Overview
On November 22, 2023, the US Securities and Exchange Commission (SEC) issued an order postponing the effective date for the new share Repurchase Rule (88 Fed. Reg. 36002 (June 1, 2023)) pending further SEC action. The SEC’s postponement of the effective date is in response to a remand by the US Court of Appeals for the Fifth Circuit for the SEC “to correct the defects” of the Repurchase Rule. Absent the SEC’s postponement, domestic issuers with a December 31 fiscal year-end would have been required to include additional disclosures regarding their fourth quarter share repurchase activities in a new exhibit to their annual report on Form 10-K for the year ending December 31, 2023.
The SEC’s objective in adopting the Repurchase Rule was to remedy asymmetries in information between issuers and the investing public with respect to issuers’ share repurchase activity. The Repurchase Rule as adopted by the SEC on May 3, 2023, would have expanded the reporting requirements for issuers regarding share repurchase activity by mandating the disclosure of daily repurchase data, the objectives and rationales for the repurchase program, the processes and criteria used to determine the amount of repurchases, the policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during the period of a repurchase program, the adoption and termination of Rule 10b5-1 trading agreements, and other information. Please refer to our prior publication on the initial adoption of the Repurchase Rule for additional information regarding the disclosures required thereunder.
The postponement of the Repurchase Rule followed an opinion issued by the Fifth Circuit in Chamber of Com. of the USA v. SEC, No. 23-60255 (5th Cir. 2023). In that case, the Court found that the SEC violated the Administrative Procedure Act in arbitrarily and capriciously adopting the rule by (i) failing to respond to comments to the Repurchase Rule and (ii) failing to conduct a proper cost-benefit analysis of the Repurchase Rule prior to its adoption.
The Court provided the SEC with a period of 30 days expiring on November 30, 2023, to remedy procedural defects to substantiate the Repurchase Rule. On November 26, 2023, the Court denied the SEC’s request for an extension of the 30-day remedy period. On December 1, 2023, the SEC’s Office of the General Counsel submitted a letter to the Court stating that the SEC was unable to “correct the defects in the rule” within the 30-day period.
McDERMOTT INSIGHT
On December 7, 2023, a motion to vacate the Repurchase Rule was filed, and it is expected that the Repurchase Rule will now be vacated by the Court. The SEC may either appeal the decision or adopt a new share repurchase rule proposal that would attempt to address the defects of the previous proposal, as identified by the Court, by providing qualitative analyses of the costs and benefits of daily repurchase disclosures, substantiating the issue of informational asymmetry in the context of share repurchases and responding to comments on such new share repurchase rule prior to its adoption.
