On Friday, November 18, 2016, the Staff in the Office of Mergers & Acquisitions (“OM&A”) in the Division of Corporation Finance (the “Staff”) at the Securities and Exchange Commission released several new Compliance and Disclosure Interpretations (“C&DIs”) addressing:
- the level of disclosure deemed appropriate for compensation arrangements with financial advisors retained in connection with responding to registered tender offers subject to Regulation 14D; and
- certain timing and structural matters related to “abbreviated” debt tender offers (i.e., tender offers for non-convertible debt securities that can remain open for as little as five business days pursuant to a no-action letter issued in early 2015 available here) subject only to Regulation 14E.
With respect to a financial advisor’s employment and compensation arrangements, the Staff reminds those companies subject to a tender offer for which a Schedule 14D-9 must be filed that Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A require a “summary of all material terms” of employment or other arrangements for compensation payable to persons “directly or indirectly” engaged to make solicitations or recommendations in connection with a tender offer. The Staff notes that even though an advisor may disclaim making a recommendation to or solicitation of security holders, if the issuer’s board or independent committee retained the advisor to advise with respect to a tender offer and the analysis is discussed in the issuer's Schedule 14D-9, then that is sufficient to bring the advisor’s engagement within the scope of the disclosure requirement.
In addition, consistent with past Staff comments on the topic, the C&DIs remind issuers that boilerplate disclosures on compensatory arrangements are inappropriate. Specifically, the Staff objects to generic disclosures indicating that an advisor will receive “customary compensation.” Instead, the Staff observed that while the disclosure of such arrangements will depend on the facts and circumstances, it should be sufficiently detailed to allow a security holder to make an informed investment decision regarding the merits of a solicitation or recommendation.
The C&DIs also make clear that it may not be necessary to quantify the amount of the compensation payable to an advisor, but where the arrangement involves the payment of success fees, periodic advisory fees, or discretionary fees, more information may be necessary to provide security holders with an understanding of an advisor’s key financial incentives. Similarly, when there are multiple types of fees, or the fee is subject to a contingency, milestone, or some other trigger, then additional information may be necessary to allow investors to fully evaluate the recommendation and properly gauge how much weight to place on such recommendation. Finally, any information that would be material to an investor’s evaluation, such as material incentives or conflicts, should be provided.
Later in the day on November 18, the Chief of OM&A, Ted Yu, speaking at an ABA meeting in Washington, D.C., noted that Senior Special Counsel Nicholas Panos in OM&A recently completed an extensive review of all Schedule 14D-9s filed over the past 15 years. The results of the survey revealed that although more than two-thirds of the 14D-9 filings had very detailed disclosures, there was still a significant number of filings containing the objectionable “customary compensation” language, prompting issuance of the interpretations.
Separately, the Staff addressed certain timing and structural issues that have come up since the 2015 no-action letter was granted. The C&DIs clarify that foreign issuers may commence their abbreviated debt tender offers by furnishing a press release on Form 6-K before noon (Eastern) – similar to the Form 8-K requirement for domestic issuers commencing such tender offers. In addition, the Staff clarified that issuers making abbreviated debt tender offers may:
- include a “minimum tender” condition in such offers;
- calculate the amount of cash offered to non-QIBs (in an exchange offer limited to QIBs and non-U.S. persons) by reference to a fixed spread to a benchmark, provided the calculation is the same as the calculation for QIBs and non-U.S. persons;
- rely on Section 3(a)(9) for an exemption from Section 5 when offering “qualified debt securities” in an exchange offer; and
- announce their offer at any time, provided that they delay commencement until ten business days following the first public announcement or consummation of any purchase, sale, or transfer of a material business or amount of assets that would otherwise require disclosure of pro forma financials under Article 11 of Regulation S-X.
The full C&DIs summarized above can be found here.
Thanks to Todd Trattner and Matt Haskell for their assistance in preparing the above summary.