On December 15, 2021, the U.S. Securities and Exchange Commission (SEC) proposed rules governing issuers' equity share repurchases. Proposed Rule 13a-21 would require more detailed and significantly more frequent disclosure of an issuer's equity share repurchases within one business day of execution of any repurchase order using a new Form SR. The SEC also proposed enhanced periodic disclosure regarding repurchases. The SEC's rationale for proposing these new disclosure requirements was to improve the "quality, relevance, and timeliness of information related to issuer share repurchases" and to deal with perceived "information asymmetries" between issuers and investors. This client alert briefly summarizes the proposed changes.
Current Disclosure Requirement for Repurchases
Under current rules, an issuer repurchasing its own equity securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) must report these repurchases (including those by its affiliated purchasers) on a quarterly basis in their Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
An issuer's disclosure must include the amount of repurchases per month in the quarter covered by the periodic report, the average price paid per share, the number of shares that have been purchased as part of previously announced repurchase programs, and the number of shares that may still be repurchased under previously announced plans. The disclosure must be accompanied by certain footnoted information regarding an issuer's repurchase plans (both announced and not announced).
Proposed Form SR
The proposed rules would create a new Form SR to report daily share repurchases. Issuers (including foreign private issuers and certain registered closed-end funds) would be required to furnish1 the Form SR to the SEC by the end of the first business day following any day on which the issuer (or any affiliated purchasers) executed2 share repurchases.
The Form SR would require the following information in tabular format, by date, with respect to the repurchase:
- Class of securities purchased
- Aggregate number of shares (or units) purchased (including for that purpose all issuer repurchases, whether or not under publicly announced plans or programs)
- Average price per share (or unit)
- Total number of shares (or units) purchased in open market transactions
- Total number of shares (or units) purchased in reliance on the safe harbor in Exchange Act Rule 10b-18
- Total number of shares (or units) purchased under a Rule 10b5-1 plan.
Additional Disclosure in Periodic Reports
The Form SR would supplement, and not replace, the current quarterly repurchase disclosures. In addition, the SEC proposed amendments to the current quarterly disclosure requirements3 to include the following additional disclosures:
- the issuer's objective or rationale for repurchasing its shares and the process or criteria it uses to determine the number of shares to be repurchased;
- any restrictions that the issuer imposes on its Section 16 officers or directors with respect to trading in issuer securities during a repurchase program;
- any other policies or procedures that the issuer has relating to insiders trading during a repurchase program;
- whether repurchases were made pursuant to a Rule 10b5-1 trading plan and if so, the date of the plan's adoption or termination;
- whether repurchases were made in reliance on the Exchange Act Rule 10b-18 safe harbor; and
- checking a box if any of the issuer's Section 16 officers and directors purchased or sold shares (or units) within 10 business days before or after the announcement of the issuer's repurchase plan.
The proposed amendments will be subject to comment for 45 days after publication in the Federal Register.
Build Back Better Act
Issuers interested in conducting a repurchase may also want to be aware of the proposed reconciliation bill commonly known as the Build Back Better Act, H.R. 5376 (the BBBA) that contains various proposed tax law changes, including, of note, a potential one percent excise tax on the value of corporate stock repurchased by a publicly-traded U.S. corporate issuer during a taxable year, reduced by the fair market value of any stock issued by such issuer during such taxable year, subject to certain exceptions. The proposed excise tax would also apply to any transaction that the Treasury Department determines to be substantially similar to a repurchase, and would generally be expected to increase the cost of any share repurchase by a publicly-traded U.S. corporate issuer. The provision, if passed as currently drafted, would be effective for stock repurchases occurring after December 31, 2021, and if enacted, further guidance from the Treasury Department interpreting the statute is expected to follow. Lawmakers have indicated that negotiations over the BBBA will continue into January.
[1] “Furnishing” a document to the SEC is different than “filing” a document with the SEC. Disclosure in documents that are furnished to the SEC 1) is exempt from liability under Section 18 of the Exchange Act, which provides a private right of action for any person who transacts in the issuer’s securities in reliance on a misleading statement or omission made in an Exchange Act filing, and 2) is not automatically incorporated by reference into any other filings with the SEC.
[2] “Execution” is “when the actual exchange of securities and payment occurs, which is known as ‘settlement.’ The date of execution (i.e., the trade date) marks an earlier point of a securities transaction at which the parties have agreed to its terms and are contractually obligated to settle the transaction.” Interpretation of Section 206(3) of the Investment Advisers Act of 1940, Release No. IA-1732, (July 17, 1998) [63 FR 39505 (July 23, 1998)].
[3] Item 703 of Regulation S-K for domestic issuers.
