Implications for foreign private issuers
On 3 May 2023, the US Securities and Exchange Commission (SEC) adopted amendments requiring specific quantitative and narrative disclosures related to an issuer's share repurchases. The new rules will significantly increase the level of disclosure that has historically been required about share repurchase activity in SEC filings. SEC registered issuers that qualify as "foreign private issuers" (FPIs) will need to comply with this new regime in essentially the same manner as US domestic issuers notwithstanding the buyback disclosures that may be required in their home jurisdictions. There is little home country relief for FPIs under the new rules.
I: Current Requirements
Currently, in their annual report on Form 20-F, FPIs are required to annually report the monthly aggregated share data of the repurchases of equity securities made by or on behalf of the FPI. With the adoption of new rules, this disclosure requirement will be removed.
II: New Requirements
In summary, the new requirements consist of:
- A new tabular reporting form: FPIs will be
required to report daily aggregated share repurchase data on a
quarterly basis using a new Form F-SR, which will be due 45 days
after the end of an FPI's fiscal quarter. The data will include
repurchases of shares or ADRs on a US exchange and ordinary shares
on the FPI's home exchange (or any other exchange on which the
ordinary shares trade).
The table will include for each day the:- class of shares;
- average price paid per share;
- otal number of shares purchased, including the total number of shares purchased as part of a publicly announced repurchase plan;
- aggregate maximum number of shares (or approximate dollar value) that may yet be purchased under a publicly announced repurchase plan;
- total number of shares purchased on the open market; and
- total number of shares purchased that are intended to qualify
for the safe harbour in Rule 10b-18 under the US Exchange Act and
separately the total number of shares purchased pursuant to a plan
that is intended to satisfy the affirmative defence conditions of
Rule 10b5-1(c) under the US Exchange Act.1
The data in the table will need to be tagged using the SEC's Inline XBRL data format. If an FPI's home country disclosures furnished on a Form 6-K satisfy the Form F-SR requirements, it can incorporate by reference its Form 6-K disclosures into its Form F-SR.
- Checkbox: Form F-SR will include a checkbox that needs to be ticked if a director or member of senior management (as identified pursuant to Item 1 of Form 20-F) purchased or sold shares four days before or after the announcement of a publicly announced repurchase program.
- Form 20-F Disclosure requirements: In addition
to requiring quarterly disclosure on new Form FSR, the new share
repurchase rules will expand the requirements for narrative
disclosures of repurchases in the annual report on Form 20-F to
require an FPI to disclose:
- the objectives or rationales for its share repurchases, and the process or criteria used to determine the amount of repurchases;
- any policies and procedures relating to purchases and sales of the company's securities during a repurchase program by its officers and directors, including restrictions on those transactions; and
- the number of shares purchased outside of a publicly announced share repurchase plan or program, and information about the nature of this transaction or transactions.
FPIs will be required to comply with the new rules beginning with an inaugural Form F-SR that covers the first full fiscal quarter that begins on or after 1 April 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings will be required starting in the first Form 20-F filed after the FPI's inaugural Form F-SR has been filed.
FPIs will also need to continue to provide certain information about their publicly announced repurchase programs, including the date each plan or program was announced; the dollar amount (or share or unit amount) approved; the expiration date (if any) of each plan or program; each plan or program that has expired during the period covered by the table; and each plan or program the FPI has determined to terminate prior to expiration, or under which the FPI does not intend to make further purchases.
The US Chamber of Commerce recently filed a lawsuit in the U.S. Court of Appeals for the Fifth Circuit to stop the SEC from implementing the new share buyback disclosure rules. The outcome of this lawsuit may affect the implementation of the rules, but for the time being, FPIs should plan to comply with the new rules by 1 April 2024.
III: Implications for FPIs
These rules have significant implications for the public reporting practices of FPIs. Currently, FPIs that report on the FPI forms do not have a quarterly financial reporting obligation under the US Exchange Act and are generally required to provide financial disclosure only in their annual report on Form 20-F and to furnish to the SEC on Form 6-K financial disclosure made in their home markets. While the new rules do not change the timing requirements for FPI financial disclosure, the requirement to file the Form F-SR on a quarterly basis will change that historical approach for disclosures of share repurchase data.
