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H. Financial Statements
us SEC - C&DI - Proxy Rules and Schedules
Question 1
Q: It appears that some of the financial disclosure requirements were cut back while others were not. See Item 1010(a) of Regulation M-A. For example, book value per share information is only required "as of the most recent balance sheet date" while the ratio of earnings to fixed charges information is required for "the two most recent fiscal years and the interim periods." Why is there a difference?
A: Book value is a ratio based on balance sheet data, and the ratio of earnings to fixed charges is based on the income statement. We believe book value information is most relevant as of the most recent balance sheet date, while the performance measured by the ratio of earnings to fixed charges is most meaningful when it can be compared among the periods covered by the income statements.
Question 2
Q: What target "financial information" can be omitted under Item 17(b)(7)(ii) to Form S-4?
A: Revised Item 17(b)(7)(ii) to Form S-4 states that no financial information (including pro forma and comparative per share information) is required for a non-reporting target when the target is significant to the acquiror at or below the 20% level and the registrant's security holders are not voting on the transaction. In these circumstances, the staff will not object to the omission of pro forma and comparative per share information as well as financial and related information of the target stipulated under Regulation S-K Items 301, 302, 303, 304(b), and 305, and comparable items of Regulation S-B.Registrants should remember to include the insignificant non-reporting target in measuring the aggregate impact of individually insignificant business acquisitions under Rule 3-05(b)(2)(i) of Regulation S-X (or Item 310(c)(3)(iii) of Regulation S-B).
Question 3
[Editor's note: S-B 310(c) has been replaced by S-X 8-04.]
Q: In proxy materials soliciting votes by an acquiror's security holders for the acquisition of a non-reporting target, the target company must furnish its financial information pursuant to Item 17(b)(7) of Form S-4. Item 17(b)(7) does not specifically require the target to furnish financial statements of its significant business acquisitions pursuant to Rule 3-05 of Regulation S-X. Does the staff interpret Item 17(b)(7) differently when the acquiror's security holders are voting on the transaction?
A: Yes. Financial information that is material to a voting security holder's evaluation should be included in the proxy materials. When security holders of the acquiror are voting, the staff believes that a non-reporting target company also must furnish financial statements under Rule 3-05 of Regulation S-X if the omission of those financial statements renders the target company's financial statements substantially incomplete or misleading. The staff's prior practice in these circumstances is not affected by the adoption of the new rules. This answer applies both to cash merger proxy statements and proxy material that is included in a Form S-4 registration statement. Note: In this and other Q&As in the Financial Statements section, references to Rule 3-05 of Regulation S-X also apply to Item 310(c) of Regulation S-B.
Question 4
Q: Instructions 2 and 3 to revised Item 14 of Schedule 14A permit a target company to omit from its proxy materials financial information about itself, as prescribed in Item 14(c)(2), when only its security holders are voting on a transaction in which the consideration being offered consists of exempt securities and/or cash, unless the transaction is a going-private or roll-up transaction. In these circumstances, does that target need to furnish the financial statements required by Rule 3-05 of Regulation S-X in its proxy materials if those financial statements have not previously been filed?
A: Yes. The target company's security holders are presumed to have access to information about their company, which would include filings it made on Form 8-K containing financial statements of significant businesses acquired. In addition, however, the target company should furnish all financial statements required by Rule 3-05 of Regulation S-X in its proxy materials to the extent those financial statements have not previously been filed, along with related pro forma information, as that information would be considered material to an informed voting decision. The staff's position concerning compliance with Rule 3-05 has not been affected by the adoption of the new rules.
The same analysis applies to the omission of financial information about the acquiror when only the acquiror's security holders are voting, as permitted by Instructions 2 and 3. Again, this information may be omitted because the acquiror's security holders are presumed to have access to information about their own company. The Rule 3-05 information should be furnished along with related pro forma financial information if not previously filed.
