Update on the SEC's Share Repurchase Disclosure Rules - What Should Companies Do Now?

On October 31, 2023, the Fifth Circuit ruled in Chamber of Commerce of the USA v. SEC that the SEC violated the Administrative Procedure Act when it adopted enhanced share repurchase disclosure rules. The Court provided the SEC 30 days—until November 30, 2023—to correct the deficiencies. Thereafter, following an unsuccessful attempt by the SEC to extend the November 30, 2023, deadline, on December 1, 2023, the SEC notified the Court that it was unable to correct the deficiencies by the deadline.

While it remains unclear whether the SEC will appeal the Court’s decision or re-propose the rules, an order to postpone the effectiveness of them issued by the SEC on November 22, 2023, remains in effect. Accordingly, companies with repurchase activity should prepare disclosures for upcoming filings that comply with the old share repurchase reporting regime with which they are familiar.

Background

In May 2023, the SEC adopted final rules intended to modernize and improve disclosure regarding repurchases of a company’s equity securities. The rules require companies to, among other things:

• Specify quantitative daily repurchase data at the end of every quarter in a new exhibit to its Form 10-Q and Form 10-K;
• Disclose the objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases;
• Disclose 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; and
• Include a checkbox above its tabular disclosures indicating whether certain officers and directors purchased or sold shares of the company’s equity securities that are the subject of an issuer share repurchase plan within four business days before or after the repurchase announcement.

The U.S. Chamber of Commerce, the Longview Chamber of Commerce and the Texas Association of Business filed the lawsuit mentioned above, challenging the new rules. The petitioners argued that: (1) requiring companies to disclose the rationale for repurchases violates the First Amendment by impermissibly compelling their speech; (2) the SEC acted arbitrarily and capriciously in adopting the final rules by not considering their comments or conducting a proper cost-benefit analysis; and (3) the SEC did not provide the public with a meaningful opportunity to comment on the rules.

The Court’s Decision

The Court found that the SEC acted arbitrarily and capriciously in adopting the rules, in violation of the Administrative Procedure Act, by not considering the petitioners’ comments or conducting a proper cost-benefit analysis.

Failure to Demonstrate Reasoned Decision-Making

In its proposed rules, the SEC stated that many of the economic effects of the rules cannot be quantified, which prompted the SEC to encourage commenters to provide data and information that would help quantify the benefits, costs and potential impacts of the proposed amendments on efficiency, competition and capital formation. During the comment period, the petitioners in the lawsuit submitted to the SEC three suggestions that explained how the SEC could quantify the proposed rules’ effects. The Court determined that all three suggestions provided quantification of the rules’ costs and benefits. However, the SEC admitted that it never considered any of the petitioners’ suggestions. The Court held that the SEC, by continuing to insist that the economic effects of the rules are unquantifiable despite petitioners’ suggestions, failed to demonstrate that its conclusion that the proposed rules promote efficiency, competition and capital formation is the product of reasoned decision-making.

Failure to Conduct Proper Cost-Benefit Analysis

The Court held that the SEC had failed to adequately substantiate the costs and benefits of the rules. It stated that the SEC had not substantiated its proposition that improperly motivated buybacks are genuine problems. The Court noted, “Almost every part of the SEC’s justification and explanation of the rule reflects the agency’s concern about opportunistic or improperly motivated buybacks. That error permeates—and therefore infects—the entire rule.”

What Should Companies Do Now?

Most companies with repurchase activity were set to begin reporting under the enhanced rules with the first periodic filing covering the first full fiscal quarter starting on or after October 1, 2023. In light of the above, companies with repurchase activity should instead prepare disclosures for upcoming filings that comply with the old rules. We will continue to monitor developments and provide additional information as it becomes available.

Note that the SEC’s order to postpone the effectiveness of the enhanced share repurchase disclosure requirements only impacts disclosures regarding a company’s stock repurchases. The disclosure requirements for the quarterly disclosure rules regarding the adoption and termination (including modifications) of Rule 10b5-1 trading arrangements by an issuer’s directors and officers are not impacted. For a more comprehensive overview of the separate disclosure requirements for Rule 10b5-1 trading arrangement utilization by directors and officers, refer to our alert and related model disclosures.

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If you have any questions regarding this update, please contact one of the authors or your regular Orrick contact.