On Tuesday, October 31, 2023, the United States Court of Appeals for the Fifth Circuit held that the SEC acted “arbitrarily and capriciously” in adopting its new share repurchase disclosure rules without conducting a proper cost-benefit analysis in violation of the Administrative Procedure Act (the “APA”). The court also found that the SEC failed to respond to the comments submitted by the U.S. Chamber of Commerce and the other petitioners, who sued to block the rules earlier this year. In granting the petition for review, the court stopped short of vacating the rules but instead provided the SEC with a 30-day period to address the rulemaking deficiencies noted in court’s opinion by adequately substantiating the rule’s benefits and costs—whether through quantitative, qualitative or such other mode of analysis that satisfies its statutory obligation under the APA—in the judgment the court. Although some may view the court’s opinion as a legal victory that may doom the rule, its ultimate disposition remains in abeyance during this period of limited remand. In the meantime, our recommendation to issuers already in the midst of preparing required disclosures is to remain prepared for either outcome as they navigate the complex maze resulting from the SEC’s recent flurry of new and amended rules.
November Update:
On November 22, 2023, the SEC announced the issuance of an order in light of the court’s decision, postponing the effectiveness of the share repurchase rules to an unspecified date pending judicial review. Pursuant to the order, the effectiveness of the rules has been indefinitely stayed subject to further action by the SEC.
December Update:
On December 1, 2023, the SEC filed a letter with the court stating that it would not be able to correct the rulemaking defects within the remand period, which the agency had unsuccessfully sought to extend. Following this, in its opinion issued on December 19, 2023, the court vacated the SEC's share buyback rule.
This means that issuers can rest assured that they will not be required to compile tabular disclosure of daily stock repurchases and detailed narratives about the rationale for such repurchases for any Form 10-Ks filed in the coming months for calendar year-end companies. Prior to the rule's vacatur, a domestic issuer would have been required to begin providing the new disclosure in the first periodic report after October 1, 2023, which for a calendar year-end issuer, would have been their Form 10-K for the fiscal year ending on December 31, 2023. The mandate would have also required issuers to file 10b5-1 plans and, within four days, disclose when a director or officer purchased or sold shares of the class of securities that is the subject of a share repurchase plan.
After this decision, time will tell how share repurchase disclosure, and the SEC's recent uptick in rulemaking generally, will shape out in the future.
