Corp Fin Posts Two New CDIs Regarding Non-GAAP Financial Measures in the M&A Context

On April 4, 2018, the Securities and Exchange Commission’s ("SEC") Division of Corporation Finance ("Corp Fin") posted two new compliance and disclosure interpretations ("CDIs")¹ regarding the use of non-GAAP financial measures in connection with business combinations:

Question 101.02

In Question 101.01, Corp Fin states that financial measures included in forecasts provided to a financial advisor and used in connection with a business combination transaction are not considered non-GAAP financial measures if certain conditions are met². New CDI 101.02³ provides that if the same forecasts provided to the company's financial advisor are also provided to its board of directors or a board committee, the financial measures will still be outside the definition of non-GAAP financial measures, so long as the specified conditions are satisfied.

Question 101.03

In this CDI, Corp Fin confirms that, if a registrant determines that forecasts exchanged between the parties in a business combination transaction are material and that disclosure of those forecasts is required to comply with the anti-fraud and other liability provisions of the federal securities laws, the financial measures included in those 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.

¹ The CDIs are available here.
² This is because under Item 10(e)(5) of Regulation S-K and Rule 101(a)(3) of Regulation G, financial measures that are required to be disclosed by GAAP, SEC rules, or an applicable system of regulation of a government or governmental authority or self-regulatory organization are not considered non-GAAP measures. The specified conditions are: (i) 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 (ii) 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.
³ Note that former Question 101.02 has been renumbered as 101.04.

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