As discussed in our October 17, 2017 post, the SEC’s Division of Corporation Finance (the “Staff”) addressed an open question as to whether the disclosure of forecasted financial measures used in connection with a business combination transaction is subject to Item 10(e) of Regulation S-K and Regulation G.

In Compliance and Disclosure Interpretation (“C&DI”) 101.01, the Staff made clear that disclosures of forward-looking financial measures in the M&A context are not non-GAAP financial measures (and thus do not need to be reconciled to GAAP), so long as they are:

(1) provided to financial advisors for the purpose of preparing an opinion that is materially related to the transaction; and

(2) being disclosed in order to comply with federal securities laws or other applicable laws governing disclosure of the financial advisor’s analysis.

While the Staff’s guidance late last year resolved some ambiguities regarding non-GAAP reconciliation requirements in the M&A context, it left some doors open as to how broadly and to whom this exemption might apply, as financial forecasts are often shared with other key players (in addition to a party’s financial advisor) during the transaction process.

In response, last week the Staff released C&DIs 101.02 and 101.03, which extended the exemption to financial forecasts that are exchanged between the parties or provided to a party’s board of directors or board committee in a business combination transaction. The Staff made clear that when forecasts are “material” and disclosure is required to comply with federal securities laws, then the information “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.”

One additional aspect left unaddressed by the C&DIs is whether the particular placement of the disclosure in a public filing is critical for reliance on the Staff’s interpretations. Luckily, this question was posed to Michele Anderson (Corporation Finance Associate Director) at the “SEC Speaks” conference sponsored by PLI earlier this year. Ms. Anderson suggested the location of the disclosure “doesn’t matter,” so long as the purpose of such disclosure is to make clear “what information was shared with the [financial] advisor.” She elaborated that the disclosure may elicit a Staff comment if they are unable to “tie it somehow to the [financial] advisor’s opinion.” However, she suggested that a filer’s response explaining the placement of the disclosure would likely suffice.

This should provide practitioners with some comfort when drafting M&A disclosures that include non-GAAP projections. Thus, whether the information is presented directly within a summary of the financial advisor’s analyses, or elsewhere in a merger proxy statement, tender offer statement, 14D-9 recommendation statement or Form S-4 registration statement, the Staff’s view on the non-applicability of Item 10(e) and Regulation G should be the same.

Special thanks to Maya Hoard in our Orange County office for her assistance with this update.

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