEO would be aware of them.</p>

<p>The corporation, and by extension the board of directors, has a fiduciary duty to its stockholders. Inducing a current stockholder to sell their shares by withholding pertinent information is a breach of that duty.</p>
<p>Where it gets a bit weird is that the buyback does benefit the surviving shareholders and so the board is acting in their interest; the people who sell their shares and are therefore harmed aren't shareholders anymore. But it's still a violation of fiduciary duty to act against the interests of someone who was <em>at the time</em> a shareholder.</p>
