Introduction
Background
New form SR filing requirement
Proposed revisions to item 703
Inline XBRL requirement
Comment
On 15 December 2021, the Securities and Exchange Commission (SEC) proposed a new rule "intended to improve the quality, relevance and timeliness of information related to issuer share repurchases".(1) Specifically, the new rule would:
- require companies to report any share repurchases on a new form SR one business day after the issuer executes a share repurchase;
- amend item 703 of Regulation S-K (item 703) to require significant additional disclosures regarding the structure of a company's repurchase programme and executed share repurchase transactions; and
- require information disclosed pursuant to form SR and item 703 to be reported using inline extensible business reporting language (XBRL).
The chair of the SEC, Gary Gensler, noted the purpose of these amendments is to "lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosure" and the rule proposal stated that the new rules would provide investors with "more detailed and timely disclosure to monitor and evaluate issuer share repurchases, and their effects on the market for the issuer's securities".
Although companies typically disclose overall plans for share repurchases when the plan is authorised by its board of directors, they rarely disclose the specific dates when repurchases are executed under the plan. Currently, there is no disclosure requirement that mandates current disclosures relating to repurchase activity by a company.
Item 703 currently requires disclosure on a quarterly basis of any purchase made by or on behalf of an issuer or by someone controlling or acting on behalf of the issuer (referred to as an "affiliated purchaser").(2) The disclosure is required in the issuer's quarterly report on form 10-Q for the first three quarters of its fiscal year and in its annual report on form 10-K covering the fourth quarter. The same disclosure is required in form 20-F for foreign private issuers on an annual basis.(3) Item 703 currently requires issuers to disclose in tabular format:
- the number of shares purchased during the relevant period (reported on a monthly basis);
- the average price paid;
- whether the shares were purchased pursuant to an announced plan;
- the remaining amount that may be purchased on announced plans; and
- the nature of the repurchase transaction.
New form SR filing requirement
The proposed amendments would require issuers to furnish a new form SR one business day after the date the issuer or any affiliated purchaser executes a purchase of the issuer's equity securities that are registered under section 12 of the Exchange Act.
Proposed form SR would require the following disclosure in tabular format, by date, for each class of securities that are repurchased:
- class of securities purchased;
- total number of shares purchased, whether or not made pursuant to publicly announced plans or programmes;
- average price paid per share on such date;
- aggregate number of shares purchased on the open market;
- aggregate number of shares purchased in reliance on the Rule 10b-18 safe harbour; and
- aggregate number of shares purchased pursuant to a Rule 10b5-1 plan
In addition, the rule proposal contemplates that form SR would be "furnished" rather than filed, which would mean companies would not be subject to liability under section 18 of the Exchange Act and the information would not be deemed incorporated by reference into a prospectus or other filings under the Securities Act, and therefore, would not be subject to section 11 liability.
Proposed revisions to item 703
The proposed amendments revise and expand the disclosure requirements in item 703(4) in conjunction with the disclosures required under the proposed form SR. The proposed amendments are intended to provide investors with more detailed and timely information that they can use to evaluate issuer share repurchases. Specifically, the proposed amendments would require the following additional disclosures:
- the company's objective or rationale for repurchasing shares and its process or criteria used to determine the amount of repurchases;
- identification of any section 16 officer or director that purchased or sold shares that were subject to the company's repurchase within 10 business days (before or after) of the announcement of the company's share repurchase plan or programme;
- the company's policies, procedures and any restrictions relating to purchases and sales of its securities by its officers and directors during a repurchase programme;
- whether its repurchases were made pursuant to a Rule 10b5-1 plan and, if so, the date(s) that the plan was adopted or terminated; and
- whether its repurchases were made in reliance on the Rule 10b-18 safe harbour.
The proposed amendments would require issuers to tag information disclosed pursuant to the new form SR and item 703(5) in inline XBRL in accordance with Rule 405 of Regulation S-T and the Electronic Data Gathering, Analysis and Retrieval (EDGAR) Filer Manual. The proposed requirements would include detail tagging of quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging of narrative and quantitative information disclosed in the footnotes to the tables required by such forms.
