Last week was a very busy regulatory week for the SEC, including issuing six new compliance and disclosure interpretations (C&DI) for merger and acquisition transactions, most of which directly impact SPAC business organization transactions; proposed rules on SPACs’ shell companies and the use of financial projections; proposed rules to modify the definition of “dealer” for purposes of broker-dealer registration requirements; and a new accounting bulletin impacting the accounting treatment of cryptocurrencies by exchanges. This blog will discuss the new C&DI.
The rules related to disclosure obligations, including in Forms 8-K, S-4 registration statements and proxy materials, and the filing of exhibits associated with a material contract, including merger agreements, have evolved over the past few years (see here related to confidential treatment of material contracts – HERE). In March 2021, the SEC issued a statement discussing certain legal specifics associated with a SPAC, including expressing concerns regarding disclosures associated with a de-SPAC transaction (i.e., a business combination or merger transaction) (see HERE).
On March 30, 2022, the SEC proposed rules enhancing disclosure requirements associated with SPAC initial public offerings (IPOs) and de-SPAC merger transactions; requiring that a private operating company be a co-registrant when a SPAC files an S-4 or F-4 registration statement associated with a business combination; requiring a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction; amending the definition of a “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statement such as projections, unavailable in filings by SPACs and other blank check companies; and deeming underwriters in a SPAC IPO to be underwriters in a de-SPAC transaction when certain conditions are met. The proposed rule change will be the topic of next week’s blog.
Ahead of the comprehensive proposed rule change, the SEC has implemented immediate changes to the business combination process, including for SPACs by issuing six new C&DI.
Two of the six new C&DI address disclosure obligations in Item 1.01 of Form 8-K. Item 1.01 of Form 8-K requires disclosure of the entry into a material definitive agreement. Material agreements are those that create material obligations that are enforceable by or against a company. As a rule of thumb, if an agreement is material enough to require separate board or shareholder consent, it requires an 8-K filing. Non-binding term sheets or letters of intent generally do not trigger a filing requirement, though material binding provisions contained therein may trigger the disclosure, such as significant breakup fees.
Historically, a company was not required to file a copy of the agreement itself with the 8-K, but if it does not, the agreement must be filed with the next periodic report on either Form 10-Q or 10-K. As is encouraged by the SEC, I have always usually recommended that the agreement be filed with the 8-K. As discussed below, one of the new C&DI now requires the filing of the agreement at the time of filing the Form 8-K.
The determination of an 8-K filing requirement is made at the time the agreement is entered into, such that if the agreement becomes material through the passage of time or events, an 8-K filing is not later triggered. A contract is considered material if a reasonably prudent investor would attach importance to the information in making a transactional decision (purchasing or selling a security or voting a security).
The guiding purpose of the many and complex disclosure provisions of the federal securities laws is to promote “transparency” in the financial markets. However, the task of winnowing out the irrelevant, redundant and trivial from the potentially meaningful material falls on corporate executives and their professional advisors in the creation of corporate disclosure, and on investment advisors, stock analysts and individual investors in its interpretation. The concept of materiality represents the dividing line between information reasonably likely to influence investment decisions and everything else.
Only those misstatements and omissions that are material violate many provisions of the securities laws, including the bedrock provisions requiring accurate financial reporting. In 1976, the U.S. Supreme Court set the standard for a materiality evaluation, which standard remains today. In TSC Industries, Inc. v. Northway, Inc., the Supreme Court held that information should be deemed material if there exists a substantial likelihood that it would have been viewed by the reasonable investor as having significantly altered the total mix of information available to the public.
Despite the principles-based approach to determine materiality, once determined the SEC provides many prescriptive guidelines as to the specific information that must be disclosed. New C&DI 102.04 sets forth the specific material terms and conditions of a business combination agreement that must be disclosed under Item 1.01 of Form 8-K. In particular, the C&DI states:
Answer: Item 1.01 of Form 8-K requires a brief description of the terms and conditions of the agreement that are material to the registrant. Although the materiality of a term or condition of the business combination agreement will ultimately depend on the particular facts and circumstances, the following terms should generally be viewed as material and disclosed in the Form 8-K:
- the amount and nature of consideration offered for the business combination (or the method, exchange ratio, or formula for determining the consideration);
- any committed financing arrangements (e.g., PIPE investments), or the need for financing to close the business combination transaction, along with the material terms of such arrangements;
- any material terms regarding the securities ownership or management structure of the combined or surviving company after the closing of the business combination transaction;
- any material conditions to the closing of the transaction; and
- the anticipated timeframes for filing any Securities Act registration statement, proxy or information statement, or tender offer materials, as well as for the closing of the business combination transaction.
