SEC Already Facing Legal Challenge to Buyback Rules

Shareholders of technology giant Apple might have experienced feelings of déjà vu earlier this month. In announcing its financial results for 2023’s second quarter, the company also revealed that its board of directors authorized buying back $90 billion in common stock. At the same time a year earlier, Apple had announced a stock repurchase program for the exact same amount.

Fortunately for Apple, the Securities and Exchange Commission’s new disclosure rules pertaining to stock buybacks aren’t considered by most to be overly burdensome. And if a legal challenge to the regulations succeeds, Apple and companies like it may not have to worry about them at all.

The SEC voted to approve its final share repurchase disclosure rules on May 3. They included one significant change from previous versions: Companies must disclose daily repurchase data each quarter, including the number of shares repurchased, the average price paid per share and the total amount expended. Naturally, the goal is to give investors access to timely and accurate information regarding stock buybacks to promote market efficiency and informed decision-making.

The new rules may sound cumbersome, but as Cooley LLP pointed out in a memo, the final version of the new buyback rules worked out favorably for companies. For instance, the initial proposal called for issuers to disclose data on repurchases one business day after their execution. And keep in mind that an excise tax on buybacks hasn’t appeared to hurt their popularity with investors and issuers alike.

The new rules also emphasize the importance of shareholder awareness and engagement. To wit, they mandate that companies must disclose their stock repurchase plans or programs in their annual reports. The idea is that the requirement empowers shareholders by enabling them to evaluate the potential impact of buybacks on share prices and assess management’s capital allocation strategies.

Furthermore, the SEC’s regulations include the requirement to disclose shares purchased in reliance on the Rule 10b-18 safe harbor, which provides companies with protection against allegations of market manipulation during stock buybacks. The amendments aim to enhance compliance and facilitate the efficient execution of repurchase programs. And to address concerns regarding potential insider trading during stock buybacks, the new rules also require companies to disclose information about their policies and procedures to prevent unlawful trading by company insiders.

Although some observers interpreted the new regulations as a win for issuers, the U.S. Chamber of Commerce clearly had a different view. In a lawsuit seeking to block the implementation of the rules, the Chamber and a coalition of like-minded organizations are arguing that the new disclosure requirements impose unnecessary burdens on companies without providing substantial benefits to investors. Additionally, the organization is contending that the rules exceed the SEC’s statutory authority and violate the First Amendment.

Notably, the Chamber is taking a similar position to one it used successfully in the past when it sued the SEC over conflict minerals rules. After making it through the arduous rulemaking process, can the new stock buyback rules survive in the courts? Stay tuned.