Beware This Misstep With Share Buybacks

Think it’s an OK time to repurchase some of the company’s stock? Better have the compliance department check with the CEO first, even he’s the one who tells you to pull the trigger on the repurchase.

That’s just one of the lessons from the Andeavor LLC case announced by the Securities and Exchange Commission last week.

The SEC accused San Antonio-based Andeavor, now part of Marathon Petroleum, of controls violations related to a stock buyback plan’s timing. According to the SEC, while the company was in talks to be acquired by Marathon in 2018, Andeavor bought back $250 million worth of stock, violating its own policies regarding trading while in possession of material, nonpublic information, and securities laws.

Andeavor and Marathon held months of confidential discussions in 2017 about Marathon potentially acquiring Andeavor. But, the order found, in October 2017, Andeavor’s then-Chairman and CEO and Marathon’s Chairman and CEO agreed to suspend the discussions. Then, in January 2018, they agreed to resume talks.

The order found that two days before the date set for resuming the discussions, Andeavor’s CEO directed the company’s CFO to initiate a $250 million stock buyback. The stock was repurchased in February and March 2018.

But a company policy that was part of the board-authorized buyback prohibited repurchases while Andeavor was in possession of material nonpublic information. Andeavor failed to maintain internal accounting controls that provided reasonable assurance that the buyback complied with Andeavor’s policy, the SEC said.

The SEC said Andeavor used “an abbreviated and informal process” to evaluate whether the buyback requirements were satisfied. More specifically, the process for evaluating the materiality of the acquisition negotiations did not include discussing, with the CEO, the likelihood of a deal between Andeavor and Marathon.

About one month after completing the buyback, the order found, Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at over $150 per share.

“Andeavor failed to take reasonable steps to ensure that personnel evaluating whether the company had material nonpublic information learned about significant corporate developments,” said Melissa Hodgman, associate director of the SEC’s division of enforcement. “While buybacks can be an important part of a company’s capital allocation plan, this case makes clear the importance of effective controls when a company is contemplating transactions with its shareholders.”

Andeavor agreed to pay a $20 million penalty to settle the charges without admitting to the violations.

The SEC’s order finds that Andeavor violated the internal controls provisions of Section 13(b)(2)(B) of the Securities Exchange Act of 1934.