The Liberal government’s proposed tax on stock buybacks is going to be expensive for a number of Canadian companies. Unfortunately, investors can’t be sure of which ones, and by how much.
The reason – and I know this will shock you – is that Canadian disclosure requirements for companies’ buyback activity have lagged U.S. rules for nearly 20 years. And the Securities and Exchange Commission (SEC) would like to expand what companies there reveal, which threatens to widen the information gap with Canada.
To review, the government said earlier last month it plans to introduce a 2-per-cent tax on share buybacks starting in 2024. The idea is ripped off from the United States, which in August brought in a 1-per-cent tax on stock buybacks, starting in 2023.
A lot of the discussion of the proposal is black-and-white: The Liberal government clearly sees buybacks as a diversion of capital from job-creating investment; business groups have said the buybacks are a legitimate capital-management technique that benefits shareholders by boosting stock prices.
Here’s my take, in the middle ground: Buybacks can be smart or dumb. And sometimes, they can be misleading.
Shareholders can buy into the conventional wisdom on share buybacks, believing a company is enhancing its value by purchasing its stock at a cheap price and reducing the share count. (If you hold on to your stock, you have a bigger piece of a smaller pie.)
However, plenty of companies have been found, in retrospect, to buy aggressively when their share price is high, not low, and then cut back on purchases after the share price drops. And companies that issue boatloads of options can do millions of dollars of buybacks but never reduce their share counts, because all the stock taken off the market effectively gets reissued to employees at bargain prices when they cash out their options.
The reason we can do this analysis easily, at least in the United States, is that the SEC, in 2003, mandated disclosures of buyback activity. Companies must include a table in their quarterly filings disclosing the number of shares repurchased, the average price paid per share, the total number of shares repurchased as part of publicly announced buyback programs, and the number or value of shares that may still be purchased under their buyback programs.
Here’s an example from OpenText Corp., a Waterloo, Ont.-headquartered company that’s required to follow the SEC rule. The regulator considers OpenText to be a U.S. company because more than half of its business is in that country.
OpenText OTEX-T announced in November, 2020, and November, 2021, that it would do buyback plans that could total US$700-million. But the quarterly disclosures show OpenText has so far purchased less than half that amount, US$296-million over the past eight quarters.
OpenText has driven its share count down – but perhaps not as much as investors might have thought by watching the headlines. And they spent an average of just under US$47 a share – compared with current trading prices around US$30. (The company still has time to buy back more shares.)
No such rule for explicit buyback disclosure exists from Canada’s securities regulators, or in the International Financial Reporting Standards that Canadian companies follow. There is, to be certain, some information to be found in the cash-flow statements and changes in shareholder’s equity, but nothing so clearly demarcated as in the quarterly and annual reports filed with the SEC.
Canadian companies also file repurchase information with the Toronto Stock Exchange. The TSX makes reports on the companies’ share-count repurchases available to investors upon request, for a fee.
Even though the SEC’s rules are more robust than Canada’s, the regulator is not satisfied with their requirements. Earlier this year, the SEC proposed that companies file a new form, to be called the “SR,” with daily reports on buyback activity. Buy back some shares on a Tuesday; disclose it by the end of the day Wednesday, please.
The SEC also proposed companies enhance their quarterly disclosures. A company would have to discuss “the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts.” They’d also have to discuss any policies and procedures they have for purchases and sales by its officers and directors during a repurchase program.
“Share buybacks have become a significant component of how public issuers return capital to shareholders,” SEC chair Gary Gensler said in the December, 2021, news release announcing the proposals. “I think we can lessen the information asymmetries between [companies] and investors through enhanced timeliness and granularity of disclosures.”
For now, the SEC buyback disclosure enhancement is still in the proposal stage, as the regulator got a fair amount of pushback on the regulatory burden of filing daily repurchase reports.
But the SEC’s ambitious plan serves to highlight how Canada has an even greater “information asymmetry” between companies and investors. Our investing public would benefit from greater data on how much companies are buying back, when and at what cost. The analysis would help us understand which corporate leaders are stewards of capital and which are squanderers of it.
And if the Liberal government proceeds with its plan, it’s only reasonable to ask: If it’s worth taxing, isn’t it worth tracking?