SEC Issues New C&DIs Expanding Disclosure Requirement for Financial-Advisor Compensation in Tender Offers
In two new C&DIs, the SEC's Division of Corporation Finance expanded the requirement to disclose compensation paid to financial advisors in tender offers, stating its view that the regulation includes advisors who have only provided fairness opinions and that the regulation requires more detail than a statement that customary compensation will be paid.
On November 18, 2016, the SEC's Division of Corporation Finance (Division) issued two new compliance and disclosure interpretations (C&DIs) that address the requirement to disclose in a tender offer the compensation paid to any person employed, retained, or otherwise being compensated to make solicitations or recommendations in connection with the offer. The C&DIs reflect the SEC's view that filers must disclose:
The compensation paid to a financial advisor who has only provided a fairness opinion, even if the advisor has expressly stated that it is not making a solicitation or recommendation to the target company shareholders.
More detail than a simple statement that "customary compensation" will be paid to the financial advisor.
The requirement to disclose the compensation paid to a financial advisor is memorialized in both Schedule TO, the disclosure document filed by the person making the tender offer, and Schedule 14d-9, the document in which the target company's board discloses its position on the tender offer. Each of those documents requires its respective filer to furnish the information required by Item 1009(a) of Regulation M-A. Item 1009(a) requires the following disclosure:
(a) Solicitations or recommendations. Identify all persons and classes of persons that are directly or indirectly employed, retained, or to be compensated to make solicitations or recommendations in connection with the transaction. Provide a summary of all material terms of employment, retainer, or other arrangement for compensation.
New Question 159.01 of the Tender Offers and Schedules C&DIs asks if a financial advisor engaged for the exclusive purpose of providing a fairness opinion on the tender offer is captured by Item 1009(a), even if the fairness opinion expressly states that the advisor is not making a solicitation or recommendation to any of the target company shareholders. The Division answers that that financial advisor is in fact contemplated by Item 1009(a). The disclaimer that the advisor is not making a solicitation or recommendation does not remove the advisor from the ambit of the disclosure requirement.
New Question 159.02 of the Tender Offers and Schedules C&DIs asks if disclosing that "customary compensation" will be paid to the financial advisor engaged to assist the issuer in making its required response to a tender offer, without any further details, satisfies the requirement to "provide a summary of all material terms" of compensation. The Division answers that while this determination ultimately depends on the relevant facts and circumstances of the transaction, "generic disclosure" of this type will ordinarily not suffice. The Division adds that while quantifying the amount of compensation payable to the financial advisors may not necessarily be required in all instances, disclosure would generally require:
The types of fees payable to the financial advisors (for example, "success" fees, periodic advisory fees, or discretionary fees).
A sufficiently detailed narrative disclosure to allow target company shareholders to identify the fees that will provide the primary financial incentives for the financial advisors (if multiple types of fees are payable to the financial advisors and there is no quantification of these fees).
Any contingencies, milestones, or triggers relating to the payment of the financial advisors' compensation (for example, the payment of a fee on the closing of a transaction, including with a bidder in an unsolicited tender offer).
Any other information about the compensatory arrangement that would be material to the assessment of the financial advisors' analyses or conclusions, including any material incentives or conflicts that should be considered as part of this assessment.
The Division's view of the details required in disclosure of compensation to financial advisors comes as financial-advisor conflicts have become a more prominent area of dispute in M&A-related litigation in recent years. The new interpretation also represents something of a rejoinder to prevailing market practice, in which filers have tended to simply disclose that the financial advisor would be paid reasonable and customary compensation (as reflected in the discussion in Practice Note, Schedule TO: Item 9: Persons/Assets, Retained, Employed, Compensated or Used ( www.practicallaw.com/w-000-7202) ).
For an overview of the tender offer process, see Practice Note, Tender Offers: Overview ( www.practicallaw.com/1-382-7403) . For a detailed description of the Schedule TO disclosure document, see Practice Note, Schedule TO ( www.practicallaw.com/w-000-7202) .