On November 18, 2016, the staff of the Division of Corporation Finance (the staff) of the Securities and Exchange Commission (the SEC) published two new Compliance & Disclosure Interpretations providing guidance with respect to financial adviser disclosure in connection with tender offers for equity securities. When certain persons, including the issuer, directors, employees, affiliates, subsidiaries or securityholders of the issuer, and persons making solicitations or recommendations to securityholders on behalf of any such persons, make a solicitation or recommendation to equity security holders in connection with an equity tender offer, the person making such solicitation or recommendation may be required to publicly file a Schedule 14D-9 with the SEC.

Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A require a “summary of all material terms” of employment, retainer or other arrangements for compensation regarding “all persons that are directly or indirectly employed, retained, or to be compensated to make solicitations or recommendations in connection with” a transaction subject to the provision.

Making a Solicitation or Recommendation. The staff clarified that a financial adviser engaged by an issuer’s board or independent committee for the exclusive purpose of providing financial advice is nevertheless considered a person “directly or indirectly employed, retained, or to be compensated to make solicitations or recommendations” within the meaning of Item 1009(a), even if such financial adviser’s opinion expressly states that it is not making a solicitation or recommendation to any of the target company’s shareholders. Therefore, the Schedule 14D-9 must include a summary of the material terms of the financial adviser's compensation notwithstanding such a disclaimer.

Summary of Material Terms. The staff also provided guidance with respect to what constitutes a “summary of all material terms” of the financial adviser’s employment, retainer or other arrangements for compensation. Generic disclosure, such as “customary compensation,” will ordinarily be insufficient as it lacks the specificity needed to assist securityholders in evaluating the merits of the solicitation or recommendation and the objectivity of the financial adviser. Quantifying the amount of compensation may not necessarily be required in all instances, but disclosure of the summary of the material terms of the compensatory arrangement would generally include:

  • the types of fees payable to the financial adviser (e.g., independence fees, sale transaction or “success” fees, periodic advisory fees, or discretionary fees);
  • if multiple types of fees are payable and there is no quantification, then sufficiently detailed narrative disclosure to allow securityholders to identify the fees that will provide the primary financial incentive for the financial advisor;
  • any contingencies, milestones or triggers relating to the payment of the financial adviser’s compensation (e.g., the payment of a fee upon the consummation of a transaction, including with a bidder in an unsolicited tender or exchange offer); and
  • any other information about the compensatory arrangement that would be material to securityholders’ assessment of the financial adviser’s analyses or conclusions, including any material incentives or conflicts.

The authors would like to thank Brian Lewis for his contribution to this alert.