SEC Adopts New Rules on Share Repurchase Disclosure
May 11, 2023
On May 3, 2023, the Securities and Exchange Commission (“SEC”) adopted amendments requiring issuers to provide additional disclosures about repurchases of their equity securities. The amended rules, which become effective for most issuers with the first filing that covers the first full fiscal quarter beginning on or after October 1, 2023, will require periodic tabular disclosure of daily share repurchase activity, enhanced narrative disclosure regarding share repurchases and related policies and procedures, and disclosure of certain trades by officers or directors and 10b5-1 trading arrangements. Similar to current rules, share repurchase disclosures will be required only for any class of an issuer’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, and will apply to repurchases made by or on behalf of the issuer or any “affiliated purchaser” of the issuer.
Tabular Disclosure of Daily Repurchase Activity
The SEC has amended Item 703 of Regulation S-K to require issuers to provide in a new exhibit to each relevant periodic report specified tabular disclosure of daily repurchase activity, as opposed to monthly aggregated repurchase activity required by current disclosure rules. The new tabular exhibit disclosure must include the following quantitative repurchase data provided separately for each date on which share repurchases are executed in the covered period:
- The class of equity securities;
- The total number of shares purchased on such date, including the total number of shares purchased as part of a publicly announced repurchase plan or program;
- The average price paid per share (excluding brokerage commissions and other costs of execution);
- The total number of shares purchased as part of a publicly announced repurchase plan or program;
- The aggregate maximum number of shares (or approximate dollar value) that may yet be purchased under the publicly announced repurchase plan or program;
- The total number of shares purchased on the open market;
- The total number of shares purchased that are intended to qualify for the safe harbor in Rule 10b-18; and
- The total number of shares purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (and a footnote to the table must disclose the date that the plan was adopted or terminated).
The tabular share repurchase information disclosed in the new exhibit will be considered filed (rather than furnished) with the SEC similar to the share repurchase disclosure required by existing rules and the additional narrative disclosure required in an issuer’s periodic reports described below. Accordingly, issuers will be subject to potential liability for material misstatements or omissions in the tabular repurchase disclosure under Section 18 of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933 for registration statements into which such disclosure is incorporated by reference.
For domestic issuers, the tabular disclosure of daily repurchase activity must be provided on a quarterly basis as a new Exhibit 26 to each Form 10-Q or Form 10-K (for an issuer’s fourth fiscal quarter). Foreign private issuers must provide the disclosure within 45 days after the end of every quarter on a new Form F-SR, and listed closed-end investment funds must provide this information semi-annually in their annual and semi-annual reports on Form N-CSR.
Issuers are no longer required to provide the monthly aggregated repurchase data in periodic reports that was previously required under Item 703 of Regulation S-K.
Disclosure of Certain Trades by Officers or Directors
Under the amended rules, issuers must check a box preceding its tabular disclosures if any of the issuer’s officers or directors purchased or sold securities that are subject to the issuer’s share repurchase plan within four business days before or after the public announcement of the repurchase plan (including announcement of any increase of an existing share repurchase plan). Domestic issuers and listed closed-end investment funds must provide this information for officers or directors subject to Section 16(a) of the Securities Exchange Act of 1934. Foreign private issuers must provide the disclosure for directors and members of senior management who would be identified pursuant to Item 1 of Form 20-F.
The checkbox requirement applies to all purchase or sale transactions by an officer or director during the specified four-business-day period, even if a transaction was made pursuant to a Rule 10b5-1 trading arrangement or was a sell-to-cover transaction to fund tax withholding on share vesting. An issuer may include additional disclosure as it determines appropriate to provide context for investors about any purchase or sale transactions by an officer or director and must provide such additional disclosure if it is material and necessary to prevent the other required disclosure from being misleading.
If an issuer has multiple classes of equity securities, each with its own repurchase plan, the checkbox requirement applies if an officer or director purchased or sold shares of a class of the issuer’s equity securities within the specified four-business-day period that is subject to any issuer share repurchase plan or program publicly announced by the issuer.
Narrative Disclosure About Share Repurchases
Amended Item 703 of Regulation S-K expands existing disclosure required in periodic reports about share repurchases to require disclosure about:
- The objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases under the plan or program;
- The number of shares purchased other than through a publicly announced plan or program and the nature of those repurchases (e.g., whether they were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer or another transaction);
- The issuer’s publicly announced repurchase plans or programs, including (i) the date each plan or program was announced, (ii) the dollar amount (or share or unit amount) approved, (iii) the expiration date (if any) of each plan or program, (iv) each plan or program that has expired during the period covered by the table, and (v) 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. These disclosures are unchanged from existing disclosure requirements; and
- Any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by the issuer’s officers and directors, including any restrictions on such transactions.
