U.S. SEC Proposes Expanded Share Repurchase Disclosure

On December 15, 2021, the U.S. Securities and Exchange Commission (the SEC) proposed amendments which would require that a public company provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a repurchase of its equity securities.[1] The proposed amendments would also expand the existing periodic disclosure requirements relating to share repurchases.

If adopted after a 45-day comment period, these proposed amendments would:

• Require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order;
• Amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and
• Require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL.

Background

In recent years, politicians, institutional investors, the media, academics, and governance experts have voiced sharp criticism of share repurchase programs for a variety of reasons. This criticism has become more heightened during COVID-19 and the federal government’s response to the crisis.[2] Critics of share repurchase programs believe that that these programs:

• Promote the use of capital for short-term purposes (i.e., near-term appreciation in a company’s stock price) to the detriment of long-term initiatives like research and development, capital expenditures, and other growth prospects;
• May be used by companies to manage their reported per-share earnings metrics in an effort to meet or exceed consensus analyst estimates;
• May benefit corporate insiders who sell their stock when share prices have appreciated after the announcement and implementation of a stock repurchase program; and
• Allocate capital that could be used to benefit employees in the form of higher wages or enhanced benefits.

Public companies are currently subject to public reporting obligations relating to share repurchases in their periodic reports. In particular, Item 703 Regulation S-K and Forms 10-Q, 10-K, and 20-F (applicable to foreign private issuers) require quarterly periodic disclosure for all repurchases of the company’s own equity securities. In the event of any stock repurchase, a company must disclose in tabular form:

• The total number of shares, by month, repurchased by or on behalf of the company or any affiliated purchaser during the past fiscal quarter;
• The weighted average price paid per share;
• The number of shares that were purchased as part of a publicly announced repurchase plan or program; and
• The maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.

For publicly announced repurchase plans or programs, the company is also currently required to disclose (by footnotes to the table):

• The announcement date of the plan or program;
• The share or dollar amount approved;
• The expiration date (if any) of the plans or programs;
• Each plan or program that has expired during the period covered by the table; and
• Each plan or program that the company has determined to terminate prior to expiration or under which the company does not intend to make further purchases.

Certain information regarding share repurchases is also required to be disclosed in a company’s financial statements, including in the statements of cash flows indicating the amount of cash paid for repurchased securities and the statements of changes in shareholders’ equity indicating any reduction in securities outstanding and additional paid-in capital for the securities repurchased. Companies often disclose share repurchase activity in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section required in periodic reports under Item 303 of Regulation S-K. 

In the Proposing Release, the SEC notes the high dollar volume of recent share repurchase activity (nearly $700 billion in 2020) “has been accompanied by public interest in corporate payouts in the form of share repurchases.” The Proposing Release surveys studies that present both positive and negative perspectives on the practice of company share repurchases.

The SEC indicates in the Proposing Release that the proposed amendments result from an ongoing, comprehensive evaluation of the SEC’s disclosure requirements regarding share repurchases. In 2016, the Commission issued a Concept Release on the business and financial disclosures required by Regulation S-K, including disclosure required pursuant to Item 703.[3] That Concept Release requested comment on, among other things, whether Item 703 disclosure is important to investors, whether the SEC should require more detailed or more frequent disclosure regarding share repurchase transactions, and whether there should be a de minimis monetary threshold for disclosure of share repurchases. The SEC also notes that it received a rulemaking petition expressing general support for the current regulatory regime for issuer share repurchases, but recommending revisions to the SEC’s executive compensation disclosure requirements to require disclosure of whether issuer share repurchases have affected the calculation of the repricing of any options, stock appreciation rights, or option-like instruments.[4]

The SEC states in the Proposing Release that, given the growth of issuer share repurchase plans in recent years and the concerns expressed by commentators, “investors could benefit from improving the quality, relevance, and timeliness of information related to issuer share repurchases.” The SEC expresses concern that, because companies are repurchasing their own securities, asymmetries may exist between companies and affiliated purchasers and investors with regard to information about the company and its future prospects. To help address these information asymmetries, the SEC proposes a new disclosure form and additional disclosure requirements relating to company share repurchases.

