The US Securities and Exchange Commission has proposed amendments to its rules regarding disclosure about issuer repurchases of its equity securities, often referred to as buybacks, including a new proposed Form SR to be filed with the SEC. As proposed, these new rules prescribe considerably greater disclosure relating to buybacks and, as with the proposed rules on 10b5-1 plans, have been met with strong statements of dissent by certain SEC Commissioners.
The US Securities and Exchange Commission (SEC) on December 15 proposed amendments (the Proposed Rule) to Regulation S-K, Regulation S-T, and certain provisions of the Securities Exchange Act of 1934, as amended (Exchange Act), which seek to enhance and modernize companies’ disclosures concerning repurchases of their own equity securities that are registered under Section 12 of the Exchange Act.
Set against a backdrop of continued public scrutiny of share repurchase programs, the Proposed Rule would do the following:
- Require companies engaging in buybacks to provide near-contemporaneous disclosure of such buybacks on a new Form SR to be filed under the Exchange Act before the end of the first business day following the date that a company, or an affiliated purchaser, makes a repurchase; and
- Through revisions to Regulation S-K Item 703, significantly expand the content of existing periodic disclosures applicable to share repurchases made by companies under the Exchange Act (for US issuers, on Form 10-K and Form 10-Q; for foreign issuers, on Form 20-F; and for registered closed-end funds, on Form N-CSR).
The information required to be disclosed pursuant to amended Regulation S-K Item 703 and on Form SR would also need to be reported using Inline eXtensible Business Reporting Language, or Inline XBRL.
If adopted as proposed, the Proposed Rule will significantly (1) increase the level of disclosure that companies and affiliated purchasers are required to provide and (2) compress the timeframe in which repurchase-related disclosures are made.
Comments on the Proposed Rule will be due in late January or early February, 45 days after the Proposed Rule is published in the Federal Register.
CURRENT DISCLOSURE FRAMEWORK
In 2003, the SEC adopted final rules that mandated certain disclosure requirements for companies and affiliated purchasers engaging in buybacks. Under the current disclosure requirements, companies must disclose the following information in their periodic filings under the Exchange Act:
- Total number of shares (or units) purchased by the company or any affiliated purchaser during the relevant period, reported on a monthly basis and by class
- Average price paid per share (or unit)
- Total number of shares (or units) purchased as part of a publicly announced repurchase plan or program
- Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
The current rules also require footnote disclosure of the principal terms of all publicly announced repurchase plans or programs, the number of shares purchased outside of a publicly announced plan or program, and the nature of the transaction.
CONTROVERSIES WITH BUYBACK PROGRAMS
“Both dividends and share repurchases are ways companies return cash to shareholders. Yet, say ‘dividend,’ and nobody gets angry, but say ‘share buyback,’ and the rage boils over.”[1]
So stated the self-described “Grinch” of the SEC,[2] Commissioner Hester J. Peirce, in a strongly worded statement of dissent in response to the Proposed Rule. In her dissenting statement, Commissioner Peirce questioned whether the Proposed Rule effectively addresses several concerns often raised with respect to companies’ repurchase programs, including information asymmetries between companies and investors, opportunism by insiders, and the perceived misuse of returning cash to investors in lieu of increasing corporate spend on, for example, higher salaries for the rank-and-file or new research and development projects—and, in some cases, expressed skepticism as to whether the concerns are even valid.
Information Lag
In the press release accompanying the Proposed Rule, SEC Chair Gary Gensler referenced “information asymmetries between issuers and investors” associated with buyback programs. The Proposed Rule notes that “market participants normally do not become aware of an issuer’s actual share repurchase-related trading activity until they are reported in an issuer’s periodic reports, long after the trades have been executed.” To this end, the Proposed Rule seeks to “improve the quality, relevance, and timeliness of information related to issuer share repurchases.”
Earnings Management and Executive Compensation
Over the last several years, the propriety of stock buybacks has been called into question by high-profile claims of improper benefits to company insiders and lack of “real” value to stockholders, including recent statements by Senator Elizabeth Warren, made in response to a company’s announced buyback program, that such actions “reward executives, company insiders, and big shareholders.”
The Proposed Rule cites to specific perceived issues such as companies utilizing buyback programs “as a form of real earnings management”—by reducing an EPS denominator—or repurchases favorably impacting executive compensation as a result of upticks in stock price following repurchases or an announcement of a repurchase program, including in a way that is not entirely transparent to investors.
With respect to the latter, the interplay between buyback programs and executive compensation has been the topic of stockholder proposals submitted to companies under Rule 14a-8 under the Exchange Act. The SEC’s Division of Corporation Finance has issued recent comment letters to companies asking for enhanced disclosure on how, if at all, repurchases impact executive compensation programs. ISS also has called out “abusive” share repurchase programs that inflate EPS or executive compensation payouts as problematic.
NEW FORM SR
Under the Proposed Rule, companies would be required to file information relating to any buybacks effected by or on behalf of the company or an affiliated purchaser within one business day on a New Form SR.
As proposed, Form SR would require tabular disclosure of the following:
- Date of the repurchase
- Class of shares purchased
- Total number of shares (or units) repurchased
- Average price paid per share (or unit)
- Total number of shares (or units) purchased on the open market
- Total number of shares (or units) purchased in reliance on the safe harbor set forth in Exchange Act Rule 10b-18
- Total number of shares (or units) purchased under a plan intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c)
ENHANCED DISCLOSURES UNDER REGULATION S-K ITEM 703
The Proposed Rule also would materially expand the amount of buyback-related information that companies currently are required to disclose in their periodic filings under Regulation S-K Item 703. As proposed, amended Regulation S-K Item 703 would require a company that has effected buybacks to disclose the following:
- Objective or rationale for its share repurchases and the process or criteria used to determine the amount of repurchases
- Any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during the pendency of 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
- Whether repurchases were made in reliance on the Exchange Act Rule 10b-18 safe harbor
As amended, Regulation S-K Item 703 also would require companies to check a box indicating whether any officers or directors subject to Exchange Act Section 16(a) reporting requirements purchased or sold shares (or units) of the class of equity that is the subject of the repurchase program within 10 business days before or after the announcement of such repurchase program.
CONCLUSION
If adopted as proposed, the Proposed Rule would significantly increase both the level of detail and the frequency with which companies are required to disclose information relating to stock repurchase programs.
We expect that the disclosed rationale and criteria called for under the Proposed Rule would be broad-based and likely fairly similar across most companies. Regardless, companies would need to grapple with how to best disclose the underlying rationale for such programs—as well as the authorized amount—and likely will face increased scrutiny if the proffered reasons do not pass muster with stockholders, proxy advisory firms, and other stakeholders, or differ significantly from industry peers. The next-business-day disclosure that would be imposed by Form SR also represents a compressed timeframe for providing this information.
In light of the Proposed Rule and with many companies now either looking to reinstate buyback programs as they emerge from the most serious impacts of the COVID-19 pandemic or having recently implemented new programs, it is more important than ever to carefully document repurchase-related board considerations and approvals.
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