On March 22, 2022, the U.S. Securities and Exchange Commission (the “SEC”) published two new compliance and disclosure interpretations (“C&DIs”) relating to Item 1.01 of Form 8-Ks in respect of business combination transactions. Item 1.01 of Form 8-K requires disclosure of material definitive agreements not made in the ordinary course of business, including a brief description of the material terms and conditions of the agreement.

New Guidance Explained

In the first new C&DI (102.04), the SEC advises that, while the materiality of a term or condition of a business combination agreement is a facts and circumstances analysis, the following items should generally be viewed as material, and therefore disclosed:

  • the amount and nature of consideration offered;
  • any committed financing arrangements (e.g., PIPE investments) and the material terms of such arrangements or the need for additional financing to close the business combination;
  • material terms of post-closing ownership or management structure;
  • material closing conditions; and
  • the anticipated timeframe for filing any registration, proxy or information statement, or tender offer materials, as well as the anticipated timing for closing the business combination.

The C&DI also provides that additional disclosure may be warranted if:

  • a material term (or terms) of the transaction have not been negotiated; or
  • the registrant is the acquirer (in which case, the registrant should disclose the nature of the target’s business, as well as information disclosed by the target in announcing the transaction).

The second C&DI (102.05) clarifies the SEC’s view that, as a best practice, a business combination agreement reported as an Item 1.01 8-K should be filed as an exhibit to the Form 8-K. The C&DI notes that, historically, the SEC would not object if a registrant did not file a business combination agreement as an exhibit to the Item 1.01 8-K because the registrant was seeking confidential treatment for sensitive terms in the agreement. The C&DI notes, however, that the instructions to Form 8-K have recently been amended to allow registrants to redact sensitive terms in an agreement filed as an exhibit to a Form 8-K without submitting a confidential treatment request. As a result, the need for confidential treatment of certain terms in an agreement no longer provides a valid reason, in the SEC’s view, to forgo filing the business combination agreement as an exhibit to the Item 1.01 8-K. The C&DI also notes that, in circumstances where the registrant is unable to include the business combination agreement as an exhibit to the Item 1.01 8-K, the registrant should provide an explanation as to why the exhibit could not be filed.

Takeaways:

  • Advance negotiation preparation: While many registrants include disclosure consistent with C&DI 102.4 guidance when announcing a business combination, the impact of this C&DI may result in further detail being provided at the time of transaction announcements, particularly in respect of transaction timelines and information about target companies. As many registrants publish Item 1.01 8-Ks announcing material business combinations on the date of signing, this C&DI may require added focus from deal parties to align on disclosure in advance of signing.
  • Advance legal and administrative preparation: Given new C&DI 102.05, deal parties will need to plan ahead to have a properly formatted, Edgar-ized version of the business combination agreement, with any required redactions, available for inclusion as an exhibit to the Item 1.01 8-K or be prepared to provide the explanation for why the exhibit could not be filed. It is unlikely that the argument “time ran out” will be compelling.