& Securities

The SEC Staff published two CDIs yesterday addressing financial projections disclosed in connection with a business combination and the application of the Regulation G reconciliation requirements to such financial projections (see below).  The new CDIs effectively exclude from the definition of “non-GAAP financial measures” (under the circumstances described) projections provided to a financial advisor and used in connection with a business combination transaction.  As a result, such projections — which are typically disclosed to comply with Delaware case law and are accordingly included in registration statements, proxy statements and tender offer statements — are not required by Regulation G to be reconciled to a GAAP measure in such disclosure.

Certain comment letters issued by the Staff have asked issuers to provide these reconciliations.  However, in recent conversations with senior members of the Staff, OMA Chief Ted Yu suggested that the Staff would relax this requirement given the nature of these projections.  These new CDIs make clear that, in typical situations involving business combinations in which projections are publicly disclosed, a reconciliation to the most comparable GAAP measure will not be required.

The CDIs also reiterate, however, that all other non-GAAP financial measures relating to a business combination and disclosed in registration statements, proxy statements and tender offer statements will still have to be reconciled.  (Note that CDI 101.02 was an existing CDI, but revised to delete language no longer necessary in light of the Staff’s position on reconciling projections meeting the requirements contained in CDI 101.01).

Click here to see the SEC’s update on Non-GAAP Financial Measures.

Question 101.01

Question: Are financial measures included in forecasts provided to a financial advisor and used in connection with a business combination transaction non-GAAP financial measures?

Answer: No, if the conditions described below are met.

Item 10(e)(5) of Regulation S-K and Rule 101(a)(3) of Regulation G provide that a non-GAAP financial measure does not include financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. Accordingly, financial measures provided to a financial advisor would be excluded from the definition of non-GAAP financial measures, and therefore not subject to Item 10(e) of Regulation S-K and Regulation G, if and to the extent:

• the financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and
• the forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work. [Oct. 17, 2017]

Question 101.02

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 statements?

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, proxy statement, or tender offer statement, this 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]