SEC Proposes Improvements to Merger Disclosures

The SEC voted to propose rule amendments intended to improve the information disclosed regarding acquisitions and dispositions of businesses. The proposal is designed to facilitate access to capital in a more timely manner and to reduce the compliance burden of financial disclosures.

The proposed changes would, among other things:

– clarify the required determination of “significance” under the rule by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business;
– require the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years;
allow disclosure of financial statements that omit “certain expenses for certain acquisitions of a component of an entity”;
– provide guidance on when financial statements and pro forma financial information are required;
– authorize the use of, or reconciliation to, International Financial Reporting Standards;
– remove the separate acquired business financial statements requirement for businesses that have been included in the registrant’s post-acquisition financial statements for a complete fiscal year; and
– improve the content of the pro forma financial information requirements to reflect “reasonably estimable synergies and transaction effects.”

Specifically, the proposal would: (i) amend Rule 3-14 to align with Rule 3-05 where no unique industry considerations exist; ​(ii) clarify elements of Rule 3-14, including the “determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule’s requirements”; (iii) codify smaller reporting company requirements in Article 8 of Regulation S-X; (iv) adopt a new Rule 6-11 and amend Form N-14 to include financial reporting for fund acquisitions by investment companies and business development companies; and (v) amend the definition of “significant subsidiary” for investment companies.

SEC Commissioner Robert J. Jackson Jr. voted to request public comment on the proposal, but urged commentators to propose improvements to the rules that would empower investors to hold executives more accountable for merger and acquisition disclosure. Commissioner Jackson cited “longstanding evidence” that corporate insiders use mergers to promote private interest over that of long-term investors. According to Mr. Jackson, the proposed rule amendments ignore this evidence and could lead to less disclosure about acquisitions by companies whose market value is significantly different from their book value. Additionally, Commissioner Jackson expressed concern that the economic analysis in the release ignores “the other half of [the] well-known equation: that acquiring companies’ stocks tend to take a hit upon the announcement of a merger.”

Comments must be submitted within 60 days of publication in the Federal Register.

LOFCHIE VIEW:

Judging by his statement, Commissioner Jackson appears to distrust corporate managers (i) when they keep profits within a company and use it to acquire another company and also (ii) when they disburse profits by buying back stock. See, e.g., SEC Commissioner Calls for Revision of Stock Buyback Rules. In general, a company that has more money than it can reasonably use for internal expansion must either use the money to buy something else or return it to shareholders. Here, Commissioner Jackson argues that “many mergers are not in investors’ long-term interests.” If the Commissioner is convinced of that, then there is inconsistency in his resistance to allowing issuers to give money back to their shareholders through stock buybacks. Even if a company can’t be too thin, it can be too (cash) rich.

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