On March 22, 2022, the staff of the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (the “Commission") issued new Compliance and Disclosure Interpretations (“C&DIs") that primarily focus on filing and disclosure issues that arise in the context of merger transactions by special purpose acquisition companies (“SPACs"). The Staff has previously addressed concerns with respect to SPACs, as discussed in our previous article, including statements addressing certain accounting, financial reporting and governance issues related to SPACs and the post-business combination public company.
The new C&DIs address the following issues related to the business combination process:
- public communication by private target company constitutes a “solicitation" of the acquirer's shareholders subject to the proxy rules
(see C&DI Proxy Rules and Schedules 14A/14C, Question 101.02); and
- public communications by a private target that is not filing a proxy solicitation in connection with a proposed business combination are allowed prior to the proxy solicitation by the acquiror, under certain circumstances
(see C&DI Proxy Rules and Schedules 14A/14C, Question 132.01);
- public communications by an acquirer that is not filing a proxy solicitation in connection with a proposed business combination are allowed prior to the proxy solicitation by the target company, under certain circumstances
(see C&DI Proxy Rules and Schedules 14A/14C, Question 132.02);
- purchases by the sponsor and its affiliates outside of the SPAC redemption offer
(see C&DI Tender offers and Schedules, Rule 14e-5, Question 166.01);
- material terms and conditions of a business combination agreement to be described in Item 1.01 under Form 8-K and guidance on filing the business combination agreement an exhibit to the Form 8-K
(see C&DI Exchange Act Form 8-K, Question 102.04 and Question 102.05)
Target Company's Public Communications as “Solicitation" of the Acquiror's Shareholders
Under Question 101.02, the Staff advises that a target company that does not plan to solicit its own shareholders could nevertheless be engaged in a solicitation of the acquiror's shareholders if its public communications promote the proposed transaction or may be reasonably expected to influence the voting decisions of the acquiror's shareholders. For the definition of “solicitation," see Exchange Act Rule 14a-1(l)(1)(iii).
Any target company communication that constitutes a solicitation would be subject to the liability provision of Exchange Act Rule 14a-9, which prohibits materially false or misleading statements or material omissions, as well as the filing and information requirements of the federal proxy rules.
Target Company's Public Communications Prior to Acquiror's Proxy Solicitation
Under Question 132.01, the Staff clarifies that a target company that is not itself soliciting its own stockholders can rely on Rule 14a-12 for its own public written communication to announce the proposed transaction, before the furnishing of a proxy statement by the acquiror, provided that:
- the target company identifies itself as a participant in the acquiror's proxy solicitation;
- the target company satisfies the remaining applicable requirements of Rule 14a-12, including the filing of its communications with the Commission; and
- the acquiror complies with the conditions specified in Question 102.04 of the Exchange Act Form 8-K C&DIs, discussed further below.
In addition, the target company may have its written communication filed by the acquiror on its behalf and under the acquiror's Exchange Act file number, provided the communication is clearly identified as that of the target company.
Acquiror's Public Communications Prior to Target Company's Proxy Solicitation
Under Question 132.02, the Staff addresses the reversed situation, where an acquiror that is not soliciting a proxy to its own stockholders in connection with a proposed business combination can also rely on Rule 14a-12 for its own public written communication to announce the proposed transaction, before the furnishing of a proxy statement by the target company, provided that:
- the acquiror identifies itself as a participant in the target company's proxy solicitation;
- the acquiror complies with all other requirements of Rule 14a-12, including the filing of its communications with the Commission; and
- the target company complies with the conditions specified in Question 102.04 of the Exchange Act Form 8-K C&DIs, discussed further below.
In addition, the acquiror may have its written communication filed by the target company on its behalf and under the target company's Exchange Act file number, provided the communication is clearly identified as that of the acquiror.
SPAC Sponsor and its Affiliates May Purchase SPAC Securities Outside of the Redemption Offer Under Certain Conditions
Under Question 166.01, the Staff clarifies that SPAC redemption provisions generally have indicia of being a tender offer (such as a limited period of time for SPAC security holders to request redemptions), which would subject such redemption offer to the Rule 14e-5 prohibition to the purchases of SPAC securities by the SPAC sponsor or its affiliates outside of the redemption offer.
