On April 4, 2018, the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) published two new Compliance and Disclosure Interpretations (“New C&DIs”) on the use of non-GAAP financial measures for business combination transactions. The New C&DIs confirm that forecasts provided to a board of directors or bidders will not be considered non-GAAP financial measures and will not be subject to Item 10(e) of Regulation S-K or Regulation G.

Background of the New C&DIs

The New C&DIs supplement the Staff’s existing guidance with respect to non-GAAP financial measures for business combination transactions, which – prior to last week’s update – consisted of two C&DIs published October 17, 2017 and one C&DI published January 11, 2010.

Both New C&DIs – Questions 101.02 and 101.03 – expand upon published C&DI Question 101.01, which provides guidance on whether financial measures included in forecasts provided to a financial advisor and used in connection with a business combination transaction are non-GAAP financial measures.

In previously released C&DI Question 101.01, the Staff indicated that such financial measures will not fall within the definition of non-GAAP financial measures “if and to the extent” the following conditions are satisfied:

  • 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.

New C&DIs

New C&DI Question 101.02 answers the question of whether an issuer may rely on C&DI Question 101.01 if the same forecasts provided to its financial advisor are also provided to its board of directors or a board committee. The Staff’s guidance confirms that an issuer may rely on the position in Question 101.01 if the forecasts provided to a financial advisor are also provided to the board of directors or board committees.

New C&DI Question 101.03 provides guidance as to whether financial measures contained in forecasts that are disclosed to bidders in a business combination transaction would be considered non-GAAP financial measures if such forecasts were disclosed in order to avoid anti-fraud concerns under the federal securities laws or to ensure that the other disclosures in the document are not misleading. Specifically, the Staff stated that the financial measures included in such forecasts 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, where the issuer determines that:

  • the financial measures included in forecasts disclosed to bidders are material; and
  • the “disclosure of such forecasts is required to comply with the anti-fraud and other liability provisions of the federal securities laws.”

Effect of New C&DIs

C&DI Question 101.01 created some confusion regarding whether the guidance therein would extend to business combination materials shared with the board or bidders. This confusion was caused by the language in C&DI 101.01 stating that its guidance applied only “if and to the extent” forecasts were provided “for the purpose of rendering an opinion.”

The New C&DIs make clear that the position set forth in C&DI Question 101.01 applies if the forecasts were also provided to the board or bidders, and, as such, the Staff clarified that such financial measures will not be considered non-GAAP financial measures and will not be subject to Item 10(e) of Regulation S-K or Regulation G.