By Mark S. Nelson, J.D.
A stock buyback bill expected to be introduced by Sen. Sanders could track legislation he introduced in the last Congress that would have mandated gains for workers before companies can engage in stock buybacks.
Senator Bernie Sanders (I-Vt) said via a tweet that he plans to introduce legislation that would curb corporate stock buybacks unless companies provide more extensive benefits to their workers, including an increased minimum wage and paid sick leave. Although the new bill text was unavailable at publication, the outline of the legislation appears to track mirror-image bills introduced in the 115th Congress by Sen. Sanders and Rep. Ro Khanna (D-Cal). For comparison, Sen. Warren’s Accountable Capitalism Act, also introduced in the last Congress, would not have curbed buybacks per se, but it would have imposed a holding period on corporate executives at companies that do conduct buybacks.
Walmart as the common theme. Senator Sanders has consistently targeted Walmart Inc. as an example of a company that engages in stock buybacks, which he claims mostly benefit executives and large investors to the detriment of ordinary workers. Senator Sanders offered a preview of the forthcoming bill in a video posted on his Twitter account that also featured Senate Minority Leader Chuck Schumer (D-NY), who appeared to back the legislation. The video largely retraces the text of the senators’ joint Op-Ed piece that appeared this past weekend in The New York Times. According to Sen. Sanders, the bill text is still being finalized.
For its part, Walmart recently announced that it will provide its associates extra cash bonuses based on store performance and it will also permit associates to earn as much as 48 hours of “Protected PTO” or paid time off that can be used for unplanned absences. Walmart said the use of “Protected PTO” would not count against associates’ attendance records. Walmart said the changes were made in response to associate feedback and that they became effective for U.S. stores on February 2.
"We’re constantly testing, learning and seeking feedback to improve our stores for associates and customers," said Drew Holler, Walmart U.S.'s vice president of associate experience. "This change, along with previous wage investments, parental leave, adoption and other benefits, is another important step on our journey to be the employer of choice."
For Sen. Sanders, that might be a step in the right direction, although the senator has said that he still sees room for additional progress. In a statement following Walmart’s announcement, Sen. Sanders had this to say: “Walmart’s decision to provide 48 hours of paid sick leave to some of its employees is a small step forward, but not nearly good enough. Walmart, which is owned by the wealthiest family in America, is not a poor company. If Walmart can afford $20 billion for stock buybacks to enrich wealthy shareholders, it can afford to raise the pay of all its workers to a living wage. Walmart can and must pay all of its workers at least $15 an hour with good benefits.”
On the Sanders-Schumer video, Sen. Schumer said stock buybacks are not the only issue. The minority leader said separate tax legislation would have to address companies’ use of dividends to achieve results similar to stock buybacks.
Mechanics of the prior stock buyback bill. The Stop Welfare for Any Large Monopoly Amassing Revenue from Taxpayers Act of 2018 (informally referred to by Sen. Sanders and Rep. Khanna as the "Stop WALMART Act") would have denied a large company the ability to repurchase its stock on a national securities exchange during a fiscal year in which the company violated terms of the legislation. Press releases issued then by Sen. Sanders and Rep. Khanna explained their focus on Walmart. According to Sen. Sanders and Rep. Khanna, Walmart is highly profitable, pays its median worker less than $15 per hour, and plans to conduct a $20 billion stock buyback.
Violations of the bill would include the following: (1) paying wages below $15 per hour; (2) denying employees the right to one hour of paid sick time per 30 hours worked up to 56 hours (7 days) of paid sick time; and (3) having a compensation ratio that exceeds 150. Enforcement of the provision would seek to hold both the large company and its executives accountable. For one, the SEC could impose a civil penalty on the company in the amount the company paid to repurchase its stock. Second, an executive officer could not hold that position for one year following a first-time violation; if the violation is not a first-time violation, the executive officer would be barred from their position at the company for life. The SEC would have to adopt rules that tell stock exchanges and companies how to comply with the requirements of the bill.
With respect to key terms, "employee" would be defined broadly to include full- and part-time employees, some independent contractors and, subject to limits, joint employees. "Large employer" would mean a company that, during the prior fiscal year, employed on average at least 500 employees and was subject to the SEC’s Regulation S-K, one of the main sources of the requirements for making filings with the SEC. "Executive officer" would mean any person (but not a director) who is authorized or participates in the large employer’s "major policy-making functions" regardless of that person’s title or compensation. Moreover, "executive officer" includes a company’s chairman, president, vice presidents, and chief financial officer, unless these persons are excluded by a board resolution or bylaws from, and they do not participate in, major policy-making functions.
The compensation ratio mentioned in the bill would be similar to the SEC’s pay ratio disclosure requirement adopted under Dodd-Frank Act Section 953(b) and which is explained in related staff guidance (e.g., "total compensation" is found in disclosures made under Item 402(c)(2)(x) of Regulation S-K). For comparison purposes only, a blog post by Margaret Engel, et al. of Compensation Advisory Partners to the Harvard Law School Forum on Corporate Governance and Financial Regulation noted early 2018 proxy trends regarding pay ratio disclosures (the median was 87, the 25th percentile was 36, and the 75th percentile was 172), while a later post to the same publication by Deb Lifshey of Pearl Meyer & Partners, LLC, found a median of 69, an average of 144, and 25th and 75th percentiles of 32 and 141, respectively.
"Paid sick time" also would cover many circumstances, including medical and mental health conditions, caring for relatives or children, and treatment for or recovery from domestic violence, sexual assault or stalking (including obtaining services from a "victim services organization," which is defined to include nonprofit, nongovernmental organizations and victim advocates, such as rape crisis centers).
The Warren bill compared. Senator Warren’s Accountable Capitalism Act (S. 3348) would have approached some of the same employee issues via a federal corporate chartering framework. Under current securities laws, corporate stock buybacks are conducted under Exchange Act Rule 10b-18, which affords companies a safe harbor from liability for manipulation if the repurchases meet four conditions regarding the use of a single broker-dealer on a single day and regarding the timing, price, and volume of purchases. Section 7 of the Accountable Capitalism Act would bar a director or officer from selling their company stock for three years after a corporate buyback.
The prohibition would not apply to securities held on the day before the date of enactment of the Accountable Capitalism Act. The SEC also could sanction noncompliance by imposing a civil penalty of at least the fair market value of the securities sold, but not more than three times the fair market value of the securities the officer or director sold, measured in both instances from the date the securities were sold.
Elsewhere, the Accountable Capitalism Act would give employees more say in how their companies are run. Under Section 6, the SEC (in consultation with the National Labor Relations Board) would issue rules aimed at making the election of directors at U.S. corporations "fair and democratic." Specifically, the employees of a U.S. corporation would be allowed to elect two-fifths (40 percent) of the corporation’s directors. Both the SEC and the NLRB would monitor for compliance. The bill would require the Secretary of Labor to impose a civil money penalty of $50,000 to $100,000 per day that a U.S. corporation fails to comply with the board representation requirement. The Office of United States Corporations, to be created by the bill, may revoke a corporation’s federal charter for noncompliance.