On May 3, the Securities and Exchange Commission (SEC) approved new final rules after an extended period of public comments and review, requiring public companies to:
- Disclose information regarding executed corporate share repurchases (aka stock buybacks), including:
- How many shares the company repurchased
- The average price of shares repurchased
- Director and officer transactions involving shares purchased or sold within four business days before or after a repurchase announcement
- Explain the company’s motives for conducting such buyback transactions. (When a company repurchases shares, it reduces the number of outstanding shares in circulation, improving the earnings-per-share ratio of remaining shares, and proponents of the new rules argue that buybacks skew important financial metrics that investors consider when allocating investments with public companies.)
The SEC issued a mandate that most public companies will be required to disclose all their daily repurchase activity on a quarterly basis. The new rules require significantly greater detail about daily stock repurchases, and they will require filing of that information quarterly in a new exhibit to the company’s Form 10-K and Form 10-Q filings. Non–US companies that report on an annual Form 20-F will now have a quarterly report requirement on new Form F-SR for buyback disclosures in the quarter. The new rules eliminate the current requirements in Item 703 of Regulation S-K and Item 16E of Form 20-F for issuers to disclose monthly repurchase data in periodic reports since the new (and more detailed) requirements on share repurchases aggregated on a daily basis make the existing disclosure requirements redundant.
While disclosure of corporate buybacks has long been required for SEC-reporting companies, the new rules significantly increase the level of information that must be disclosed. Stock buyback activity for public companies reached an all-time high of $1.25 trillion in 2022, according to SEC data, up from the previous record of $950 billion in 2021, according to the Washington Post. The SEC’s motivation for the rule is the concern that companies, and more specifically executive management at companies, have begun to use buybacks to meet near-term earnings targets tied to executive compensation or that repurchases come at the expense of research and development and other priorities that increase shareholder value in the long run. This supposed utilization of buybacks to meet earnings targets, coupled with the argued obfuscation of financial metrics upon which investors rely, has led the SEC to promulgate rules that opponents argue “micromanage corporate decisions in a free economy,” according to SEC Commissioner Hester Pierce.
The SEC’s desired goal is for investors to have more information regarding corporate buybacks upon which to make more-informed decisions once the new rules take effect. To provide investors with more information on corporate buybacks, under the new rules companies will also be required to explain their rationale for conducting buybacks and what criteria they used to authorize them. According to a statement by SEC Chair Gary Gensler, “Through these disclosures, investors will be able to better assess issuer buyback programs.”
The final rule issued by the SEC acknowledges that companies may, in certain circumstances, conduct buybacks for beneficial reasons, including:
- Providing tax advantages to investors
- Providing price support for its stock during a market sell-off
- Offsetting the dilutive impacts of shares that are granted to employees in the form of equity compensation
But the rule additionally finds that existing buyback disclosures, prior to the passage of the new rules, failed to inform investors whether companies could be authorizing buybacks for “suboptimal” reasons, given the link between the value of a company’s stock and executive compensation or obfuscating financial metrics.
“With today’s actions, investors will be able to distinguish between repurchases intended to increase shareholder value, and those that are motivated by other reasons, such as short-term attempts to boost share price,” SEC Commissioner Jaime Lizarraga said.
Lizarraga also defended the SEC’s new rules requiring foreign issuers to report buyback activity quarterly on the grounds that companies raising capital in the US should operate on a “level playing field” for the benefit of American investors. The new rules now require foreign issuers whose shares trade in the US to report repurchases quarterly regardless of their home country’s disclosure laws. Detractors of the new rules argue that the SEC should have conducted separate rulemaking for foreign-based issuers, noting that in the past the agency has allowed foreign companies to satisfy certain US regulatory obligations through annual reports.
Companies should begin considering updates to their internal controls and evaluation methods regarding buybacks to reflect the new rules and their increased requirements, including preparing for the quarterly reporting of daily stock buyback information and justification and evaluating potential blackout periods for director and officer trading for the four trading days before and after stock buyback announcements. At McCarter & English, we have experienced corporate counsel who can assist with crafting buyback policy language to reflect these new changes as well as implementing and integrating corporate procedures to more easily gauge daily stock buybacks for reporting purposes and the methodology to justify same.