The discussion of the issuer’s objectives or rationales for its repurchase plan should convey “a thorough understanding” of the plan’s objectives, but the SEC clarified that it does not expect disclosure to reveal any competitive or sensitive information beyond what may already be gleaned from an issuer’s other disclosures. In considering possible disclosure to provide, the SEC referenced the following disclosure suggestions in the adopting release: (i) other possible ways to use the funds allocated for the repurchase and comparing the repurchase with other investment opportunities, such as capital expenditures and other uses of capital, (ii) the expected impact of the repurchases on the value of remaining shares, (iii) factors driving the repurchases, including whether the issuer’s stock is undervalued, and (iv) the sources of funding for the repurchases, where material, such as where the source of funding results in tax advantages that would not otherwise be available for a repurchase.
Domestic issuers are required to provide the narrative disclosure in the same location in the body of the applicable Form 10-Q or Form 10-K as existing share repurchase disclosure is currently required (i.e., Part II, Item 2 of Form 10-Q and Part II, Item 5 of Form 10-K), although, as noted above, the tabular disclosure has been moved to an exhibit. Corresponding disclosure requirements will be required for foreign private issuers in Form 20-F and listed closed-end investment funds in Form N-CSR.
Disclosure of 10b5-1 Trading Arrangements for Share Repurchases
Under new Item 408(d) of Regulation S-K, a domestic issuer will be required to disclose on a quarterly basis in each applicable periodic report on Forms 10-Q and 10-K (for an issuer’s fourth fiscal quarter) whether the issuer adopted or terminated a trading arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) during the issuer’s last fiscal quarter. Issuers are also required to provide a description of the material terms of the Rule 10b5-1 trading arrangement, such as:
- The date on which the issuer adopted or terminated the Rule 10b5-1 trading arrangement;
- The duration of the Rule 10b5-1 trading arrangement; and
- The aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.
Issuers are not required to disclose the price at which the trades are authorized.
Domestic issuers are required to provide the new disclosure in each Form 10-Q and Form 10-K for any quarter during which a Rule 10b5-1 trading arrangement was adopted or terminated, even if there were no share repurchase transactions pursuant to the Rule 10b5-1 trading arrangement during the quarter. The disclosure will be required in the same location as the new disclosures required for Rule 10b5-1 trading arrangements entered into by an issuer’s officers and directors under separate SEC rules adopted in December 2022 (i.e., Part II, Item 5 of Form 10-Q and Part II, Item 9B of Form 10-K). If disclosure otherwise required by Item 703 would satisfy the new Item 408(d) disclosure requirement, an issuer will be permitted to cross-reference to that disclosure to avoid duplication. Foreign private issuers (filing on FPI forms), asset-backed issuers, and investment companies will not be subject to the additional disclosure requirement for Rule 10b5-1 trading arrangements.
Under the amended rules, issuers are required to tag the new disclosures in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. Detailed tagging will be required for the quantitative amounts disclosed within the required tabular disclosures and block text tagging and detailed tagging will be required for the required narrative and other quantitative disclosures.
Domestic issuers are required to comply with the new disclosure requirements in their periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. For calendar year-end filers, the Form 10-K for the year ending December 31, 2023 will be the first filing in which the new disclosures will be required.
Foreign private issuers are required to comply with the new disclosure requirements in the new Form F SR beginning with the Form F-SR covering the first full fiscal quarter that begins on or after April 1, 2024, and the expanded narrative disclosures will be required starting in the first Form 20-F filed after the first Form F-SR has been filed. Listed closed-end investment funds are required to comply with the new disclosure requirements beginning with their Form N-CSR covering the first six-month period beginning on or after January 1, 2024.
There are no exemptions or extended compliance periods for smaller reporting companies or emerging growth companies.
While the final share repurchase disclosure requirements adopted by the SEC thankfully avoid the real-time disclosures initially proposed by the SEC, they will still create additional disclosure burdens for issuers and are likely to produce heightened scrutiny of issuer share repurchase activities. These factors, together with the new 1% excise tax applicable to repurchases under the Inflation Reduction Act as discussed in our August 2022 client alert, may well impact future share repurchase plans for some issuers.
Other matters issuers should consider in planning the timing and structure of any future share repurchases include:
- The issuer’s existing policies and procedures for adoption of Rule 10b5-1 trading arrangements for issuer share repurchases, including whether to formalize a “cooling-off” period requirement for the first repurchase under any adopted Rule 10b5-1 repurchase plan, in light of new requirements to disclose information about repurchases under a Rule 10b5-1 trading arrangement, including plan adoption and termination;
- The impact of the new, daily-disclosure requirement for issuers who engage in accelerated share repurchases or similar structured repurchase programs, including what constitutes a daily repurchase by the issuer for purposes of the tabular disclosure (i.e., each delivery of shares to the issuer from its counterparty dealer or certain purchases by such dealer effectuated in connection with such repurchase program) and how to determine the average price paid per share on each reported date; and
- The adequacy of existing pre-clearance requirements or other controls in place to identify potential officer or director transactions occurring close-in-time to proposed share repurchase transactions and whether any additional trading policies or restrictions are warranted in connection with the announcement of a share repurchase plan.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jaroslaw Hawrylewicz, an O’Melveny partner licensed to practice law in New York, Shelly Heyduk, an O’Melveny partner licensed to practice law in California, Robert Plesnarski, an O’Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, James M. Harrigan, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, and Chloe K. Keedy, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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