SEC’s Semiannual Reporting Plan Would Shift More than Paperwork

The Securities and Exchange Commission’s proposal to allow public companies, as well as companies seeking to go public, to provide financial information in semiannual rather than quarterly could upend how public companies approach strategic transactions, disclosure practices and shareholder communications.

Since 1970, the SEC’s reporting framework has required three quarterly report filings and one annual report filing each year. Under the proposal, companies could either maintain the current quarterly reporting structure or transition to one semi-annual report filing and one annual report filing.

Those electing semi-annual reporting would need to consider the reduced availability of current financial and operational information to potential acquirors, strategic investors, professional analysts and the investing public.

Although the proposal wouldn’t change existing Form 8-K filing requirements and information standards for material events, the overall volume of publicly available information inevitably would decline. As a result, companies considering investment opportunities or strategic transactions may need to modify their disclosure and diligence processes to address gaps in information available to counterparties.

Management and in-house counsel could find it necessary to expand the use of non-disclosure agreements to provide counterparties with information that otherwise may have appeared in quarterly filings. In practice, the reduced cadence of periodic reporting may increase reliance on Regulation fair disclosures and lead to more frequent use of Form 8-K filings to keep the market informed.

Buyers in the mergers and acquisition space generally seek up-to-date information from sellers to evaluate risk and determine valuation. From the initial indication of interest through negotiation of final deal terms, pricing decisions are tied closely to the availability of current financial and operational data.

A shift to semi-annual reporting could lead to buyers discounting valuations to account for the higher uncertainty associated with less frequent reporting. Buyers and investors also may incur higher diligence costs to bridge the informational gaps that would have been addressed through quarterly reporting.

Those additional costs ultimately could be reflected in transaction pricing. Two otherwise comparable companies—one maintaining quarterly reporting and the other one using semi-annual reporting—could be valued differently by investors or acquirers.

Management and in-house counsel should consider how semi-annual reporting may affect transaction documentation. Traditionally, investors and buyers require representations and warranties confirming that the issuer’s most recent SEC filings are true and accurate, and that no material adverse changes to the financial condition or business and operations of the issuer have occurred since the date of the most recent filing.

Under a semi-annual reporting framework, the period covered by those representations and warranties would expand. Even where issuers made greater use of Form 8-K filings, not every development affecting an issuer’s financial condition, business, or operations meets the threshold of materiality to justify a Form 8-K filing.

Yet some of those developments may still be relevant to investors and buyers and, under the current reporting framework, may have been disclosed in quarterly filings. Investors and buyers therefore may seek broader representations and warranties, enhanced interim operating covenants, or additional diligence rights in transactional documents.

Management and in-house counsel should consider the impact of semi-annual reporting on transaction timing. Buyers and investors may prefer to schedule signings or closings shortly following the filing of a semi-annual or annual report, when current public information is most readily available.

The proposal also may influence shareholder communications and investor relations practices. Many companies choosing semi-annual reporting would likely do so, at least in part, because they view quarterly reporting and related earnings releases and calls as unnecessarily burdensome or costly.

However, companies will need to consider whether competitors that continue quarterly reporting may appear more transparent or attractive to the investing public because of the more frequent flow of information. To address potential disclosure gaps, companies adopting semi-annual reporting may need to enhance communications through press releases, website disclosures, or other voluntary updates.

As a practical matter, some issuers may conclude that although semi-annual reporting reduces formal reporting obligations, market expectations will still require a relatively steady flow of information to investors and analysts.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Brian C. Daughney is partner at Moritt Hock & Hamroff in New York specializing in mergers and acquisitions, public and private securities offerings, and general corporate law matters.

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