The Form 8-K also must include all other material information that is necessary to make the required disclosure, in light of the circumstances under which it is made, not misleading. See Exchange Act Rule 12b-20 and Exchange Act Section 10(b). For example, the registrant should consider disclosing the following information in the Form 8-K so that investors can evaluate the business combination agreement with the proper context:
- if a material term of the agreement has not yet been determined by the parties, the Form 8-K should affirmatively state so; and
- in the case where the registrant is the acquiror, the Form 8-K should briefly describe the nature of the target company’s business, including, at a minimum, whether it has existing operations or has generated revenues, as well as any information disclosed by the target company in announcing the business combination transaction. [March 22, 2022]
New C&DI 102.05 addresses whether the business combination agreement should be filed as an exhibit to the Form 8-K. The C&DI states:
Answer: Registrants are encouraged, as a best practice, to file the agreement as an exhibit to the Item 1.01 Form 8-K. The Commission did not require the material definitive agreement to be filed as an exhibit to the Item 1.01 Form 8-K due to the registrant’s need for time to (1) request confidential treatment of sensitive terms of the agreement and (2) prepare the agreement in the proper EDGAR format. See Release No. 33-8400 (March 16, 2004).
The Commission, however, recently amended Form 8-K to permit registrants to redact sensitive terms of a material definitive agreement without submitting a confidential treatment request. See Instructions 5 and 6 to Item 1.01 of Form 8-K; see also Release No. 33-10618 (March 20, 2019). The need for confidential treatment generally can no longer be the basis for declining to file the material definitive agreement as an exhibit to the Item 1.01 Form 8-K. This is consistent with the Commission’s previous views. See Release No. 33-8400 (“[W]e encourage companies to file the exhibit with the Form 8-K when feasible, particularly when no confidential treatment is requested.”).
Further, absent unusual circumstances, it should generally be feasible to prepare the agreement in the proper EDGAR format within the four business day timeframe for filing an Item 1.01 Form 8-K, given technological advances since 2004 and widespread availability of EDGAR filing services. Registrants that are unable to prepare the agreement in the proper EDGAR format and file the agreement as an exhibit should, as a best practice, provide an explanation in the Form 8-K. [March 22, 2022]
Proxy Rules and Schedules, including Schedule 14A and 14C
Three of the six new C&DI are directed at the proxy rules. The new C&DI in effect result in an advance implementation of some of the proposed rules. The three new C&DI address when a private target that isn’t soliciting its own shareholders may be viewed as engaged in a solicitation of the acquiror’s shareholders (as noted above, the proposed new rules would make the private target a co-registrant in an S-4 or F-4); and the availability of Rule 14a-12 for communications by the target and by the acquiror under certain circumstances.
Rule 14a-12 covers solicitations before the furnishing of a proxy statement. In particular, a solicitation may be made before furnishing security holders with a proxy statement if:
(i) Each written communication includes: (a) the identity of the participants in the solicitation and a description of their direct or indirect interests, by security holdings or otherwise, or a prominent legend in clear, plain language advising security holders where they can obtain that information; and (b) a prominent legend in clear, plain language advising security holders to read the proxy statement when it is available because it contains important information. The legend also must explain to investors that they can get the proxy statement, and any other relevant documents, for free at the SEC’s web site and describe which documents are available free from the participants; and
(ii) A definitive proxy statement meeting the requirements of Rule 14a-3(a) is sent or given to security holders solicited in reliance on Rule 14a-12 before or at the same time as the forms of proxy, consent or authorization are furnished to or requested from security holders.
Rule 14a-12 also requires that any solicitation materials under the Rule be filed with the SEC no later than the date the material is first used (i.e. published, sent or given to security holders). Rule 14a-12 also has special provisions for its use by persons or groups that are opposing solicitations related to the election or removal of directors.
New C&DI discussed when a target can be viewed as engaged in a solicitation of an acquiror’s shareholders. The C&DI prefaces specific facts including that the target is a non-reporting company not subject to the Exchange Act reporting requirements or proxy rules. Further, the target company plans to publicly support the transaction and its benefits for both companies’ shareholders including through press releases, public communications and social media. Confirming that such communications constitute a solicitation subject to the proxy rules, the C&DI states:
Answer: Yes. A solicitation includes any “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” See Exchange Act Rule 14a-1(l)(1)(iii). Accordingly, a target company that does not plan to solicit its own shareholders could nevertheless be engaged in a solicitation of the acquiror’s shareholders if its public communications promote the proposed transaction or may be reasonably expected to influence the voting decisions of the acquiror’s shareholders. Any target company communication that constitutes a solicitation would be subject to the liability provision of Exchange Act Rule 14a-9, which prohibits materially false or misleading statements or material omissions, as well as the filing and information requirements of the federal proxy rules. Also see Question 132.01 below. [March 22, 2022]
The second two C&DI are directed at Rule 14a-12 discussed above. Setting forth the same facts as laid out in C&DI 101.02, C&DI 132.01 questions whether the target can rely on Rule 14a-12 to communicate publicly about the proposed business combination transaction even though it does not plan to file its own definitive proxy statement. The SEC answers in the affirmative, stating:
Answer: Yes, subject to the conditions described below. Rule 14a-12 permits solicitations before the furnishing of a proxy statement, provided, among other things, that “a definitive proxy statement…is sent or given to security holders solicited in reliance” on the rule. See Rule 14a-12(a)(2). Recognizing the need for the target company to publicly announce the proposed transaction and the fact that the acquiror will send its own definitive proxy statement to its shareholders, the staff will not object if the target company relies on Rule 14a-12 for its public written communications, provided that:
- the target company identifies itself as a participant in the acquiror’s proxy solicitation;
- the target company satisfies the remaining applicable requirements of Rule 14a-12, including the filing of its communications with the Commission; and
- the acquiror complies with the conditions specified in Question 102.04 of the Exchange Act Form 8-K C&DIs.
