On December 19, 2023, the U.S. Court of Appeals for the Fifth Circuit vacated the Share Repurchase Disclosure Modernization rule (Repurchase Rule) that was adopted by the U.S. Securities and Exchange Commission (SEC) in May 2023.[1] The Repurchase Rule would have required new share repurchase disclosures in upcoming periodic filings for the period ending December 31, 2023. With the Repurchase Rule vacated (and subject to future SEC guidance), companies should continue to disclose share repurchase information, aggregated on a monthly (rather than daily) basis, under the pre-existing version of Item 703 of Regulation S-K (reproduced in its entirety in the Appendix to this post).
Background
On May 3, 2023, the SEC approved the Repurchase Rule. Among other things, the Repurchase Rule would have required quarterly disclosure of company share repurchases aggregated on a daily basis, checkbox disclosure indicating director or Section 16 officer purchases or sales of company securities made close in time to share repurchase program announcements, and narrative disclosure with respect to the company’s share repurchase plans and programs. The Repurchase Rule also would have required quarterly disclosure regarding the company’s Rule 10b5-1 trading arrangements. For more information on the Repurchase Rule, please see our previous Client Alert.
Shortly after the SEC adopted the Repurchase Rule, on May 12, 2023, the U.S. Chamber of Commerce, the Longview Chamber of Commerce, and the Texas Association of Business filed a petition for review of the Repurchase Rule with the U.S. Court of Appeals for the Fifth Circuit (court), challenging the Repurchase Rule under the Administrative Procedure Act and the U.S. Constitution.
The Ruling
In an opinion issued on October 31, 2023, the court found that the SEC acted arbitrarily and capriciously, in violation of the Administrative Procedure Act, in adopting the Repurchase Rule, and provided for a limited remand allowing the SEC 30 days to correct the deficiencies in the Repurchase Rule.[2] On November 22, 2023, the SEC issued an order postponing the effective date of the Repurchase Rule, pending further SEC action. Concurrently with issuing such order, the SEC filed a motion to extend the remand period beyond the 30 days provided in the court’s opinion. For more information on the court’s opinion and the SEC’s order, please see our previous Known Trends blog posts available here and here.
Following opposition from the petitioners to the SEC’s request for an extension, on November 26, 2023, the court denied the SEC’s motion to extend the remand period, and on December 1, 2023, the SEC’s Office of the General Counsel submitted a letter to the court stating that, consistent with the SEC’s November 22 filing, the SEC “was not able ‘to correct the defects in the rule,’” within the 30-day period. As a result, on December 7, 2023, the petitioners filed a motion to vacate the Repurchase Rule, and on December 19, 2023, the court granted petitioners’ motion and vacated the Repurchase Rule.
What Should Companies Do Now?
With the Repurchase Rule vacated, companies are not currently required to comply with the requirements under the Repurchase Rule, including:
- new Item 601(b)(26) of Regulation S-K, which would have required quarterly tabular disclosure of company share repurchases aggregated on a daily basis and checkbox disclosure indicating if any director or Section 16 officer purchased or sold company securities within four business days before or after the company’s announcement of new repurchase plans or programs (or increases to existing repurchase plans or programs);
- amended Item 703 of Regulation S-K, which would have required narrative disclosure regarding the company’s objectives or rationales for repurchasing its shares and the process or criteria used to determine the amount of repurchases, and any policies or procedures relating to purchases and sales of the company’s stock by its officers and directors during a repurchase program (including any restrictions on such transactions); and
- new Item 408(d) of Regulation S-K, which would have required quarterly disclosure regarding any company Rule 10b5-1 trading arrangements adopted or terminated during the applicable quarterly period.
Although Item 408(d) of Regulation S-K is part of the Repurchase Rule and has been vacated, companies are still required to comply with the remainder of Item 408 of Regulation S-K, including disclosure relating to officer and director Rule 10b5-1 trading arrangements and non-Rule 10b5-1 trading arrangements and company insider trading policies and procedures, when applicable, which was adopted as part of the SEC’s insider trading arrangements and related disclosures rulemaking in December 2022.
With the Repurchase Rule vacated (and subject to future SEC guidance), companies should continue to comply with the disclosure requirements under the pre-existing version of Item 703 of Reg. S-K.
Appendix
§ 229.703 Purchases of equity securities by the issuer and affiliated purchasers.
(a) In the following tabular format, provide the information specified in paragraph (b) of this Item with respect to any purchase made by or on behalf of the issuer or any ‘‘affiliated purchaser,’’ as defined in §240.10b–18(a)(3) of this chapter, of shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act (15 U.S.C. 781).
ISSUER PURCHASES OF EQUITY SECURITIES
(b) The table shall include the following information for each class or series of securities for each month included in the period covered by the report:
(1) The total number of shares (or units) purchased (column (a));
Instruction to paragraph (b)(1) of Item 703: Include in this column all issuer repurchases, including those made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Briefly disclose, by footnote to the table, the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the company’s obligations upon exercise of outstanding put options issued by the company, or other transactions).
(2) The average price paid per share (or unit) (column (b));
(3) The total number of shares (or units) purchased as part of publicly announced repurchase plans or programs (column (c)); and
(4) The maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (column (d)).
Instructions to paragraphs (b)(3) and (b)(4) of Item 703: 1. In the table, disclose this information in the aggregate for all plans or programs publicly announced.
2. By footnote to the table, indicate:
a. the date each plan or program was announced,
b. the dollar amount (or share or unit amount) approved,
c. the expiration date (if any) of each plan or program,
d. each plan or program that has expired during the period covered by the table, and
e. each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.
Instruction to Item 703: Disclose all purchases covered by this Item, including purchases that do not satisfy the conditions of the safe harbor of §240.10b–18 of this chapter.
[1] Chamber of Com. of the U.S. v. SEC, No. 23-60255, No. 150 (5th Cir. Dec. 19, 2023); Share Repurchase Disclosure Modernization, 88 Fed. Reg. 36,002 (June 1, 2023).
[2] Chamber of Com. of the U.S. v. SEC, 85 F.4th 760 (5th Cir. 2023).