Question 5
Q: In proxy materials soliciting votes by a target company's security holders for an all-cash acquisition, the acquiror must furnish its financial information if it has not demonstrated its financial ability to satisfy the terms of the cash transaction. (See Instruction 2(a) to Item 14 of Schedule 14A.) In these circumstances, should the acquiror also furnish the financial statements of any other business acquisitions that would be required under Rule 3-05 of Regulation S-X?
A: Yes. When an acquiror is required to furnish its financial information, the revised proxy rules (Item 14(c)(1) of Schedule 14A) refer to Part B of Form S-4, which requires compliance with Rule 3-05 of Regulation S-X. However, if only the target's security holders are voting, the staff would consider granting relief on a case-by-case basis to acquirors with respect to financial statements required by Rule 3-05 in all-cash transactions when those financial statements are not material in assessing the acquiror's financial ability to satisfy the terms of the transaction. The staff's position concerning compliance with Rule 3-05 in these circumstances is not affected by the adoption of the new rules.
Question 6
Q: What financial statements should be filed with proxy materials soliciting votes with respect to the sale or other transfer of all or any substantial part of assets? See Item 14(a)(4) of Schedule 14A.
A: The registrant should provide its financial information pursuant to Item 14(c)(1) of Schedule 14A. In addition, if authorization is sought from security holders for disposition of a significant business, unaudited financial statements of that business should be provided in the proxy materials for the same periods as are required for the registrant, along with pro forma information. The staff's position concerning these financial statements is not affected by the adoption of the new rules.
[Editor’s note: The SEC staff has not established a bright line threshold of significance. See the highlights of the July 2017 meeting of the CAQ SEC Regulations Committee.]
Question 7
NEW
Q: Item 10 of Schedule TO provides that certain financial information may need to be disclosed in the Schedule TO about a bidder in a tender offer. Instruction 3 to Item 10 indicates that the bidder may incorporate this financial information by reference instead of disclosing it directly in the Schedule TO. Instruction 6 to Item 10 allows summarized financial information to be disseminated to security holders (Item 1010(c) of Regulation M-A) instead of the full financial information required by Item 1010(a) and (b). If a bidder elects to incorporate the financial information by reference, may the bidder omit summarized financial information from the document disseminated to security holders?
A: No. Instruction 6 is intended to make it clear that when financial information is considered material, the disclosure materials disseminated to security holders must contain at least summarized financial information. In addition, when summarized financial information is disseminated to security holders in lieu of full financial information pursuant to Instruction 6, the full financial information must be provided in the Schedule TO or incorporated by reference pursuant to Instruction 3.
Question 8
NEW
Q: Item 1010(a)(1) of Regulation M-A states that a bidder's audited financial statements that are included in a Schedule TO should cover the two fiscal years that are required to be filed with its most recent annual report under the Exchange Act. What is the requirement to update annual financial statements shortly after the end of a fiscal year for a bidder that is not subject to the periodic reporting requirements of the Exchange Act?
A: When the proposed mailing date of the Schedule TO falls within 90 days after the end of the fiscal year, that Schedule need not include financial statements more current than as of the end of the third fiscal quarter of the most recently completed fiscal year unless the financial statements for the most recently completed fiscal year are available. The audited annual financial statements for the most recently completed fiscal year must be included if the mailing date of the Schedule TO is beyond 90 days after the end of the fiscal year. If the bidder is a foreign private issuer, the audited year-end financial statements must be included if the mailing date of the Schedule TO is beyond six months after the end of the fiscal year (the due date of the Form 20-F if one were required).
Question 9
NEW
Q: Item 10 of Schedule TO and Item 1010(a) of Regulation M-A require a bidder in a tender offer to disclose its financial statements if material. This includes quarterly financial information. How does a foreign private issuer comply with this requirement?
A: A foreign private issuer does not need to provide any quarterly or other interim financial statements unless it has filed such information in a report on Form 6-K or made it publicly available in its home jurisdiction. In that case, the information would satisfy the quarterly financial information requirement of Item 1010. The information would have to be either provided in the tender offer material or incorporated by reference and a summary provided. See Question H.7 above. If the foreign private issuer prepares its financial statements on the basis of a comprehensive body of accounting principles other than U.S. GAAP, the quarterly or other interim financial information should include disclosures consistent with the guidance in Instruction 3 to Item 8.A.5 of Form 20-F.