The target company may have its written communication filed by the acquiror on its behalf and under the acquiror’s Exchange Act file number, provided the communication is clearly identified as that of the target company. [March 22, 2022]
C&DI 132.02 questions whether Rule 14a-12 is also available for an acquiror that makes public communications regarding a proposed business combination transaction in which it will not file a definitive proxy statement for the transaction but the target company will. Again, the answer is the in the affirmative, stating:
Answer: Yes, as long as the following conditions are satisfied:
- the acquiror identifies itself as a participant in the target company’s proxy solicitation;
- the acquiror complies with all other requirements of Rule 14a-12, including the filing of its communications with the Commission; and
- the target company complies with the conditions specified in Question 102.04 of the Exchange Act Form 8-K C&DIs.
The acquiror may have its written communication filed by the target company on its behalf and under the target company’s Exchange Act file number, provided the communication is clearly identified as that of the acquiror. [March 22, 2022]
Tender Offer Rules and Schedules
The final new C&DI provides guidance on the circumstances under which the SEC will not object to purchases by the SPAC sponsor or its affiliates outside of the redemption offer in a tender offer de-SPAC transaction. Although a de-SPAC transaction generally involves a proxy solicitation under the proxy rules and/or an S-4 or F-4 registration statement, some de-SPAC transactions include using the tender offer rules. In such a transaction, the SPAC will offer its security holders the right to redeem the SPAC securities in exchange for a pro rata portion of the funds held in the SPAC’s trust account.
Generally, rule 14e-5 prohibits purchases outside of the tender offer by a “covered person.” In this context a “covered person” includes any persons associated with the broker-dealer involved in the transaction. New C&DI questions whether Rule 14e-5 prohibits the purchases of SPAC securities by the SPAC sponsor outside of the redemption offer. The SEC states:
Answer: SPAC redemption provisions generally have indicia of being a tender offer, such as a limited period of time for SPAC security holders to request redemptions. To the extent that the SPAC redemption offer constitutes a tender offer, the Rule 14e-5 prohibition applies to the purchases of SPAC securities by the SPAC sponsor or its affiliates outside of the redemption offer.
For policy reasons, however, the staff will not object to purchases by the SPAC sponsor or its affiliates outside of the redemption offer as long as the following conditions are satisfied:
- the Securities Act registration statement or proxy statement filed for the business combination transaction discloses the possibility that the SPAC sponsor or its affiliates will purchase the SPAC securities outside the redemption process, along with the purpose of such purchases;
- the SPAC sponsor or its affiliates will purchase the SPAC securities at a price no higher than the price offered through the SPAC redemption process;
- the Securities Act registration statement or proxy statement filed for the business combination transaction includes a representation that any SPAC securities purchased by the SPAC sponsor or its affiliates would not be voted in favor of approving the business combination transaction;
- the SPAC sponsor and its affiliates do not possess any redemption rights with respect to the SPAC securities or, if they possess redemption rights, they waive such rights; and
- the SPAC discloses in a Form 8-K, prior to the security holder meeting to approve the business combination transaction, the following:
- the amount of SPAC securities purchased outside of the redemption offer by the SPAC sponsor or its affiliates, along with the purchase price;
- the purpose of the purchases by the SPAC sponsor or its affiliates;
- the impact, if any, of the purchases by the SPAC sponsor or its affiliates on the likelihood that the business combination transaction will be approved;
- the identities of SPAC security holders who sold to the SPAC sponsor or its affiliates (if not purchased on the open market) or the nature of SPAC security holders (e.g., 5% security holders) who sold to the SPAC sponsor or its affiliates; and
- the number of SPAC securities for which the SPAC has received redemption requests pursuant to its redemption offer. [March 22, 2022]