On December 15, 2021, the SEC provided an early holiday present to those calling for enhanced disclosure (and scrutiny) of corporate share buybacks. The proposed amendments to SEC rules require issuers to provide more detailed, frequent and timely disclosure concerning repurchases made by or on behalf of the issuer or an affiliated purchaser [1] and enhance existing periodic disclosure requirements.
New Rule and Form
The SEC has proposed new Exchange Act Rule 13a-21 and Form SR, which requires tabular disclosure of the following information concerning any purchase made by or on behalf of an issuer of any class of such issuer’s equity securities registered under Section 12 of the Exchange Act:
- date of the repurchase;
- identification of the class of securities purchased;
- the total number of securities purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
- the average price paid per security;
- the aggregate total number of securities purchased on the open market;
- the aggregate total number of securities purchased in reliance on the safe harbor in Exchange Act Rule 10b-18; and
- the aggregate total number of securities purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c)[2].
Such disclosures would be required to be furnished (but not filed)[3] to the SEC one business day after execution of a share repurchase order, even if the repurchase has not settled (which would be the case assuming a T+2 settlement). In contrast, share repurchase disclosure is currently required to be made only on a quarterly basis for domestic issuers in their Form 10-Qs and Forms 10-K and, for foreign private issuers, in their annual reports on Form 20-F.
Enhanced Periodic Disclosures
The proposal would also require issuers to disclose the following additional information in their quarterly reports, if applicable, and annual reports:
- the objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases;
- any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions;
- whether repurchases were made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated; and
- whether repurchases were made in reliance on the Exchange Act Rule 10b-18 nonexclusive safe harbor.
Practical Implications
The SEC estimates 3,300 companies conducted share buybacks in the 2020 fiscal year. The SEC’s proposed rule suggests the share repurchase disclosure amendments are intended to enhance transparency, enable more timely review of issuer share repurchases, alleviate information asymmetries and, in doing so, provide more informed investment decisions.
For some time, corporate governance advocacy groups (such as the Council of Institutional Investors), individual investors (such as CalSTRS and CalPERS) and politicians[4] have called for enhanced disclosure or termination of share buybacks. At the same time, activist investors and others seeking for companies to return capital to investors instead of letting cash sit on their balance sheets have advocated for share buybacks. Along with settlements for board seats, it is a popular compromise position in activism situations and one that activists have long treated as an “easy win”. Other investors, including those that are generally vocal concerning “good governance” measures, have been more muted on share repurchases.
While there is a 45-day comment period prior to the adoption of the proposed rules and the final rule may have different contours than the SEC proposal, issuers should take notice of the continued increased focus on buybacks. In particular, the enhanced quarterly disclosure will almost certainly lead to increased scrutiny, and not just from governance enthusiasts, activists or other investors who are considering a company’s performance and its rationale for buybacks. In fact, we may also see increased interest from plaintiffs scrutinizing the company’s stated rationale for its share repurchases, the criteria used to determine the amount of repurchases as well as whether company insiders can participate during the pendency of the repurchases, all information that was otherwise not easily available to the public. Companies should carefully review board materials and related analyses and consider whether any revisions to their insider trading policies are necessary.
Even if new rules concerning share repurchases are not adopted, issuers should view this and other ESG-related proposals as important signposts as to where they will need to focus and educate investors. As always, clear communication with shareholders showing carefully considered company policies will help boards and management control their own narratives as they relate to performance and governance, including with respect to why repurchases are or are not occurring.
[1] An “affiliated purchaser” is “(i) [a] person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or (ii) an affiliate who, directly or indirectly, controls the issuer’s purchases of such securities…” 17 CFR § 240.10b-18(a)(3). An affiliated purchaser does not include an issuer’s officer or director solely by reason of that officer or director's participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.
[2] The SEC is also in the process of proposing new regulations with respect to Rule 10b5-1.
[3] Form SR is proposed to be furnished rather than filed. As such, issuers would not be subject to liability under Section 18 of the Exchange Act for reports made on Form SR, nor would such information be deemed incorporated by reference into Securities Act filings (and, thus, the issuer would not be subject to liability under Section 11 of the Securities Act).
[4] Senator Elizabeth Warren co-sponsored a 2018 bill to ban buybacks, reviving such efforts in connection with CARES Act legislation when she unsuccessfully demanded that any bailed-out company be permanently barred from share repurchases (rather than for the duration of the loan and 12 months after the date on which the loan is no longer outstanding, as provided in the CARES Act). Similarly, in March 2020, Joe Biden called for all CEOs of American companies to commit to refraining from share buybacks for a year, with then-President Trump noting he was open to barring buybacks as a bailout condition.
