SEC Adopts Disclosure Rules Related to Issuer Share Buybacks
On May 3, 2023, the Securities and Exchange Commission (“SEC”) adopted by a 3-2 party-line vote final rules designed to strengthen disclosures about an issuer’s repurchases of its own shares. The adopting release is available at the SEC’s website here.
As we have written in the past, share buybacks have become increasingly controversial in recent years. (For example, see our 2018 blog “Stock buybacks are not evil.”) Issuer share repurchases (or share buybacks) have become a significant method through which issuers return capital to shareholders. One criticism directed at issuer share repurchase programs has focused on the alleged ability of management to influence the issuer’s stock price, or earnings per share, through issuer share repurchases.
Currently, Regulation S-K requires issuers only to disclose, on a quarterly basis, any purchase made by or on behalf of the issuer of shares that are registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), aggregated on a monthly basis. The new rules will require disclosure of issuer share repurchase information aggregated on a daily basis and other related information.
The new rules are designed to enhance the transparency and integrity of the share buyback process and lessen some of the information asymmetries inherent between issuers and investors in issuer share buybacks by requiring issuers to disclose:
- Periodically: the prior period’s daily repurchase activity by the issuer (or any affiliated purchaser) by disclosing share repurchase information on a quarterly basis on an exhibit in tabular form, required by new Regulation S-K Item 601(b)(26), on the Form 10-Qs and Form 10-Ks, that includes:
- date of the repurchase;
- amount of shares repurchased;
- average purchase price for the date;
- maximum amount in shares or dollar value that remain to be repurchased under a publicly announced plan;
- aggregate total number of shares repurchased in reliance on the safe harbor in Rule 10b-18; and
- aggregate total number of shares repurchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).
Further, such exhibit requires issuers to check a box indicating if certain directors or officers traded in the relevant securities within four business days before or after the public announcement of an issuer’s share repurchase program. The exhibit will be deemed “filed” for purposes of liability under the Exchange Act, not merely “furnished” as originally proposed.
- Quarterly: specified information in narrative form with respect to the issuer’s objectives or rationales for the repurchases, as well as the process or criteria used to determine the repurchase amounts. (See amendments to Item 703 of Regulation S-K.)
- Quarterly: whether, during the issuer’s most recent quarter, the issuer adopted or terminated any Rule 10b5-1 trading arrangement and a description of the material terms of the Rule 10b5-1 trading arrangement (other than terms with respect to the price at which the party executing the Rule 10b5-1 trading arrangement is authorized to trade), such as: (i) the date on which the issuer adopted or terminated the Rule 10b5-1 trading arrangement; (ii) the duration of the Rule 10b5-1 trading arrangement; and (iii) the aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement. (See new Item 408(d) of Regulation S-K.)
The final rules differ from the proposed rules in one material respect: The proposed rules sought practically real-time reporting of repurchase disclosure by the filing of a form within one business day after issuer share repurchases. The final rules require only quarterly reporting of share repurchase activity, albeit daily share repurchase activity, not monthly activity as currently required. You can find our prior blog post on the proposed repurchase rule amendments here.
The new rules will require XBRL tagging of the required disclosures.
All issuers (other than foreign private issuers) will be required to comply with the new disclosure and tagging requirements in their Exchange Act periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. Therefore, issuers with December 31 fiscal year-ends will be required to begin complying with the new disclosure and tagging requirements in their Form 10-K for the fiscal year ending on December 31, 2023, as it relates to share repurchases made during the quarter ending December 31, 2023.
Issuers should inform their senior financial management and Board of Directors about the new disclosure rules on issuer share repurchase programs and begin preparing the description of the objectives and reasons for any existing share repurchase program. Issuers should also review (i) any applicable disclosure controls and procedures to determine if changes to such controls are needed to capture the information required to be disclosed by the new rules, and (ii) other policies, including insider trading policies, and practices to maintain consistency with the new rules.