Abstracted from: What's The Big Deal? Why Some Seemingly Material Acquisition Agreements Might Never See The Light Of Day
By: Jim Moloney, Mike Titera, and Kevin Hill
Gibson Dunn & Crutcher, Irvine CA
Deal Lawyers, Vol. 8, No. 6, Pgs. 1-4
Quixotic quest for a quick fix. Why are some multibillion-dollar acquisitions never disclosed to the SEC, corporate attorneys Jim Moloney, Mike Titera, and Kevin Hill ask. Under Item 1.01 of Form 8-K, a public company must disclose specified information about a material final agreement made other than in the ordinary course of business, within four business days after entering into it. Under Regulation S-K Items 601(b)(2) and (10), a company must - with specified exceptions - file a material plan of acquisition and a material contract made other than in the ordinary course of business as exhibits to registration statements and periodic reports. Because these items do not define “material,” a company has to refer to general standards in other SEC rules, case law, and administrative guidance. According to the SEC staff, information is material if a reasonable investor would be substantially likely to deem that information “important in making an investment decision,” but no brightline rule or exact formula exists.
Quantitative and qualitative quizzes. Without an exact definition, a company must assess materiality case by case, applying two types of factors - quantitative thresholds and qualitative queries - to all acquisition agreements. The SEC has adopted various quantitative thresholds. Most significantly, S-K Item 601(b)(10)(ii)(C) requires a contract for selling or buying any property, plant, or equipment to be an exhibit when the consideration is more than 15% of the company's fixed assets, even if the transaction was in the ordinary course of business. Other thresholds appear in Form 8-K and Reg. S-X. No transaction, however, becomes material just by clearing a threshold, the authors emphasize. A number of qualitative questions apply to determine materiality, such as how acquisitive the acquiring company is, whether the target is in a line of business that is new to the acquiring company, how much its assets resemble the target's, and whether the acquisition creates a new reporting segment. Although the SEC can later contest an issuer's decision to not make a disclosure, it frequently defers to a company and corporate counsel whose analysis is reasonable.
Quirk: material but quotidian. The agreement for an acquisition determined to be material need not be disclosed if made in the ordinary course of business, which S-K Item 601(b)(10)(ii) explains as “ordinarily accompanies the kind of business conducted by the registrant and its subsidiaries.” To make that determination, compare the nature of the agreement with that of the company's business. An acquisition agreement might be outside the ordinary course of business for a company that seldom makes acquisitions but within the ordinary course for an exceptionally acquisitive company. The more acquisitions a company - particularly a large conglomerate - makes, the less material each succeeding one becomes. Still, the authors observe, the fact that a company makes numerous acquisitions will not singlehandedly eliminate its obligation to disclose an otherwise material one.
Abstracted from Deal Lawyers, published by Executive Press, PO Box 21639, Concord CA 94521. To subscribe, call (925) 685-5111; or visit www.deallawyers.com.
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