New tabular reporting requirement
Many FPIs do not currently collect and disclose (in the format required by the SEC) all of the daily repurchase data that will be required under the Form F-SR. FPIs with a UK home country dual listing, for example, do not disclose daily data for the aggregate maximum number of shares that may yet be purchased under a publicly announced share repurchase plan. Moreover, the rule would generally require the disclosure of all shares repurchased by or on behalf of an FPI. Subject to any SEC guidance to the contrary, this would include repurchases that are made outside of a publicly announced share repurchase program, including (1) arrangements to acquire shares in the market to deliver to shareholders participating in dividend reinvestment plans, to employees participating in employee share purchase programs, or to retirement accounts in satisfaction of "stock match" commitments; (2) arrangements to facilitate the operation of employee equity incentive plans; (3) self-tender offers; (4) net share settlement and other transactions where a holder forfeits an entitlement to an issuer's shares (e.g., in connection with an option, or upon separation); and (5) cash settlement of transactions that reference an issuer's shares, such as derivative transactions. FPIs may thus need to update their internal and disclosure controls and procedures to compile and verify the daily share repurchase data in an accurate and timely manner, especially since the data will be subject antifraud liability under the US securities laws. FPIs may also want to involve their brokers and banks to assist in the collection of the daily repurchase data.
FPIs also do not normally disclose the total number of shares repurchased in their home countries in reliance on the safe harbour in Rule 10b-18 nor the total number of shares purchased pursuant to a plan that is intended to satisfy the affirmative defence conditions of Rule 10b5-1(c). This is because the 10b-18 safe harbour and Rule 10b5-1(c) affirmative defence are not typically relied upon for share repurchases outside the United States in the FPI's home market. To the extent that FPIs do not rely on these rules for trades conducted outside the United States, they may need to include additional disclosure explaining why repurchases were made without reliance on Rule 10b-18 or Rule 10b5-1(c) (to avoid any suggestion that the repurchases were made in violation of the US Exchange Act's antimanipulation or insider trading rules).
Checkbox
The "checkbox" requirement to disclose whether any board members or senior management bought or sold shares four days before or after the announcement of a share repurchase plan also represents a sea change in approach. In contrast to their US domestic counterparts, directors and officers of FPIs are not subject to the US trade reporting requirements of Section 16 of the US Exchange Act. The "checkbox" requirement in Form F-SR will not subject FPIs to Section 16, but it will require FPIs to have visibility over the purchase or sale of shares by directors and senior management. To the extent not already covered, some FPIs may consider updating their trading "blackout" trading policies to prevent the purchase or sale of shares by directors and senior management to cover, at a minimum, the four-day periods before and after the announcement of a share repurchase program.
Form 20-F Disclosure requirements
Finally, the new narrative disclosure requirements in the annual report on Form 20-F will require FPIs to re assess their current public disclosures regarding share repurchases. In its adopting release, the SEC said it expected issuers to provide the required narrative disclosure without relying on boilerplate language. The disclosures need to convey a thorough understanding of the FPI's objectives or rationales for the repurchases, and the process or criteria it used in determining the amount of the repurchase.
With respect to the process or criteria for repurchasing shares, FPIs will need to consider disclosing the other possible ways they could have used the funds allocated for the repurchase, and to compare the repurchase with other investment opportunities that would ordinarily be considered by the FPI, such as capital expenditures and other uses of capital. FPIs will also need to consider disclosing the expected impact of the repurchases on the value of remaining shares.
In connection with their disclosure of the objectives or rationales for a repurchase, FPIs should consider disclosing the factors driving the repurchase, including, for example, whether their stock is undervalued, whether prospective internal growth opportunities are economically viable, or whether the valuation for potential targets is attractive. FPIs should also consider the sources of funding for the repurchase, where material, such as, for example, in the case where the source of funding results in tax advantages that would not otherwise be available for a repurchase.
Footnote
1. Rule 10b-18 provides issuers with a safe harbour from liability for manipulation under the US Exchange Act when they repurchase their common stock in the market in accordance with the rule's manner, timing, price, and volume conditions. The Rule 10b-18 safe harbour applies only to repurchases effected in the United States and not to repurchases effected in markets outside the United States. Rule 10b5-1(c) established an affirmative defence to Rule 10b-5 liability for insider trading in circumstances where the trading was not based on material non-public information and the trade was pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person's account, or a written plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
