On October 17, 2017, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) issued one new Compliance & Disclosure Interpretation (“C&DI”) and revised an existing C&DI addressing the disclosure of forward-looking financial measures in the business combination context. These two C&DIs seek to clarify the Staff’s position as to when:
- certain forecasts or projections shared in a business combination are not deemed non-GAAP financial measures; and
- a GAAP reconciliation of such information is appropriate.
The new and revised C&DIs are available here.
By way of background, Regulation G and Item 10(e) of Regulation S-K do not apply to non-GAAP financial measures included in disclosures relating to a proposed business combination transaction that are subject to the SEC’s communications rules applicable to business combination transactions (i.e., Securities Act Rule 425, and Exchange Act Rules 14a-12, 14d-2(b)(2), and 14d-9(a)(2)). These rules basically cover the early communications filed on the date of first use before a final disclosure document is filed (e.g., definitive proxy statement, registration statement/prospectus, tender offer or solicitation/recommendation statement). For more information on the topic, see “Conditions for Use of Non-GAAP Financial Measures” adopting release, available here.
Historically, parties to a business combination transaction have disclosed projections or forecasts for Rule 10b-5 cleansing purposes, to comply with line-item SEC disclosure requirements (e.g., Item 1015 of Regulation M-A), as well as to satisfy disclosure duties under applicable state law. However, the practice of providing a full-blown reconciliation of the non-GAAP financial measures found within those forecasts has been somewhat mixed. As a result, the Staff is now updating their interpretive guidance on this topic in order to facilitate greater consistency and compliance with the applicable rules.
New C&DI Question 101.01 makes clear the financial measures included in forecasts are not non-GAAP financial measures so long as the forecasts are:
- provided to a financial advisor for purposes of rendering an opinion materially related to the business combination transaction; and
- the information is disclosed to shareholders in order to comply with Item 1015 of Regulation M-A (or requirements under state or foreign law, including case law), with respect to the financial advisor’s analyses or substantive work.
Revised C&DI Question 101.02 (previously Question 101.01) addresses the exemption from Regulation G and Item 10(e) of Regulation S-K (applicable to non-GAAP financial measures disclosed in early communications relating to a business combination transaction), making clear the exemption does not extend to the same non-GAAP financial measures when they are disclosed in the body of a registration statement/prospectus, proxy statement, tender offer or solicitation/recommendation statement. The C&DI goes on to explain the exemption is limited to those communications subject to Securities Act Rule 425 and Exchange Act Rules 14a-12, 14d-2(b)(2), and 14d-9(a)(2). In other words, the exemption would only cover disclosures made in early communications filed pursuant to one of the rules listed above.
Finally, the Staff deleted certain unnecessary language in C&DI 101.02 in light of the publication of new C&DI 101.01. Please see the marked changes to C&DI 101.02 below.
This updated guidance should clear up uncertainties in the marketplace and inconsistencies in disclosure practices surrounding the reconciliation of forward-looking financial measures disclosed in business combination transactions. Of course, time will tell how these C&DIs are applied in practice by the Staff under varying factual circumstances where forward-looking projection and forecast information is disclosed.
Special thanks to Tull Florey in our Houston office and Kevin Hill in our Orange County office for their assistance with this update.
Redline of new C&DI 101.02 against the Staff’s prior interpretation:
Question: Does the exemption from Regulation G and Item 10(e) of Regulation S-K for non-GAAP financial measures disclosed in communications relating to a business combination transaction extend to the same non-GAAP financial measures disclosed in registration statements, proxy statements, and tender offer materialsstatements?
Answer: No. There is an exemption from Regulation G and Item 10(e) of Regulation S-K for non-GAAP financial measures disclosed in communications subject to Securities Act Rule 425 and Exchange Act Rules 14a-12 and 14d-2(b)(2); it is also intended to apply to communications subject to Exchange Act Rule 14d-9(a)(2). This exemption does not extend beyond such communications . Consequently, if the same non-GAAP financial measure that was included in a communication filed under one of those rules is also disclosed in a Securities Act registration statement or a, proxy statement, or tender offer statement, nothis exemption from Regulation G and Item 10(e) of Regulation S-K would not be available for that non-GAAP financial measure. [Oct. 17, 2017]
In addition, there is an exemption from Regulation G and Item 10(e) of Regulation S-K for non-GAAP financial measures disclosed pursuant to Item 1015 of Regulation M-A , which applies even if such non-GAAP financial measures are included in Securities Act registration statements, proxy statements and tender offer statements. [Jan. 11, 2010]