Question 10
NEW
Q: In a Schedule TO filed by a non-reporting foreign bidder for a fully financed, all-cash offer for all the securities of a U.S. reporting company, financial statements of the bidder are not required. See Instruction 2 to Item 10 of Schedule TO. If the bidder includes its financial statements solely to comply with local law and those financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, are they required to include a reconciliation to U.S. GAAP?
A: Yes, unless the reconciliation to U.S. GAAP is not available. If the financial statements are included solely to comply with local law and a reconciliation to U.S. GAAP is not available, preamble disclosure to those financial statements should explain why those financial statements are being furnished, that they are not required to be furnished under the SEC's rules, and that they do not include all the disclosures that would be required under the SEC's rules, such as a U.S. GAAP reconciliation. A textual description of the differences between U.S. GAAP and home country GAAP is encouraged but not required.
Question 11
NEW
Q: When the Schedule TO includes an independent accountant's report, should one copy of the Schedule TO filed with the Commission include a manually signed copy of that report (similar to Instruction 2 to Item 13 of Schedule 14A)?
A: No. A manually signed copy of the accountant's report is not required to be filed with the Commission in connection with a Schedule TO.
Question 12
NEW
Q: Item 17(b)(5)(i) to Form F-4 requires the registration statement to include the financial statements of a non-reporting foreign target for either or both of the two fiscal years before the latest fiscal year if those financial statements have been provided to the target company's security holders and they were prepared in conformity with GAAP. A similar provision is included in Form S-4. Is the reference to "GAAP" intended to mean only U.S. GAAP?
A: No. The references to GAAP in this Item also include a comprehensive body of accounting principles other than U.S. GAAP. If the financial statements required to be included in the filing are prepared on a comprehensive body of accounting principles other than U.S. GAAP, those financial statements should include a reconciliation to U.S. GAAP in accordance with Item 17 of Form 20-F. However, that reconciliation may be omitted if it is unavailable or not obtainable without unreasonable cost or expense, so long as a narrative description of all material differences between U.S. GAAP and non-U.S. GAAP is disclosed.
Question 13
NEW
Q: Item 5 to Forms S-4 and F-4 requires the registration statement to include pro forma financial information in accordance with Article 11 of Regulation S-X giving effect to the acquisition of the target company. The separate financial statements of a non-reporting foreign target that have been prepared on a comprehensive body of accounting principles other than U.S. GAAP may omit quantified reconciliations to U.S. GAAP if they are unavailable or not obtainable without unreasonable cost or expense, so long as a narrative description of all material differences between U.S. GAAP and non-U.S. GAAP is disclosed. Is this accommodation to omit a U.S. GAAP reconciliation also available with respect to the issuer's pro forma financial information that has been prepared on a comprehensive body of accounting principles other than U.S. GAAP?
A: No. A foreign private issuer's pro forma financial information presented in accordance with Article 11 of Regulation S-X should either be prepared on a U.S. GAAP basis or be accompanied by quantified reconciliations to U.S. GAAP prepared in a manner consistent with Item 17 of Form 20-F. A domestic issuer's pro forma financial information must be prepared on a U.S. GAAP basis even when the financial statements of the foreign target are not required to be reconciled to U.S. GAAP.
Question 14
NEW
Q: The instructions to Item 17(b)(5) to Form F-4 state that the financial statements of a non-reporting target company for the fiscal years before the latest fiscal year need not be audited if they were not previously audited. A similar provision is included in Form S-4. How do these instructions apply to a situation where those financial statements have been previously audited in accordance with non-U.S. GAAS?
A: If financial statements of a non-reporting foreign target have been previously audited in accordance with non-U.S. GAAS and those financial statements have been published for general distribution in the target's home jurisdiction or elsewhere, financial statements for those periods must be audited in accordance with U.S. GAAS and included in the registration statement. The staff will consider granting relief on a case-by-case basis in unusual circumstances.
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