Proposed Form SR

The SEC is proposing new Rule 13a-21 under the Securities Exchange Act of 1934, as amended (the Exchange Act), and new Form SR, which would require a company, including a foreign private issuer and certain registered closed-end funds, to report any purchase made by or on behalf of the company or any affiliated purchaser of shares or other units of any class of the company’s equity securities that is registered by the company pursuant to Exchange Act Section 12.[5]

The company would have to furnish a new Form SR before the end of the first business day following the day on which the company executes a share repurchase. The Form SR would require the following disclosure in tabular format, by date, for each class or series of securities:

• Identification of the class of securities purchased;
• The total number of shares (or units) purchased, including all company repurchases whether or not made pursuant to publicly announced plans or programs;
• The average price paid per share (or unit);
• The aggregate total number of shares (or units) purchased on the open market;
• The aggregate total number of shares (or units) purchased in reliance on the safe harbor in Exchange Act Rule 10b-18; and
• The aggregate total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

Proposed Form SR would be required to be furnished electronically on the SEC’s EDGAR system. The SEC is proposing to require that companies “furnish,” rather than “file,” Form SR; accordingly, companies would not be subject to liability under Section 18 of the Exchange Act for the disclosure in the Form SR, and the information would not be deemed incorporated by reference into filings under the Securities Act of 1933, as amended (the Securities Act), and thus would not be subject to liability under Securities Act Section 11, unless the issuer expressly elects to incorporate such information.

Proposed Revisions to Item 703 of Regulation S-K, Form 20-F, and Form N-CSR

The SEC is proposing to revise and expand the disclosure requirements in Item 703 (with corresponding changes to Form 20-F and Form N-CSR) to require the following additional disclosure about a company’s share repurchases:

• The objective or rationale for its share repurchases and 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 a repurchase program, including any restriction on such transactions;
• Whether the company made its repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated; and
• Whether repurchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor.

The SEC is also proposing to require that companies disclose if any of their officers or directors subject to the reporting requirements under Exchange Act Section 16(a) purchased or sold shares or other units of the class of the company’s equity securities that is the subject of a company’s share repurchase plan or program within 10 business days before or after the announcement of an purchase plan or program by checking a box before the tabular disclosure of company purchases of equity securities.

In addition to these proposed amendments, the SEC is proposing clarifying amendments to Item 703, Form 20-F, and Form N-CSR, including:

• To relocate certain guidance in the Instruction 1 to paragraph (b)(1) to a new paragraph (c);
• To consistently refer to “issuer” instead of “company”;
• To remove Instruction 1 and 2 in the Instructions to paragraphs (b)(3) and (b)(4) and effectuate those instructions by adding “aggregate” to total number of shares for all plans or programs publicly announced in paragraph (b)(3) in lieu of Instruction 1 and adding proposed paragraph (c) to replace Instruction 2; and
• To delete the Instruction to the affected requirements as they are clear that all purchases, including those that do not satisfy the conditions of Rule 10b-18, are included.

Inline XBRL Requirement

The SEC proposes to require that companies tag information disclosed pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-CSR, and Form SR in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. The proposed requirements would include detail tagging of quantitative amounts disclosed within the tabular disclosures in each of the forms, as well as block text tagging and detail tagging of narrative and quantitative information disclosed in the footnotes to the tables required by Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item 9 of Form N-CSR.

In the Proposing Release, the SEC indicates that tagging the data in Inline XBRL “would enable automated extraction and analysis of granular data on actual repurchases, allowing investors and other market participants to more efficiently perform large-scale analysis and comparison of repurchases across issuers and time periods, including comparing repurchases to information on executive’s compensation.”

Next Steps

The SEC’s proposed amendments are subject to a relatively short comment period of 45 days following publication of the Proposing Release in the Federal Register. We expect that given the priority placed by the SEC on addressing these issues, the SEC will act quickly to consider commenters’ suggestions and adopt final rules.

[1] Release No. 34-93783, Share Repurchase Disclosure Modernization (Dec. 15, 2021).

[2] See our client alert Coronavirus (COVID-19) and Stock Repurchases (Apr. 2, 2020).

[3] Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K (Apr. 13, 2016).

[4] Rulemaking Petition 4-772, Request to Amend Regulation S-K (17 C.F.R. § 229.402(d), instruction (7)) (Apr. 21, 2021).

[5] For purposes of these proposed rules, forms and rule amendments, the requirements also include affiliated purchasers and any person acting on behalf of the company or an affiliated purchaser. The term “affiliated purchaser” as used in Item 703 of Regulation is defined in Exchange Act 10b-18(a)(3).