Things are turning out so well for your client Green Goo that United Goo, a leader in the sustainable sewage space, has reached an agreement with Green Goo to add Green Goo to its portfolio of gooey companies. Green Goo’s General Counsel calls to ask about disclosing the transaction.

In a previous installment we tackled the question of what Green Goo needs to do before the deal has been signed. In this installment, we explore what happens now that you have a deal, and in particular, what you need to file on Form 8-K, together with a flowchart to tie it all together.

The basics – Items 1.01, 2.01 and 9.01

Once a deal is struck, disclosure may be called for under several Items of Form 8-K. First, Item 1.01 of Form 8-K requires disclosure of entry into a material definitive agreement not made in the ordinary course of business. Bear in mind that a material definitive agreement is defined as an agreement that provides for obligations that are “material to and enforceable against” the company or by the company against parties to the agreement. As a result, this provision should not cover a non-binding letter of intent, but would cover a definitive merger agreement.

Second, completion of the acquisition or disposition of a “significant amount of assets” other than in the ordinary course of business must be disclosed under Item 2.01 of Form 8-K, and in turn may trigger the requirement for financial statements of the target under Item 9.01 of Form 8-K. Instruction 4 to Item 2.01 provides that an acquisition or disposition is deemed to involve a significant amount of assets if:

• the company’s and its other subsidiaries’ equity in the net book value of the assets or the amount paid or received for the assets upon such acquisition or disposition exceeded 10% of the total assets of the registrant and its consolidated subsidiaries; or
• it involved a “business” that is “significant.

The term “business” includes an operating entity or business unit, but excludes machinery and other assets that do not generate a distinct profit or loss stream. See Regulation S-X Rule 11-01(d); Financial Reporting Manual, Topic 2010 covers 2.01 and 9.01 in more detail.

Acquisitions and disposition work somewhat differently under 2.01/9.01, so let’s consider them separately.

Acquisitions

A “significant” acquisition of a business for these purposes is one meeting the definition of a “significant subsidiary” under Regulation S-X Rule 1-02(w) above the 20% level.

If a completed acquisition of a business results in results in Item 2.01 disclosure, Item 9.01 of Form 8-K comes into play. That Item requires a company to file separate audited financial statements of the acquired business under Regulation S-X Rule 3-05, based on the significance of the acquisition. In other words, if an acquisition is significant to at least a 20% level or above, financial statements of the acquired business will be needed. Similarly, if S-X Rule 3-05 financial statements are needed then S-X Article 11 pro forma financial information will be required (and conversely, if no S-X Rule 3-05 financials are needed, then no S-X Article 11 financials will generally be required). 

Item 9.01(a) provides that the required financial information may be filed with the initial Form 8-K or by amendment to that 8-K not later than 71 calendar days after the due date for the initial Form 8-K (i.e., four business days after the occurrence of the event). People often use 75 days as a shorthand for the deadline for the target financials, but it’s actually 71 calendar days plus four business days, which may be a longer period than 75 calendar days (e.g., if you cross a weekend or holiday). This can matter when you’re down to the wire and each day counts.

Dispositions

The situation is different for dispositions.  First, unlike in the case of acquisitions, there is no link between the need for S-X Rule 3-05 financial statements and S-X Article 11 pro forma financial information. S-X Rule 3-05 does not apply to dispositions, but you may still need S-X Article 11 pro forma financial information. For example, in the case of a disposition that is significant at a 12% level, pro forma financial information would be required notwithstanding that there are no required financial statements.

Second, you have to file the pro forma financial information required by Item 9.01 of Form 8-K more quickly in the case of dispositions, because if S-X Article 11 pro forma financial information is required, you do not get the benefit of the 71-day extension under Item 9.01(a) of Form 8-K. In other words, you have four business days to prepare and file your pro forma financial information (rather than four business days plus 71 additional calendar days).

For a summary of S-X Rule 3-05 and Article 11 governing financial disclosure for acquired businesses, download our Desktop Reference Guide to Rules for Acquired Business Disclosures.

The Flowchart: