DealLawyers.com Blog

Last week, at PLI’s SEC Speaks program, Heather Rosenberger, Chief Accountant at Corp Fin, shared several helpful observations on Rule 11-01(d)’s list of considerations when evaluating whether an acquisition of a component of an entity (not a subsidiary or division) constitutes a business. Based on our notes from the event and subject to the standard SEC disclaimers, she reminded listeners that:

The list in Rule 11-01(d) is intended to provide guidance on the meaning of the term “business” to assist registrants in determining whether financial statements related to an acquisition are required, but it is not meant to create a required checklist. When the rule was adopted, the Commission stressed that registrants would need to exercise judgment. There are two guiding principles in the adopting release:

– That the acquisition — which can involve something more or less than a complete standalone business — needs to be evaluated in the specific context of the facts and circumstances; and

– That the evaluation needs to focus on whether there is sufficient continuity of the acquired operations so that the disclosure of prior financial information is relevant and material to the understanding of future operations.

She gives some specific examples where OCA has received interpretive requests on this guidance:

It’s not uncommon for a seller to have cash flow problems and stop or pause clinical development. OCA believes that the length, nature, and extent of that dormancy are relevant. If the entire operations were discontinued during the period for which financial statements would otherwise be required, that fact pattern would be evaluated differently than one where acquired operations were only on hold for a short time prior to the acquisition.

There are differences in approach when acquired operations are to be continued by the registrant for a limited period of time after the acquisition. OCA suggests thinking about whether the disclosure of prior financial information would be material to understanding future operations, depending on the length and nature of the post-acquisition activity.

Acquired licenses or entities entering into licenses could represent the acquisition of a business for reporting purposes depending on the existence of operating rights or production techniques, and the continuity of related operations. Again, the focus should be on whether there is sufficient continuity of acquired operations before and after the transaction such that disclosure of the relevant financial information would be material to the understanding of future operations. Continuinty can refer to the drug development activity, the terms of the license, what the licensee is permitted to do with the IP, and the nature and significance of the expenses.

OCA believes there are limited circumstances where Rule 11-01(d)’s presumption regarding subsidiaries would be overcome, although it’s possible. For example, sometimes an acquisition might involve putting in place a holding company on the seller side for tax purposes. OCA doesn’ expect that legal entity — when the acquisition could have been completed without it — to be a determining factor in the Rule 11-01(d) analysis.

Arguments about changes in the value of assets, changes in the management team, or different financing structures are not arguments they find persuasive in the Rule 11-01(d) analysis.

Finally, if you’re submitting an interpretive request and you’re concerned that staff might not agree with your position, she noted that you can add a waiver component to that request (but do not skip the analysis and jump straight to the waiver process).

– Meredith Ervine