Yesterday, the Staff of the U.S. Securities and Exchange Commission (SEC) elaborated on existing rules and interpretations to make clear that, in the context of an M&A transaction, Regulation G does not apply to financial projections or forecasts that are provided by a company to its financial advisors to use in rendering a fairness opinion and then disclosed in summary form to stockholders in the related proxy or tender offer materials. In light of the significant rise in deal-related lawsuits that allege, as their central argument, that failure to provide a GAAP reconciliation for the non-GAAP information included in those summary forecasts is a violation of the federal securities laws, the SEC Staff’s clarification should have a significant effect on numerous pending suits and on the ability of the plaintiff’s bar to bring such claims in the future.

The SEC Staff issued a new Compliance & Disclosure Interpretation (CDI) and revised an existing CDI in which the SEC Staff noted that the existing provisions of Regulation S-K and Regulation G exclude, among other things, financial measures required to be disclosed under SEC rules or by another governmental authority. Because the SEC regulations require disclosure of fairness opinions and a summary of the bases for and methods of arriving at a fairness opinion, and a string of state law cases have made clear that if the opinion and summary of the bankers’ analysis is based in part on forecasts, those forecasts are material and must also be disclosed, it follows that disclosure of such forecasts is required by a governmental authority and thus do not require GAAP reconciliation.  The CDI explicitly draws this conclusion, stating: “Accordingly, financial measures provided to a financial advisor would be excluded from the definition of non-GAAP financial measures, and therefore not subject to Item 10(e) of Regulation S-K and Regulation G, if and to the extent:

  • the financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and
  • the forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work.”

The full text of the new CDI is available here.

This welcome development will have a significant effect on the course of deal-related litigation following the sharp decline seen in disclosure-based settlements and the shift in both focus and forum for such suits resulting from the Delaware Court of Chancery’s decision in In re Trulia, Inc. Stockholder Litig. (Del. Ch. Jan 2, 2016) (see prior Sidley articles on this topic in our February 2016August 2016April 2017 and August 2017 issues of Sidley Perspectives on M&A and Corporate Governance).