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Securities Regulation and Corporate Governance > Posts > SEC Adopts Final Rules to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses
SEC Adopts Final Rules to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses

​On May 21, 2020, the Securities and Exchange Commission (“SEC") announced (available here) that it had adopted amendments to its rules and forms to improve and modernize required financial disclosures relating to acquisitions and dispositions of businesses.  The amendments were first proposed on May 3, 2019 (see related post here) and will become effective on January 1, 2021.  To provide more immediate benefits to investors, registrants and the market more generally, the SEC has announced that voluntary compliance will be permitted in advance of the effective date, provided that a registrant applies the final amendments in their entirety from the date of such voluntary compliance. 

The amendments (SEC Final Rule available here) seek to (1) assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and (2) improve the financial disclosure requirements applicable to acquisitions and dispositions of businesses, including real estate operations and investment companies.

The final amendments modify Regulation S-X, the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940.  Key changes are as follows:

Changes​ to Significance Tests under Rule 1-02(w)

  • Effective only in the context of acquisitions or dispositions, the “Investment Test" has been revised to compare the registrant's investments in and advances to the acquired or disposed business against the aggregate worldwide market value of the registrant's voting and non-voting common equity (when available). Aggregate worldwide market value is calculated by multiplying the aggregate number of shares of voting and non-voting common equity the registrant has outstanding by the price at which such common equity was last sold, or the average of the bid and asked prices of such common equity, in the principal market for such common equity.  For the purpose of the Investment Test, a registrant should use the average of aggregate worldwide market value calculated daily for the last five trading days of the registrant's most recently completed month ending prior to the earlier of the registrant's announcement date or agreement date of the acquisition or disposition.  Registrants should continue to apply the Investment Test in effect prior to the amendments in other contexts or in situations where the registrant does not have an aggregate worldwide market value.
  • The “Income Test" has been revised to add a new revenue component that compares the registrant's (together with its other subsidiaries) proportionate share of the acquired or disposed business's consolidated total revenues from continuing operations (after intercompany eliminations) to the consolidated total revenues of the registrant (together with its other subsidiaries) for the most recently completed fiscal year.  Under the new test, financial statements under Rule 3-05 will only be required if the acquired or disposed business meets both the new income test and the net income test in the rule (and only for the fewer number of years required by the two tests), with the goal of reducing the likelihood that marginal or break-even net income or loss in a recent fiscal year will distort the significance analysis for otherwise immaterial acquisitions.
  • Registrants will now be permitted to measure significance for purposes of Rule 3-05 and Rule 3-14 using pro forma financial information that depicts completed, significant business acquisitions and dispositions consummated after the most recent fiscal year-end for which the registrant's financial statements are required to be filed, provided that the registrant has filed (1) the applicable Rule 3-05 or Rule 3-14 financial statements for such acquired business and (2) the related Article 11 pro forma information for any such acquired or disposed business.
  • The amendments have also raised the significance threshold for a disposed business from 10% to 20%, thereby conforming to the significance trigger for dispositions to the lowest significance trigger for acquisitions; and

Changes to Time Periods Required and Related Disclosures

  • No more than two years of financial statements will be required with respect to  an acquired business, a reduction from the prior three year maximum. In addition, if the relative significance of an acquired business exceeds 20% but does not exceed 40%, the required interim financial statements will only need to include the most recent period, eliminating the need to provide a comparative interim period if there is no requirement to provide the corresponding prior annual period.
  • Registrants will now be permitted to omit separate financial statements for an acquired business once such business has been included in the registrant's post-acquisition audited financial statements for nine months or a complete fiscal year, so long as the significance of the acquisition does not exceed 40%.  Prior to the amendments, registrants were required to file separate financial statements for an acquired business under the 40% threshold in certain instances even if such business had been included in post-acquisition audited financials.
  • The amendments also modify and enhance required disclosure of the aggregate effect of acquisitions for which financial statements are not required, or are not yet required, by eliminating the requirements for historical financial statements of insignificant businesses and expanding the pro forma financial information to depict the aggregate effects in all material respects.

Amendments to Pro Forma Financial Disclosures

  • The amendments replace previously existing pro forma adjustment criteria with revised criteria broken out into two required categories, “Transaction Accounting Adjustments" and “Autonomous Entity Adjustments," and one optional category, “Management's Adjustments."
    • Transaction Accounting Adjustments – Registrants must show the accounting adjustments required for the transaction under U.S. GAAP or IFRS-IASB in the pro forma condensed balance sheet and the effects of such pro forma balance sheet adjustments, assuming such adjustments were made as of the beginning of the fiscal year presented, in the pro forma condensed income statements. Adjustments to the income statement must be made regardless of whether the pro forma balance sheet is presented.
    • Autonomous Entity Adjustments – The final rules require adjustments to show a registrant as an autonomous entity if certain conditions are met.  Such adjustments are to be titled “Autonomous Entity Adjustments" and must be presented in a separate column from the Transaction Accounting Adjustments.
    • Management's Adjustments – The amendments provide registrants the option to provide forward-looking disclosure about anticipated synergies, dis-synergies and related-transactions effects.  As a condition to making such Management's Adjustments, the registrant must conclude that there is a reasonable basis for each adjustment and include a statement that the pro forma financial information reflects all Management's Adjustments that are, in the opinion of management, necessary to a fair statement of the pro forma financial information presented.  In addition, a registrant must disclose both the basis for, and any material limitations of, each adjustment.

Other Amendments

The amendments also:

  • for acquired businesses that are not a foreign business but would qualify as a foreign private issuer, permit the use of IFRS-IASB, without reconciliation to U.S. GAAP, and the use of IASB-reconciled home county IFRS;
  • permit disclosure of acquired business financial statements that omit certain expenses that will not be assumed by a registrant in connection with acquisition of a component of an entity that meets certain qualifying conditions;
  • align Rule 3-14 (for acquisitions of real estate operations) with Rule 3-05, where no unique industry considerations exist and clarify the application of Rule 3-14 in connection with the determination of significance, need for interim financial statements, special provisions for blind pool offerings and the scope of the rule's requirements;
  • include a definition of “significant subsidiary" that is tailored for investment companies;
  • implement corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which will also apply to issuers relying on Regulation A; and
  • include a new Rule 6-11 and amend current Form N-14 to cover financial reporting for fund acquisitions by investment companies and business development companies. 



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