On May 3, 2019, the Securities and Exchange Commission announced (available here) proposed changes to existing disclosure requirements in connection with acquisitions and dispositions of businesses. The proposed rules (available here) are intended to: (1) improve financial disclosures regarding the acquisition and disposition of businesses, (2) facilitate more timely access to capital, and (3) reduce the complexity and compliance costs related to such disclosures.
The proposed rules, if adopted, would represent a modest but welcome change for registrants that are involved in M&A activity. A registrant is required to file financial statements of the target business and pro forma financials of the registrant if the acquisition is deemed “significant" under one of three tests set forth in Rule 1-02(w) of Regulation S-X: an investment test, an asset test and an income test. At times, these tests have resulted in a technical requirement to prepare and file financial statements of an acquired business even when the acquisition may not be material under other applicable analysis, such as when there is an anomaly in financial results in a particular year. Registrants have also struggled with providing three years of audited financial statements for target businesses that are not subject to SEC reporting requirements. Although the Staff has frequently granted waivers that alleviate this burden on a showing of cause, the proposed rules would significantly reduce the circumstances in which the time-consuming and uncertain waiver request process is undertaken. The proposed amendments to the significance tests are intended to reflect more accurately the relative significance to the registrant of the acquired business.
The following is a summary of some of the key changes proposed by the SEC:
Proposed Changes to Significance Tests
The changes to the significance tests will affect other disclosures not related to acquisition financials, notably the identification of significant subsidiaries listed in an exhibit to a company's Form 10-K. Similarly, as representations and warranties in purchase agreements and underwriting agreements often cover “Significant Subsidiaries" by reference to Rule 1-02(w), their scope of coverage may be impacted by these changes.
The proposal will have a 60-day public comment period following its publication in the Federal Register. Comments may be submitted (1) via the internet at http://www.sec.gov/rules/other.shtml; (2) via e-mail to firstname.lastname@example.org (with “File Number S7-05-19" included on the subject line); or (3) via mail in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-05-19.
Special appreciation to Rodrigo Surcan for his contribution to this post.