SEC Charges Company for Implementing Stock Buyback Plan Before Acquisition Negotiations Resumed

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The SEC announced settled charges against Andeavor LLC for controls violations relating to a stock buyback plan it implemented while it was in discussions to be acquired by Marathon Petroleum Corp. in 2018. Andeavor agreed to pay a $20 million penalty to settle the charges.  According to the SEC order, the matter involved Andeavor’s failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that stock buyback transactions were executed in accordance with management’s authorization.

In 2015 and 2016, Andeavor’s Board of Directors authorized the company to spend $2 billion for share repurchases. This authorization required Andeavor to comply with a policy that prohibited the company from repurchasing stock while it was in possession of material nonpublic information.

The SEC maintained Andeavor did not, however, have internal accounting controls sufficient to provide reasonable assurance it was complying with this policy such that buyback transactions were executed in accordance with management’s authorization. Specifically, Andeavor lacked an effective process for obtaining an accurate and complete understanding of the facts and circumstances necessary to determine whether it was in possession of material non-public information and therefore prohibited from engaging in buyback transactions. As a consequence of this internal accounting controls failure, Andeavor engaged in buyback transactions that were not executed in accordance with management’s authorization.

On February 21, 2018, Andeavor’s then-Chairman and Chief Executive Officer (Andeavor’s CEO) directed the company’s Chief Financial Officer to initiate a share buyback to repurchase $250 million of shares over a period of several weeks. At the time of this direction, Andeavor’s CEO was scheduled to meet with his counterpart at Marathon two days later to resume the confidential discussions about Marathon’s potential acquisition of Andeavor at a significant premium that had taken place in 2017 (but were suspended in October of that year).

On February 22, 2018, Andeavor’s legal department approved a Rule 10b5-1 plan to repurchase $250 million of stock. It did so after concluding, based on a deficient understanding of all relevant facts and circumstances regarding the two companies’ discussions, that those discussions did not constitute material non-public information.

The SEC charges state this lack of understanding was the result of Andeavor’s insufficient internal accounting controls. Andeavor used an abbreviated and informal process to evaluate the materiality of the acquisition discussions that did not allow for a proper analysis of the probability that Andeavor would be acquired. Andeavor’s informal process did not require conferring with persons reasonably likely to have potentially material information regarding significant corporate developments prior to approval of share repurchases. As a result, for example, despite Andeavor’s CEO’s leadership role at the company and the fact that he was the primary negotiator with Marathon, no one involved in Andeavor’s process discussed with him the prospects that Andeavor and Marathon would agree to a deal. Because they did not do so, the company failed to appreciate that the probability of Marathon’s acquisition of Andeavor was sufficiently high at that time as to be material to investors. In short, Andeavor did not have internal accounting controls that provided reasonable assurance that its buyback would be executed in accordance with its Board’s authorization.

On February 23, 2018, Andeavor executed the Rule 10b5-1 plan that its legal department had approved. Pursuant to that plan, Andeavor repurchased 2.6 million shares of its stock from investors at an average of $97 per share in February and March 2018. About six weeks after initiating the buyback, and two weeks after completing the buyback, the two companies’ CEOs reached an agreement in principle for Marathon to acquire Andeavor. On April 30, 2018, Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at over $150 per share.

Andeavor did not admit or deny the findings in the SEC order.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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