If You Buy, Tell Us Why (and When, and How): SEC Adopts New Share Repurchase Disclosure Requirements

The crackdown on stock buybacks continues. On May 3, 2023, the Securities and Exchange Commission (SEC) adopted final amendments to rules under the Securities Exchange Act of 1934, as amended (the Exchange Act) that will require issuers to provide quarterly and more detailed disclosure regarding their share repurchases. The final rules, which received significant opposition over three comment periods, adopt many of the initially proposed amendments, with some modifications.  Although the final rules eliminated one of the more controversial proposals to require daily reporting of issuers’ repurchase activity within one trading day of the repurchase [1], issuers will still be faced with the (not-so-) simple task of collecting, collating and tagging a significant amount of additional information as described below.

Foreign private issuers (FPIs) also don’t get a pass: in a departure from the SEC’s (mostly) historical practice of deferring to an FPI’s home country disclosure rules, the amendments subject FPIs to new repurchase disclosure obligations as well.  For a more detailed discussion of the implications for FPIs of this and other recent rulemaking see our blog post here and information about timing below.

Overview of the Final Rules [2]

• Quarterly disclosure of day-by-day repurchases as an exhibit.  The final rules amend Item 601 of Regulation S-K to require a new exhibit filed with each Form 10-K and Form 10-Q disclosing in tabular format the information enumerated below for daily purchases made by or on behalf of the issuer or any “affiliated purchaser” (as defined in Rule 10b-18 under the Exchange Act) of any class of its equity securities that is registered by the issuer pursuant to Section 12 of the Exchange Act:
  • Date;
  • The class of shares or units;
  • The average price paid per share or unit;
  • The total number of shares or units purchased on each such date and whether such purchases are part of a publicly announced repurchase plan or program;
  • The aggregate maximum number (or approximate dollar value) of shares or units that may yet be purchased under any plan or program;
  • The total number of shares or units purchased on such date in the open market, subject to certain exceptions;
  • The total number of shares or units purchased on such date that are intended by the issuer to qualify for the safe harbor in Rule 10b-18; and
  • The total number of shares or units purchased on such date pursuant to a Rule 10b5-1 trading plan.

Issuers must also report, via a checkbox in the exhibit, whether any Section 16 officer or director purchased or sold shares within four business days before or after the issuer’s announcement of a repurchase plan or program (or announcement of an increase of an existing plan or program).  Issuers must also disclose by footnote to the exhibit the date that any Rule 10b5-1 plan was adopted or terminated.

• Enhanced narrative repurchase disclosure in Forms 10-K and 10-Q.  The final rules also amend Item 703 of Regulation S-K and Forms 10-K and 10-Q to require narrative disclosure of the following information with respect to repurchases disclosed in the required exhibit:
  • Objectives and rationales for share repurchases and the process or criteria used to determine the amount of repurchases;
  • The number of shares or units purchased other than through a publicly announced plan or program, and the nature of the transaction(s);
  • For publicly announced repurchase plans or programs: the date, dollar or share/unit amount approved and the expiration date, as well as each plan or program that has expired during the covered period and each plan or program the issuer has determined to terminate prior to expiration or under which it does not intend to make further purchases; and
  • Policies or procedures (including any restrictions) relating to purchases and sales by directors and officers during a repurchase program.

• Quarterly 10b5-1 plan disclosure in Forms 10-K and 10-Q.  The final rules add a new Item 408(d), requiring disclosure as to whether, during the most recently completed applicable quarter, the issuer adopted or terminated any Rule 10b5-1 trading plan, as well as a description of the material terms of that plan—such as the date of adoption or termination, the duration of the plan and the aggregate number of securities to be purchased or sold pursuant to the plan (but not the terms with respect to the price at which the party executing the Rule 10b5-1 trading plan is authorized to trade). 
  
  
• iXBRL tagging. All of the new enhanced disclosures and information described above must be tagged in inline XBRL (iXBRL).
  
  
• Effective date: For issuers with a December 31 fiscal year, the rules will first apply to the Form 10-K for the 2023 fiscal year.  For all others, the rules will apply for the first quarter commencing on or after October 1, 2023.

Application to FPIs

For FPIs that report on Form 20-F, the rules will apply beginning with the first quarter commencing on or after April 1, 2024.  FPIs will be required to file new Form F-SR within 45 days of each quarter end to report daily share repurchase activity.  The form must be tagged in iXBRL and will be considered filed rather than furnished.  In addition, annual reports on Form 20-F will be required to include similar narrative disclosure of the objectives or rationales, criteria and policies relating to their repurchase activities, including a checkbox to report whether any director or member of senior management purchased or sold shares within four business days before or after the announcement of a share repurchase program.   

