In a win for conservatives, the recent amendments to the share repurchase rules are officially on hold. Adopted on May 3, 2023 (see HERE) the new disclosure requirements would have taken effect for inclusion in the upcoming 10-K season. Following a successful court challenge, on November 22, 2023, the SEC issued an order postponing the effective date of the new rules pending further SEC action.
Background
On May 3, 2023, the SEC adopted amendments to Securities Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) when issuers bid for or repurchase their common stock.
The SEC allows for limited methods that an issuer can utilize to show confidence in its own stock and assist in maintaining or increasing its stock price. One of those methods is Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Exchange Act Sections 9(a)(2), 10(b) and Rule 10b-5 when issuers bid for or repurchase their common stock in accordance with the Rule’s manner, timing, price and volume conditions. Each of the four main conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made. For more on Rule 10b-18, see HERE.
Showing confidence in a stock and price support are not the only reasons for enacting a share repurchase program. A company may have excess cash and believe providing a return of capital to investors is the most efficient use of such cash. A repurchase program can also be used in lieu of a dividend, providing such benefits as tax advantages for some investors, greater flexibility, and limiting the dilutive effect of future issuances. On the flip side, the SEC has concerns that repurchase programs may also be used to influence accounting metrics (such as earnings per share (EPS) by lowering the total outstanding shares), to impact executive compensation (especially EPS tied compensation), and to increase returns on insider equity sales, all without adequate public disclosure.
Sections 9 and 10 of the Exchange Act are the general anti-fraud and anti-manipulation provisions under the Act. Section 9(a)(2) of the Exchange Act makes it unlawful for any person to, directly or indirectly, create actual or apparent active trading in a security or raise or depress the price of such security for the purpose of inducing the purchase or sale of such security by others.
Section 10(b) of the Exchange Act makes it unlawful for any person to, directly or indirectly, “use or employ, in connection with the purchase or sale of any security… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Rule 10b-5, promulgated under Section 10(b), provides that “[I]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
Companies and affiliates may repurchase the company’s shares through, among other means, open market purchases, tender offers, private negotiated transactions, and accelerated share repurchases. Issuers typically disclose repurchase plans or programs at the time that the share repurchases are authorized by the board of directors. However, up until now, most share repurchases are executed over time through open market purchases through share repurchase plans or programs and the company is not required to, and generally does not, disclose the specific dates on which trades are executed. Investors and other market participants normally do not become aware of a company’s actual share repurchase-related trading activity until they are reported in the company’s quarterly periodic reports, long after the trades have been executed.
Currently Item 703 of Regulation S-K requires companies to disclose any purchase of shares made on its behalf or by an affiliated party on a quarterly basis in Forms 10-Q and 10-K and on an annual basis in Form 20-F for foreign private issuers. The disclosure requirement applies to both open market and private transactions. In general, Item 703 required disclosure of: (i) the total number of shares purchased reported on a monthly basis by class of security; (ii) whether purchases are made other than through a publicly announced plan or program and the nature of the transaction; (iii) the average price paid per share; (iv) the total number purchased as part of a publicly announced share repurchase plan or program; and (iv) the maximum number of shares that may yet be purchased under the plans or programs.
Item 703 also required a footnote disclosure of the terms of all publicly announced repurchase plans or programs, including: (i) the date the plan or program was announced; (ii) the dollar amount approved; (iii) the expiration date (if any) of each plan or program; (iv) each plan or program that has expired during the reporting period; and (v) each plan or program that has been terminated prior to expiration during the reporting period. As noted below, Item 703 is being completely eliminated and replaced by the new disclosure rules.
Although Rule 10b-18 provides a safe harbor from the liability provisions of Section 9(a)(2), 10 and Rule 10(b)(5), like most securities rules, the rule does not provide protection from liability where it is utilized as part of a plan or scheme to evade the securities laws. In addition, an issuer must consider the interaction of insider trading laws when attempting to rely on Rule 10b-18, such as whether it is in possession of material non-public information.
New Share Repurchase Rules
The new rules require an issuer to file a new Form SR or F-SR, on a quarterly basis disclosing daily repurchase activity during the covered disclosure period (registered investment companies must disclose on a semi-annual basis). The new Forms must be included as exhibits to Forms 10-Q and 10-K for domestic issuers and to Forms 20-F and 6-K for foreign issuers. The frequency of reporting is much more palatable than the proposed rule, which would have required daily disclosure filings on the new Forms. To avoid duplication, the new rules eliminate current Item 703 of Regulation S-K, which required monthly repurchase data in periodic reports.
The required disclosures include, the number of shares repurchased that day, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).
Companies will also be required to include a checkbox indicating whether certain officers and directors traded in the company securities in the four business days before or after the announcement of the repurchase plan or program (the proposed rule had a ten-day look-back). Domestic issuers will need to include any Section 16(a) officers and directors and foreign private issuers will include any person identified pursuant to Item 1 of Form 20-F.
Moreover, new Item 408(d) to Regulation S-K will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.
The new rules also revise and expand on narrative repurchase disclosures to include: (i) the objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases; and (ii) any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.
Foreign private issuers (FPIs) that file on FPI forms will disclose the quantitative data in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024, and provide the narrative disclosure starting in the first Form 20-F filed after their first Form F-SR has been filed. FPIs will also have to disclose the daily quantitative repurchase data at the end of every quarter in the new Form F-SR, within 45 days after the end of each fiscal quarter. This requirement has been somewhat controversial as it is the first SEC reporting rule that requires quarterly information from an FPI regardless of home country rules (for more on FPI reporting requirements, see HERE).
Registered closed-end management investment companies that are exchange traded will disclose the quantitative data and provide the narrative disclosure on Form N-CSR beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. All other companies will be required to include the quantitative data as an exhibit to their Forms 10-Q and 10-K and provide the narrative disclosure in their Forms 10-Q and 10-K beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.
The amended rules make several conforming changes to rules and forms. Per usual, the new Forms SR and F-SR require inline XBRL tagging. Finally, in a change from the proposed rule, the Forms SR and F-SR will be “filed” instead of “furnished.”
Form SR/F-SR
The rules add new Exchange Act Rule 13a-21 and Forms SR and F-SR that requires all companies, including foreign private issuers and certain registered closed-end funds, to report any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to Exchange Act Section 12 (for more on Section 12 registration, see HERE).
The Form SR and F-SR require the following disclosure in tabular format, by date, for each class or series of securities: (i) identification of the class of securities purchased; (ii) the total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs; (iii) the average price paid per share (or unit); (iv) the aggregate total number of shares (or units) purchased on the open market; (v) the aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18; and (vi) the aggregate total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (see HERE).
Court Challenge
Following adoption of the new repurchase rules, a lawsuit was filed by the U.S. Chamber of Commerce challenging the rule on multiple grounds. In a big win for conservatives, the Fifth Circuit found that the new rules are arbitrary and capricious. In particular the court found that: (i) the SEC’s assertion that the rules economic effects are unquantifiable is inaccurate; (ii) the SEC failed to demonstrate that its conclusion that the proposed rule “promote[s] efficiency, competition, and capital formation” is “the product of reasoned decision making;” and (iii) the SEC does not support the supposed benefits of the rule including failing to show that opportunistic or improperly motivated buybacks are a genuine problem.
The court gave the SEC thirty days to fix the problems, but the SEC did not do so. As mentioned on November 22, 2023, the SEC issued an order suspending the effectiveness of the new rules pending further SEC action.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
Contact Anthony L.G., PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony L.G., PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Anthony L.G., PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
© Anthony L.G., PLLC
