October 30, 2017

Non-GAAP: What the New CDI Might Not Cover

recently blogged about Corp Fin’s new “M&A Forecasts” CDI – which says that forecasts provided for the purpose of rending a fairness opinion & disclosed in order to comply with Item 1015 of Reg M&A or state law disclosure requirements would not be regarded as “non-GAAP measures” subject to Reg G.

The blog noted that the new CDI didn’t cover the entire waterfront of situations that might prompt disclosure of forecasts in connection with a deal.  Along those lines, here are some thoughts I received from a member about one scenario where the CDI’s applicability may be unclear:

Commentators have pointed out that historically, the Staff has taken the position that projections provided by the target company to the buyer in connection with tender offers need to be disclosed because they “crossed the table” raising 10b-5 concerns. Because the buyer is seeking to purchase shares directly from stockholders via a tender offer while in possession of material non-pubic information (e.g., target management’s projections), a summary of those projections must be disclosed to the target’s stockholders as well so that they are on an equal informational footing as the buyer.

The Staff takes the view that the same 10b-5 issue exists in long form mergers and generally requires the disclosure of a summary of the projections that have crossed the table in connection with the negotiation of long form mergers.  By way of example, the lead-in to the section disclosing a summary of the target’s projections in a merger proxy statement or a Schedule 14D-9 typically explains that the summary is being provided because, in addition to having been provided to the target’s board and the target’s financial advisor, the projections were provided to the counterparty to the transaction.

But the interpretive exemption provided by the new C&DI doesn’t on its face provide an exemption from Reg G if the non-GAAP measures disclosed in a proxy statement or Schedule 14D-9 are being disclosed in part in order to address a 10b-5 issue and not solely because of Item 1015 (which the Staff interprets to require the disclosure of a material input underlying the opinion of the target’s financial advisor) or state law disclosure requirements (which the Delaware courts have have often (but not always) interpreted to require the disclosure of reliable projections in the possession of the target board and/or that the target board has authorized the target’s financial advisor to rely upon for purposes of its opinion). In contrast to the Staff of the SEC, neither Item 1015 nor state law require the disclosure of projections because they crossed the table and potentially raise a 10b-5 issue.

John Jenkins