Thursday, October 19, 2017

Staff clarifies non-GAAP C&DIs on business combinations

By Mark S. Nelson, J.D.

The SEC’s Division of Corporation Finance issued a new Compliance & Disclosure Interpretation explaining the application of rules for non-GAAP financial measures to forecasts used in business combination transactions. The staff further renumbered two existing C&DIs and modifed one of them, also within the topic of business combinations.

The new C&DI (Question 101.01) regarding forecasts asked whether certain financials provided to advisers in the context of business combination transactions would be treated as non-GAAP financial measures. The staff said “No.” Generally, the staff explained, forecasts of this type would not fall within the definition of non-GAAP financial measures, which excludes items that must be disclosed under GAAP or under Commission rules.

But the staff also said the forecasts would have to satisfy some criteria. First, the forecasts must be provided to a financial adviser for purposes of obtaining an opinion materially related to the transaction. Second, the forecasts would be disclosed in compliance with Item 1015 of Regulation M-A or other law (including case law).

In addition to renumbering two of the existing C&DIs in this area, the staff also significantly altered one of these C&DIs by deleting a paragraph from Question 101.02 (previously Question 101.01). That question had asked whether exemptions from Regulation G or Item 10(e) of Regulation S-K for non-GAAP financials disclosed in business combination transactions apply in other contexts, such as registration, proxy, or tender offer “statements” (formerly “materials”). The staff answered “No” and provided a more detailed explanation. The revised C&DI, however, eliminated the following paragraph:
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.
Nevertheless, part of the subject matter addressed in the deleted paragraph appears in new Question 101.01.

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