Dive Brief:

• The Securities and Exchange Commission (SEC) has settled charges against Andeavor LLC for controls violations relating to a stock buyback plan it implemented in 2018 while in discussions to be acquired by Marathon Petroleum Corporation. 
• Andeavor agreed to pay a $20 million penalty to settle the charges.
• "Companies must have reasonable controls in place to ensure buybacks are made in accordance with management's authorization," said Stephanie Avakian, director of the SEC's Division of Enforcement. 

Dive Insight:

According to the SEC, Andeavor and Marathon held months of confidential discussions in 2017 about Marathon potentially acquiring Andeavor, which at the time was an energy company headquartered in San Antonio.

In October 2017, Andeavor's then-chairman and CEO and Marathon's chairman and CEO agreed to suspend the discussions, and then agreed in late January 2018 to resume talks. 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.

According to the order, the board of directors' authorization for the buyback was subject to a company policy prohibiting repurchases while Andeavor was in possession of material non-public information, yet Andeavor failed to maintain internal accounting controls that provided reasonable assurance that the buyback complied with Andeavor's policy.

Andeavor used an abbreviated and informal process to evaluate whether the requirements for the buyback were satisfied, including that the company was not in possession of material non-public information.

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.

In February and March 2018, Andeavor repurchased 2.6 million shares of its stock from investors at an average price of $97 per share. Approximately one month after completing the buyback, Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at over $150 per share.

"Andeavor's board of directors set clear lines around when the company could buy back its shares, but Andeavor failed to have a process that was reasonably designed to ensure that it stayed within those lines," said Avakian. 

"Andeavor failed to take reasonable steps to ensure that personnel evaluating whether the company had material non-public information learned about significant corporate developments," said Melissa Hodgman, associate director of EC's enforcement division. "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."

The SEC's order finds that Andeavor violated the internal controls provisions of the Securities Exchange Act of 1934. Without admitting the findings in the order, Andeavor agreed to cease-and-desist from further violations of that provision, and to pay a civil penalty of $20 million.