Takeaways and Recommendations

These new rules, like the 1% excise tax on buybacks included in the Inflation Reduction Act of 2022, reflect increased scrutiny over stock buybacks.  The adopting release notes the SEC’s concern (shared by some corporate governance advocacy groups) that a minority of issuers strategically conduct repurchases for nefarious reasons that do not benefit shareholders (e.g., in order to increase management compensation or accounting metrics like EPS) and not to signal that the issuer’s shares are undervalued.  The SEC’s stated intent with the final rules is to overcome perceived informational asymmetry by providing stakeholders with enhanced qualitative and quantitative information about share repurchases that the SEC believes will enable stakeholders to draw clearer and more informed conclusions about the purposes and effects of issuer share repurchases. 

By mandating enhanced disclosure about the purpose and structure of issuers’ repurchase programs, the new rules will require issuers to explain and be accountable to shareholders for their repurchase activity, which will create a new source of potential liability if such disclosure later proves (or is alleged to be) false or misleading.  In addition, the requirements to report daily repurchase activity, Rule 10b5-1 trading plan activity and whether directors or Section 16 officers (or, in the case of FPIs, senior management) bought or sold around the time of a repurchase program’s announcement signal the SEC’s continued interest in monitoring such transactions—and provide a warning to issuers to review their relevant policies and practices carefully. 

We expect the new disclosure rules to lead to increased stakeholder scrutiny.  Investors are likely to be interested in the reporting, as are activists that may use issuer-provided information as evidence to bolster their thesis or leverage a wedge issue.  We expect to see more stakeholder engagement focused on explaining and justifying issuer repurchases where clear communication and a clear tie to other issuer disclosure and strategy will be key.  We also expect to see increased interest from the plaintiffs bar scrutinizing the issuer’s rationale for its share repurchases, the criteria used to determine the amount of repurchases as well as whether insiders can participate during the pendency of the repurchases, all information that was previously not readily available to the public.  Lastly, this information may be used by regulators—not just to determine compliance with these rules, but also as evidence of an issuer’s intent and views on the company and its valuation.

We recommend issuers carefully consider and plan for how the justifications, triggers and timing of their repurchase programs and activity (and close-in-time transactions by their insiders) will be perceived by investors, other stakeholders and regulators—and ensure that their insider trading, Rule 10b5-1 trading plan and other policies are amended to contemplate the new rules and to restrict or coordinate transactions that would trigger potentially unfavorable disclosure.  In addition, in light of the potential liability attached to the new rules and the requirement to file (not furnish) the exhibits, issuers should carefully review their board materials and corporate records to ensure that the criteria and rationale of the board and management are properly documented in the event of a Section 220 demand.

Finally, both repurchase activity reporting and the qualitative disclosure discussed above must be incorporated into issuers’ disclosure controls and procedures, which will add administrative burden to issuers.  Issuers should carefully consider how to implement these new requirements in their disclosure controls and procedures, assess whether any changes will be required and communicate as necessary with disclosure committees or other upward certification processes, internal or external auditors or audit committees.  Although these new reporting obligations do not begin immediately, the design, implementation and testing of any new disclosure controls and procedures may require substantial lead time, and we recommend companies start planning as soon as possible. 

As companies try to grapple with the amendments, we are available to guide you through the new disclosure requirements, including all of the issues described above.

ANNEX: Summary of Changes from the Proposed Rules         

Principal differences from the initially proposed amendments include:

• changing the frequency with which issuers must provide their daily quantitative share repurchase disclosure from one business day after execution to quarterly;
• requiring a checkbox indicating whether officers and directors purchased or sold shares within four business days before or after the announcement of the repurchase plan or program instead of ten business days;
• no longer requiring the narrative disclosure pertaining to repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and purchases made in reliance on the Rule 10b-18 non-exclusive safe harbor;
• requiring the daily quantitative disclosure to be filed and not furnished in Form 10-Q, Form 10-K and Form F-SR; and
• adopting new Item 408(d), which requires quarterly disclosure in periodic reports on Forms 10-Q and 10-K (for the issuer’s fourth fiscal quarter) about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.

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[1] The original proposal, which we discuss here, would have required tabular reporting of repurchase activity on a new Form SR just one business day after the execution of any share repurchase order, even if the repurchase had not yet settled.

[2] In this post, we do not discuss the implications of the amended rules for listed closed-end funds.