On April 4, 2018, the staff of the Division of Corporation Finance (Staff) of the US Securities and Exchange Commission (SEC) updated its compliance and disclosure interpretations (CDIs) on the use of non-GAAP financial measures in disclosures relating to business combination transactions.i These additional CDIs are properly viewed as a continuation of the Staff’s earlier guidance in CDI 101.01 issued on October 17, 2017, which set forth the conditions under which financial measures included in forecasts provided to a financial advisor and disclosed in connection with a business combination transaction are not considered to be non-GAAP financial measures.
In its latest guidance, the Staff added new CDI 101.02 providing that registrants can rely on CDI 101.01 if the same forecasts provided to the financial advisor are also provided to the registrant’s board of directors or a board committee. In addition, new CDI 101.03 provides that if a registrant determines that forecasts exchanged between the company and bidders in a business combination transaction are material and that disclosure of such forecasts is required to comply with the anti-fraud and other liability provisions of the federal securities laws, the financial measures included in such forecasts would be excluded from the definition of non-GAAP financial measures.
As noted in our update in October 2017, in light of the Delaware Chancery Court’s decision in In re Trulia, Inc. Stockholder Litigationii in January 2016 and Delaware’s endorsement of forum selection provisions, shareholder suits challenging public company M&A transactions are increasingly being brought in federal courts alleging disclosure violations under federal securities laws, including Section 14 of the Securities Exchange Act of 1934. Such suits often allege, among other things, that the disclosure of projected financial information set forth in the target company’s proxy statement or tender offer materials violates federal securities laws because it does not include a presentation of the most directly comparable GAAP financial measures and a reconciliation of such financial measures to the projected financial information included in such disclosure documents, as required under Regulation G and Item 10(e) of Regulation S-K for non-GAAP financial measures.
Notwithstanding the Staff’s guidance issued in October 2017, shareholder plaintiffs (and their lawyers) have persisted in alleging disclosure violations in federal suits challenging public M&A transactions for failures to make disclosures required under Regulation G and Item 10(e) of Regulation S-K for non-GAAP financial measures on the grounds that the projected financial information was not only provided to and used by a registrant’s financial advisor in connection with the business combination transaction, but was also provided to and used by the registrant’s board of directors as well as by the acquirer (and other bidders) in connection with their respective evaluations of the transaction. Accordingly, it was not clear that the relief provided under the Staff’s October 2017 guidance would be particularly useful to registrants because in a typical public company M&A transaction, projected financial information is provided to and used by boards of directors and bidders. The Staff’s latest guidance clarifies that financial measures contained in projected financial information, as it is typically used in public company M&A transactions, are excluded from the definition of non-GAAP financial measures for purposes of disclosure documents used for such transactions.