Securities offerings and listings in the US: an ... - Latham & Watkins

Chapter 5 – Required financial statement disclosureor as soon as the acquisition becomes probable in caseswhere the transaction is at the highest level of significance(as discussed below). Furthermore, where amaterial acquisition has occurred or is probable, S-XRule 11-01 generally requires pro forma financialinformation in the registration statement for the mostrecent fiscal year and most recent interim period. 237The term “business” is defined in S-X Rule 11-01(d) toinclude an operating entity or business unit, but excludesmachinery and other assets that do not generate a distinctprofit or loss stream. 238 Acquisitions of related businessesare treated as a single acquisition for purposes of the significancetests. Businesses are considered “related” if they areowned by a common seller, under common management,or their acquisitions are conditional upon each other or asingle common event. The term “probable” is interpretedto mean more likely than not. The SEC staff has takenthe general view that an acquisition becomes probableupon the signing of a letter of intent. 239Whether financial statements for recent and probableacquisitions must be included in the filing also dependsupon the significance of the acquisition. Significance ofan acquired business is evaluated under S-X Rule 1-02(w) based upon three criteria:• the amount of the issuer’s investment in the acquiredbusiness compared to the issuer’s total assets;• the total assets of the acquired business compared tothe issuer’s total assets; and• the pre-tax income 240 from continuing operations ofthe acquired business compared to the issuer’s pre-taxincome from continuing operations;in each case, based on the issuer’s most recent auditedfinancial statements. 241Generally:• if the acquired business exceeds 20% of any of the threesignificance criteria, then one year of audited financialinformation is required, as well as the interim financialinformation that would be required for the issuer;• if it exceeds 40%, then two years of audited andinterim financial information is required; and• if it exceeds 50%, three years of audited and interimfinancial information is required.Practice point:These determinations are often difficult and should beaddressed by the issuer and its accounting firm beforecommencing the offering process.Practice point:The rules require the amounts used to be determinedon the basis of US Gaap rather than local Gaap or IAS(as used by the issuer or the acquired company). 242However, foreign private issuers typically make thecalculation in the first instance on the basis of the systemof accounting used in their primary financial statements(that is, local Gaap or IAS).(ii) Financial statement requirementsThe table on the following page summarizes the financialstatement requirements in connection with acquisitions.Practice point:If financial statements for an acquired business arerequired, the acquired company’s auditors may notbe qualified (or willing) to have their audit report filedwith the SEC. The auditors may also be unfamiliarwith the procedures required under US Gaas. Theadditional work required to get those financial statementsinto compliant form can be a significant timingissue.One notable exception to these rules is that below the50% significance level, no audited financial statementsare required in a registration statement for probableacquisitions or for completed acquisitions consummatedup to 74 days before the date of the offering. 243www.iflr.comUS SECURITIES OFFERINGS: A GUIDE FOR NON-US ISSUERS37