SEC Clarifications for Non-GAAP M&A Disclosures

Trevor S. Norwitz and Sabastian V. Niles are partners and Samson Z. Mesele is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Norwitz, Mr. Niles, and Mr. Mesele.

The SEC Staff recently released Compliance & Disclosure Interpretation 101.01 (the “C&DI”) which provides that financial measures included in forecasts given to a financial advisor and used in connection with a business combination transaction are not non-GAAP financial measures that must be reconciled to GAAP. This applies as long as the forecasts (i) are provided to the financial advisor for the purpose of rendering a fairness or similar opinion and (ii) are disclosed to comply with Regulation M-A Item 1015 (requiring a summary of the analyses supporting a fairness opinion) or to comply with requirements under state or foreign law, including case law, regarding disclosure of financial advisor analyses.

The C&DI will help end a recent spate of frivolous litigation claims that projections provided to explain the assumptions underlying a financial advisor’s fairness analyses require GAAP reconciliation. The considerations underlying Regulation G’s reconciliation requirements (“to ensure that investors and others are not misled by the use of non-GAAP financial measures”) do not apply to management forecasts provided to a financial advisor for the purpose of rendering a fairness opinion in connection with an M&A transaction.

The C&DI does not specifically clarify whether the GAAP reconciliation requirements apply to projections shared with bidders (as opposed to financial advisors) in an M&A transaction that are later publicly disclosed in the merger proxy or tender offer materials. In our opinion the underlying logic of the C&DI should apply here as well: disclosure of these internal forecasts to bidders is not intended to communicate performance expectations to investors, so reconciling them to GAAP would not be useful and should not be required.

We welcome the guidance provided in the C&DI which will limit the ability of plaintiffs’ lawyers to bring weak disclosure claims based on Regulation G where it should not apply and where GAAP reconciliation would not be meaningful (thus also avoiding the waste of managerial resources preparing unnecessary GAAP reconciliations). We hope the SEC Staff will confirm that the same considerations that animate the C&DI also apply to projections disclosed because they were shared with bidders.

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