The SEC has adopted final share repurchase disclosure rules requiring public companies to provide more detailed disclosures about their share repurchases and to tag those disclosures in Inline XBRL. Below are the key takeaways and action items for public companies to consider, followed by detailed information about the new rule requirements.
Key Provisions for Domestic Public Companies
- Enhanced share repurchase reporting: Provide, on a quarterly basis in a new exhibit filing, daily share repurchase information for each day on which a repurchase was conducted, including share class, average price, number of shares repurchased, number of shares that may yet be repurchased under publicly announced programs, and shares intended to be covered by Rule 10b-18[1] and/or Rule 10b5-1 safe harbors.
- New disclosure of director and officer trades and related policies and procedures. Indicate, on a quarterly basis, the occurrence of any transaction in company securities by company directors or Section 16 officers within four (4) business days before or after the announcement of a repurchase program, and disclose related policies and procedures governing transactions by company directors or officers during a repurchase program.
- New use of 10b5-1 plan disclosures: Provide, on a quarterly basis, disclosure related to the adoption and termination of 10b5-1 trading arrangements by the public company itself, similar to the SEC’s recent rule requiring the same for directors and officers
- New qualitative disclosures: Disclose, on a quarterly basis, the objectives or rationales for share repurchases and the process or criteria used to determine the amount of repurchases.
Domestic public companies must comply with the new rules in the first periodic filing that covers the first full fiscal quarter that begins on or after October 1, 2023.
The appendix “Roadmap Of The New Disclosures” below presents a more detailed summary of the new disclosure obligations, including for foreign private issuers (FPIs), and registered closed-end management investment companies that are exchange traded (listed closed-end funds).
Four Things Public Companies Should Consider Doing
In light of these new rules, public companies should consider taking the following actions:
- Revisit and document the rationale for repurchasing shares.
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Because companies will need to disclose the rationale for repurchases and process for determining the amount of repurchases, boards should consider multiple factors in advance of approving a repurchase program, such as:
- the sources of funding for the repurchases;
- alternative uses for the funds allocated for the repurchases;
- the expected impact of the repurchases on the value of remaining shares;
- whether repurchases are consistent with the company’s liquidity and capital allocation plans; and
- if applicable, the reasons the board believes the stock is undervalued.
- Board materials and minutes should reflect these discussions and the board’s conclusion that the repurchase program is in the company’s and its stockholders’ best interests when authorizing a repurchase program.
- Establish policies and procedures regarding transactions by directors and officers during repurchase programs.
- Because companies will need to disclose director and Section 16 officer trades that occur four (4) business days before or after the announcement of a repurchase program and provide disclosure about policies and procedures governing trades by directors or officers during a repurchase program,[2] companies should consider:
- prohibiting directors and Section 16 officers from trading in company stock (excluding transactions pursuant to a Rule 10b5-1 plan) within four (4) business days before or after the announcement of a repurchase plan or program;
- regular training for directors and officers (and other affiliates) about the risks of buying or selling while the company is repurchasing shares;
- establishing procedures to ensure that directors and officers, and those who trade on their behalf, are aware of the announcement of a repurchase program and its duration;
- enhancing procedures to track the dates of director and Section 16 officer trades for reporting purposes; and
- enhancing or establishing procedures to ensure trades by directors and officers (or other affiliate purchasers) do not impair repurchase programs intended to be covered by Rule 10b-18.
- Determine whether to adopt new policies or amend existing policies, such as insider trading policies, to reflect the above or any other restrictions on trading.
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Reevaluate process with broker and related controls.
- Public companies may need to increase their interactions with their brokers to ensure they have all necessary information to make required filings due to the new requirement to disclose daily repurchase activity on a quarterly basis.
- Public companies designating a point person to work with brokers for repurchases should also consider developing policies or preclearance procedures to prevent the point person, and any other personnel aware of the repurchase program, from transacting in company securities during the repurchase program (except pursuant to a Rule 10b5-1 plan).
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Consider the interplay between repurchase programs and the use of stock price-based metrics in executive compensation programs or earnings guidance.
- While the SEC’s new rules do not have any specific provisions relating to executive compensation programs or earnings guidance, its requirement to disclose the purpose of repurchase programs signals increased skepticism. To avoid concerns that repurchase programs may be used to manipulate stock price-based metrics, public companies should consider excluding the impact of repurchases when setting stock price-based targets for performance-based compensation or providing stock price-based guidance.
Where Can I Find Additional Information?
Refer to the appendix hereto for a more detailed summary of the new disclosure obligations, disclosure locations, and compliance dates.
The SEC announcement, fact sheet, and final rule text are available here, here and here.
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We will continue to monitor developments under these new requirements.
Appendix
Roadmap Of The New Disclosures
We have prepared the below checklist to help ensure these new SEC disclosure requirements are considered and addressed as part of an already thorough quarterly review and form check process.
[1] Rule 10b-18 provides a voluntary, nonexclusive “safe harbor” from liability for manipulation under certain sections of the Exchange Act, and Rule 10b-5, when an issuer or its affiliated transacts in shares of a public company’s common stock in accordance with Rule 10b-18’s manner, timing, price, and volume conditions.
[2] Note that policies and procedures governing trades by any officer of the company must be disclosed, while the disclosure about the occurrence of transactions close in time to the announcement of a buyback program captures Section 16 officer activity only.
[3] For company with a December 31 fiscal year end, this will first be required in the 10-K covering the fiscal quarter ending December 31, 2023.
[4] For company with a December 31 fiscal year end, the first Form F-SR will be required 45 days after the end of the fiscal quarter ending June 30, 2024.
[5] For a listed closed-end fund with a December 31 fiscal year end, this will first be required in the N-CSR filed for the fiscal quarter ending June 30, 2024.