On December 19, 2023, the Fifth Circuit vacated the SEC's Share Repurchase Disclosure Modernization rule (the “Repurchase Rule") in its entirety. The Repurchase Rule, discussed further in our Client Alert, would have required companies to disclose objectives or rationales and certain additional information for all share repurchases conducted during the quarter on Form 10-Q and Form 10-K and required quarterly disclosure regarding a company's adoption or termination of any Rule 10b5-1 trading plans. The Repurchase Rule was scheduled to go into effect beginning with the Form 10-K or Form 10-Q filed for the first full fiscal quarter beginning on or after October 1, 2023, meaning that for calendar year-end companies, these disclosure requirements would have applied to the 2023 Form 10-K.
In vacating the Repurchase Rule, the court stated “[t]he rule remains no less flawed – and no less unlawful – than it was on October 31, 2023" and that “[t]he SEC acted arbitrarily and capriciously, in violation of the APA, when it failed to respond to petitioners' comments and failed to conduct a proper cost-benefit analysis." As a result, if the SEC determines to pursue rulemaking to require additional disclosures around share repurchases, it will need to begin a new rulemaking process and issue a proposed rule for notice and comment.
Now that the Fifth Circuit has vacated the Repurchase Rule, the pre-existing share repurchase disclosure rules (found in Regulation S-K Item 703, available at https://www.ecfr.gov/on/2023-06-01/title-17/chapter-II/part-229#229.703), which require information on share repurchase programs and quarterly repurchase disclosures presented on an aggregate, monthly basis, will remain in effect. Companies will not be required to provide quarterly disclosure regarding the adoption or termination of any Rule 10b5-1 trading plans by the companies themselves, but must continue to provide disclosure of any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements (as defined in Regulation S-K Item 408(c)) for Section 16 officers and directors.
The Fifth Circuit's decision to vacate the Repurchase Rule marks the culmination of the lawsuit brought by the U.S. Chamber of Commerce and several other business groups (“Petitioners") challenging the Repurchase Rule. The lawsuit, filed in May 2023, alleged that:
- the requirement for companies to disclose the rationale behind their repurchases violates the First Amendment by impermissibly compelling companies' speech;
- the SEC acted arbitrarily and capriciously in adopting the Repurchase Rule by not considering the Petitioners' comments on the rule when it was proposed and by not conducting a proper cost-benefit analysis; and
- the SEC did not provide the public with a meaningful opportunity to comment on the SEC's rule when it was proposed. On October 31, 2023, the court issued an opinion ruling for Petitioners on the argument that the SEC acted arbitrarily and capriciously when adopting the Repurchase Rule, holding that the SEC failed adequately to respond to petitioners' comments on the SEC's rule proposal and failed to conduct a proper cost-benefit analysis.
The Court remanded the matter to the SEC to correct the defects identified by the court in the Repurchase Rule, and required the SEC to respond by November 30, 2023. On November 22, 2023, the SEC filed a motion:
- requesting that the court extend the remand period “pending further action by the Commission to remedy the defects in the rule identified in the court's October 31, 2023, opinion,"
- indicating that the Commission would “provide an update within 60 days … on the status of the Commission's efforts to remedy the rule's defects," and
- simultaneously staying the Repurchase Rule's effectiveness pending further Commission action “to facilitate" the court's consideration of its motion.
Petitioners' opposed the SEC's request for an extension, and on November 26, 2023, the Fifth Circuit denied the SEC's request. On December 1, 2023, the SEC filed a letter with the court acknowledging that it “was not able 'to correct the defects in the rule'" by the court's deadline. On December 7, 2023, Petitioners filed a motion to vacate the Repurchase Rule, and counsel for the SEC took no position on the motion. The Fifth Circuit granted petitioners motion as discussed above, and vacated the Repurchase Rule on December 19, 2023.
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We would like to thank Maggie Valachovic and David Korvin from our Washington D.C. office for their work on this post.