The rules, if adopted as proposed, would fundamentally alter the disclosure requirements in connection with a company's share repurchases, potentially affecting how a company executes share repurchase transactions and its willingness to do so. The rule appears to be premised on the SEC's concerns regarding the use by executives of share repurchases for a number of "opportunistic and harmful" purposes, such as decreasing outstanding shares to boost earnings per share (EPS) in an effort to meet or beat forecasts and/or trigger EPS-tied incentive compensation pay-outs targets. The SEC focuses less on the use by many companies of share repurchases for ordinary capital management purposes and in a manner that is consistent with maximising shareholder value.
It is expected that public comment on the rule proposal will focus on the appropriateness of a next-business day filing requirement in form SR. For many companies, a one-day filing requirement could create a significant administrative burden as many companies implementing a share repurchase programme enter the market to repurchase securities on successive days and structure their repurchases to fall within the limits of the Rule 10b-18 anti-manipulation safe harbour. Under the proposed rules, a new form SR would need to be filed each day of repurchase, which could also impact the overall effectiveness of a company's share repurchase programme. A form SR filing on the day after a repurchase programme has commenced would immediately announce a company's plans, which would tip off other market participants whose opportunistic trading activity could serve to increase the overall cost and reduce the effectiveness of the company's repurchase programme. It is also unclear how the form SR disclosure requirement would be satisfied in connection with a company's entry into an accelerated share repurchase programme as the information required for the form SR may not be available on the next business day. The next-business day form SR disclosure requirement will also impose new obligations on brokers who assist companies with share repurchase transactions as they will need to assist in gathering the information necessary to complete the form SR filing.
It is also expected that there will be public comment on the new item 703 requirement for disclosure of the rationale behind a company's share repurchase programme and the process or criteria the company used to determine the number of shares to repurchase. These disclosures could require companies to reveal information about their share repurchase strategy. It is also unclear from the rule proposal how investors would use this information and what the additional information included as part of the item 703 table provides to investors that is not included in the disclosure which many companies include in their management discussion and analysis (MD&A).
Also, on 15 December 2021, the SEC proposed a new rule to address the structure of Rule 10b5-1 plans and the disclosures relating to the adoption and modification of such plans by insiders and companies. As many companies use Rule 10b5-1 plans in connection with share repurchase transactions, the progression of these new rules, particularly a proposed cooling-off period after the adoption or modification of a Rule 10b5-1 plan and new extensive disclosure requirements, will be important to watch.
The comment period for the new rule is 45 days, beginning from the date the rule is first published in the Federal Register, which we expect to occur shortly.
For further information on this topic please contact Richard Alsop, Geoffrey B Goldman, Lona Nallengara or Kristina Trauger at Shearman & Sterling by telephone +1 212 848 4000) or email ([email protected], [email protected], [email protected] or [email protected]). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
Endnotes
(1) See Share Repurchase Disclosure Modernization, SEC Release Nos. 34-93783; IC-34440 (15 December 2021).
(2) An "affiliated purchaser" means:
- a person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer's securities; or
- an affiliate who, directly or indirectly, controls the issuer's purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer.
However, an "affiliated purchaser" shall not include a broker, dealer or other person solely by reason of such broker, dealer or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director's participation in the decision to authorise Rule 10b-18 purchases by or on behalf of the issuer. See 17 Code of Federal Regulations section 240.10b-18(a)(3).
(3) The same disclosure is required in form N-CSR on a semi-annual basis for certain closed-end funds. See the SEC release for details.
(4) The proposed amendments also include comparable disclosure requirements in item 16E of form 20-F and item 9 of form N-CSR.
(5) The proposed amendments would also require issuers to tag information disclosed pursuant to item 16E of form 20-F and item 9 of form N-CSR in inline XBRL.