In a significant victory for American businesses, the United States Court of Appeals for the Fifth Circuit recently vacated the Securities and Exchange Commission’s (SEC) final rule mandating daily disclosure of share repurchase activity. This decision has far-reaching implications for businesses across various industries and underscores the ongoing debate surrounding regulatory requirements and corporate transparency.
Our business and commercial litigation attorneys at Fee, Smith & Sharp LLP discuss the details of the case, its implications for Texas businesses, and what company owners should know moving forward.
Understanding Share Repurchases
Share repurchases, or stock buybacks, occur when a business uses its cash reserves to buy back its outstanding shares from the market. This can be done through various methods, such as open market purchases, fixed-income purchases, and accelerated share repurchase programs (ASRs). Companies engage in buybacks for several reasons, including:
- Increasing earnings per share (EPS): By reducing the number of outstanding shares, buybacks can artificially increase a company’s EPS, a key metric investors use to evaluate profitability.
- Signaling confidence: Buybacks can signal management’s confidence in the company’s prospects and commitment to shareholder value.
- Hedging against dilution: Companies may repurchase shares to offset dilution caused by stock option grants or other forms of employee compensation.
The SEC’s Final Rule and Its Controversies
In May 2023, the SEC adopted amendments to modernize share repurchase disclosure requirements. A key provision of this final rule mandated companies to disclose daily quantitative repurchase activity on a quarterly or semi-annual basis, based on the filer type. The SEC framed the rule to provide investors with timely and comprehensive information about stock repurchases, promoting market efficiency and investor confidence.
Shortly after the SEC implemented the final rule, it sparked significant controversy and faced legal challenges from various stakeholders, including business advocacy groups and industry associations. Arguments against this daily disclosure requirement included the following:
- Increased regulatory burden: Businesses argued that the daily disclosure requirement was overly burdensome and time-consuming, requiring significant resources to compile and report the data.
- Limited investor benefit: Critics questioned the actual benefit for investors, arguing that daily data would not provide meaningful insights beyond existing quarterly disclosures.
- Potential for marketplace manipulation: Concerns arose that high-frequency traders could exploit daily data to manipulate stock prices.
The Fifth Circuit’s Ruling and Legal Reasoning
In a unanimous decision on December 19, 2023, the Fifth Circuit Court of Appeals vacated the SEC’s final rule on daily share repurchase disclosures. The court found that the SEC violated the Administrative Procedure Act (APA) when it adopted the Share Repurchase Disclosure Modernization Rule. These violations occurred in the following ways:
- The SEC failed to address public comments suggesting methods for quantifying its final rule’s economic impact. It had previously argued that quantifying many of these effects was impossible.
- The SEC’s analysis of its final rule’s costs and benefits fell short of the APA
The Fifth Circuit initially gave the SEC 30 days to fix these deficiencies. The court stated there was at least a legitimate probability that the SEC would successfully substantiate its final rule if it had the opportunity. However, despite the additional time, the SEC informed the Fifth Circuit that it could not remedy the violations identified by the court within 30 days.
What the Ruling Means for Business Owners
The Fifth Circuit’s decision provides relief for many businesses, particularly smaller companies, who faced a significant compliance burden with the daily disclosure requirement. However, it is important to note that the SEC will likely continue prioritizing transparency around share repurchases. Business owners should remain prepared for potential future rulemaking in this area.
While the SEC may choose to revisit the issue and propose alternative disclosure rules, the timing and scope of any new regulations remain uncertain. In the meantime, our commercial litigation lawyers at Fee Smith & Sharp LLP can keep business owners informed about developments in securities law and help them maintain a proactive approach to compliance and risk management.
Recommendations for Business Owners
While the immediate burden of daily disclosure has been lifted, business owners should remain informed about potential developments. Here are ways your company can remain proactive:
- Monitor SEC activity: Stay updated on the SEC’s response to the Fifth Circuit’s decision. Our business and commercial litigation practice group can help you navigate any potential future rule changes.
- Maintain strong investor relations: Fostering open and transparent communication with investors remains crucial regardless of mandated disclosure requirements. Consider providing quarterly or even more frequent share repurchase data as part of a comprehensive investor relations strategy.
- Seek legal guidance: Consulting with our qualified business and commercial litigation attorneys in Texas is essential for ensuring your company complies with current and future regulations regarding share repurchase disclosures.
The Current SEC Regulations Governing Stock Buybacks
Business owners must remain cognizant of existing SEC regulations governing stock repurchases. Key regulations and provisions relevant to stock repurchases include:
- Regulation S-K: Outlines disclosure requirements for companies filing registration statements and periodic reports with the SEC
- Regulation M: Addresses market manipulation and insider trading issues related to securities offerings and market transactions
- Insider trading rules: Section 16 of the Securities Exchange Act of 1934 and related rules govern transactions by corporate insiders, including officers, directors, and significant shareholders.
- Proxy rules: The SEC’s proxy rules require companies to disclose information about stock repurchases in proxy statements distributed to shareholders.
- Anti-fraud provisions: The SEC’s anti-fraud provisions, including Rule 10b-5 under the Securities Exchange Act of 1934, prohibit deceptive or manipulative practices concerning securities transactions.
Companies and their executives can suffer enforcement actions, civil penalties, and reputational damage if they fail to adhere to these regulations. Therefore, business owners should consult legal and compliance professionals to ensure compliance with applicable SEC rules and regulations when implementing stock repurchase programs.
Consult With Fee, Smith & Sharp LLP for Help Remaining Vigilant About Changes in Securities Law
The Fifth Circuit’s decision on daily share repurchase disclosures is a significant development with potential long-term implications for business owners and investors. While the immediate burden of daily reporting has been lifted, companies should remain proactive and adaptable as the regulatory landscape surrounding buybacks evolves.
Contact our business and commercial litigation lawyers at Fee, Smith & Sharp LLP to schedule a consultation regarding how we can help you remain proactive in regulatory compliance and corporate transparency.
