July 9, 2020
M&A Financials: SEC’s New Rules Give Carve-Outs a Break
Public companies acquiring divisions or product lines have often had to seek Corp Fin’s sign-off on the use of abbreviated acquired company financial statements in connection with those acquisitions. That process introduces an additional element of potential delay & uncertainty to these “carve-outs,” but this Cooley blog says that the SEC’s new rules on acquired company financial statements provide some real help. This excerpt from the intro summarizes the implications of these changes for buyers:
The new rules permit buyers to file abbreviated financial statements in these types of carve-out transactions without prior SEC consent, as long as certain criteria are met. Eliminating the need to obtain this relief from the SEC will save buyers time and legal and accounting expense. More importantly, the new rules may better position a buyer in an auction process where the buyer needs to know that it will be able to satisfy its SEC filing obligations if its bid prevails.
Under the current rules, a potential buyer is often forced to choose among several less than ideal options in an auction process, whether it be (i) seeking permission from the seller to request the SEC exemption on a contingent basis during the process, (ii) including a contingency in its bid for obtaining this SEC relief or (iii) accepting the risk that it might not be able to satisfy the financial statement requirements and become non-compliant with SEC filing requirements (therefore losing S-3 eligibility).
While buyers will still need to make arrangements with sellers to prepare & audit the abbreviated financial statements, the blog notes that the new rules eliminate much of the uncertainty for many carve-outs. That’s because they provide that abbreviated financial statements may be used without prior SEC approval if certain conditions are met, including the absence of separate historical financials for the acquired business. The acquired business also must represent 20% or less of the seller’s total assets & total revenues on a consolidated basis for its most recently completed fiscal year.
– John Jenkins