However, for policy reasons, the Staff will not object to purchases by the SPAC sponsor or its affiliates outside of the redemption offer if the following conditions are satisfied:
- the Securities Act registration statement or proxy statement filed for the business combination transaction discloses the possibility that the SPAC sponsor or its affiliates will purchase the SPAC securities outside the redemption process, along with the purpose of such purchases;
- the SPAC sponsor or its affiliates will purchase the SPAC securities at a price no higher than the price offered through the SPAC redemption process;
- the Securities Act registration statement or proxy statement filed for the business combination transaction includes a representation that any SPAC securities purchased by the SPAC sponsor or its affiliates would not be voted in favor of approving the business combination transaction;
- the SPAC sponsor and its affiliates do not possess any redemption rights with respect to the SPAC securities or, if they possess redemption rights, they waive such rights; and
- the SPAC discloses in a Form 8-K, prior to the security holder meeting to approve the business combination transaction, the following:
- the amount of SPAC securities purchased outside of the redemption offer by the SPAC sponsor or its affiliates, along with the purchase price;
- the purpose of the purchases by the SPAC sponsor or its affiliates;
- the impact, if any, of the purchases by the SPAC sponsor or its affiliates on the likelihood that the business combination transaction will be approved;
- the identities of SPAC security holders who sold to the SPAC sponsor or its affiliates (if not purchased on the open market) or the nature of SPAC security holders (e.g., 5% security holders) who sold to the SPAC sponsor or its affiliates; and
- the number of SPAC securities for which the SPAC has received redemption requests pursuant to its redemption offer.
Form 8-K Disclosure of Material Terms and Conditions of Business Combination Agreements
In an interpretation that applies generally to business combination transactions (including those not involving SPACs), in Question 102.04, the Staff states that the following terms should generally be viewed as material and be disclosed under Item 1.01 of Form 8-K (although the materiality of a term or condition of the business combination agreement ultimately depends on particular facts and circumstances):
- the amount and nature of consideration offered for the business combination (or the method, exchange ratio, or formula for determining the consideration);
- any committed financing arrangements (e.g., PIPE investments), or the need for financing to close the business combination transaction, along with the material terms of such arrangements;
- any material terms regarding the securities ownership or management structure of the combined or surviving company after the closing of the business combination transaction;
- any material conditions to the closing of the transaction; and
- the anticipated timeframes for filing any Securities Act registration statement, proxy or information statement, or tender offer materials, as well as for the closing of the business combination transaction.
In addition, other material information that may be deemed necessary to make the required disclosure, in light of the circumstances under which it is made, not misleading, so that investors can evaluate the business combination agreement with the proper context, may include:
- if a material term of the agreement has not yet been determined by the parties, the Form 8-K should affirmatively state so; and
- in the case where the registrant is the acquiror, the Form 8-K should briefly describe the nature of the target company's business, including, at a minimum, whether it has existing operations or has generated revenues, as well as any information disclosed by the target company in announcing the business combination transaction.
Filing Business Combination Agreements as Form 8-K Exhibits
Under Question 102.05, the Staff advises that reporting companies are encouraged, as a best practice, to file the business combination agreement as an exhibit to the Item 1.01 on Form 8-K.
When it adopted the Item 1.01 material contract Form 8-K reporting requirement, the Commission did not require that companies file the contract as an exhibit to the Form 8-K, recognizing that companies needed time to (1) request confidential treatment of sensitive terms of the agreement and (2) prepare the agreement in the proper EDGAR format. See Release No. 33-8400 (March 16, 2004) and Correction; Release No. 33-8400A (August 4, 2004).
The Commission, however, more recently amended Form 8-K to permit companies to redact sensitive terms of a material definitive agreement without submitting a confidential treatment request. See Instructions 5 and 6 to Item 1.01 of Form 8-K; see also Release No. 33-10618 (March 20, 2019) and Correction; Release No. 33-10618A (August 6, 2019). Therefore, the Staff is of the view that the need for confidential treatment generally no longer justifies not filing the material definitive agreement as an exhibit to the Item 1.01 Form 8-K. This is consistent with the Commission's previous views. See Release No. 33-8400 (“[W]e encourage companies to file the exhibit with the Form 8-K when feasible, particularly when no confidential treatment is requested.").
The Staff further noted that, absent unusual circumstances, it believes it should generally be feasible to prepare the agreement in the proper EDGAR format within the four business day timeframe for filing an Item 1.01 Form 8-K, given technological advances since 2004 and widespread availability of EDGAR filing services. The Staff advises registrants that are unable to prepare the agreement in the proper EDGAR format and file the agreement as an exhibit to, as a best practice, provide an explanation in the Form 8-K.
We would like to thank Rodrigo Surcan in our New York office and James Springer in our Washington, D.C. office for their work on this article.