DealLawyers.com Blog

On May 5, the SEC proposed amendments that would allow public companies to elect to file semiannual reports on new Form 10-S, rather than filing quarterly reports on Form 10-Q. For companies that may be interested in taking advantage of optional semiannual reporting or acquire companies that take advantage of semiannual reporting (should the proposed rules be finalized), there are many considerations to work through — including some M&A-related considerations. For example, this Akin alert says:

The SEC’s proposed amendments would likely make public mergers & acquisitions (M&A) more diligence-intensive, bespoke and sensitive to timing. Prospective buyers may be less willing or able to rely on recent filed financials and instead depend more heavily on internal company data and expanded diligence processes. Valuation could become harder to anchor, which could drive more frequent use of pricing protections such as collars, earnouts and contingent value rights. Merger agreements may include greater emphasis on interim operating covenants, KPI reporting and tighter representations, with expanded schedules, rather than periodic disclosure.

Deal timing could likely become less predictable given fewer natural windows tied to earnings releases. At the same time, financing and investor processes could become more complex due to misalignment with lender expectations and market practices. Overall, the SEC’s proposed changes may inadvertently push public M&A toward a more private equity–style model of risk allocation, which, in turn, could constrain a public company board’s ability to maximize shareholder value by forcing it to accept greater conditionality, pricing adjustments and execution risk that dilute deal certainty and headline value.

This Jones Day alert from October, when the proposed rules were only anticipated, also listed these potential M&A impacts:

Targets and acquirors will need to consider implications if the acquiror completes voluntary quarterly auditor reviews but the target does not.

Financing cooperation covenants may need to be adjusted to require specified financial statements during the period between signing and closing. Similarly, access to information covenants and notice of certain events covenants may change.

With regard to the presentation of pro forma financial information or acquired business financial statements, corresponding changes to Rule 3-12 of Regulation S-X may need to be made to maintain symmetry between the Securities Act of 1933 and the Securities Exchange Act of 1934 regarding the age of financial statements.

The due diligence process may change. Acquisitive companies, or companies considering pursuing a strategic transaction, will need to determine whether to have quarterly financial statements prepared that have been reviewed by the auditors and that can be presented to potentially interested parties.

There may be additional financing or due diligence challenges for potential acquirors that are considering an unsolicited offer. Companies will need to identify and develop an action plan for addressing these challenges.

With respect to Rule 3-12 of Regulation S-X, the proposal does contemplate this update. Under the proposal, the SEC contemplates consolidating the requirements of Rule 3-12 into Rule 3-01 and eliminating Rule 3-12.

We’re hosting a webcast, “The SEC’s Semiannual Reporting Proposal: Considering the Alternatives,” on TheCorporateCounsel.net on Thursday, June 4th, at 2 pm ET. Current members of TheCorporateCounsel.net automatically have access to this webcast. Not yet a member? We’re giving non-members special access to this important program. Register for free access today.

– Meredith Ervine