CONCEPT RELEASE-BUSINESS AND FINANCIAL DISCLOSURE REQUIRED BY REGULATION S-X

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Rule 3-05, Financial Statements of Business Acquired or to be Acquired1 The accounting standards require disclosure to enable investors to understand the nature and financial

effect of a business combination. Some of disclosures requirements by the accounting standards are the same as those required by Rule 3-05 and the related requirements. Others, such as pro forma financial information are similar although the pro forma information REQUIRED BY Article 11 of Reg S-X is more detailed and requires the filing of Form 8-K registration statement. Reg 3-05 requires historical financial statements of acquired entity and the accounting standards do not

2 There are changes to these requirements the SEC should consider in order to add quality and utility of this disclosure by average investors. For instance, there are suggestions of changing the requirements of Article 11 in order for pro forma information to help readers investors understand the target performance of the combined company post-merger. In my view, synergy is the most important information investor needs to evaluate the merger but the challenge is to minimize the gap between the target synergy and the actual synergy. The problem is that registrant tends to overestimate this information just to win a vote from shareholders. The second problem is the issue of asymmetric of information putting the registrant in a difficult position to estimate the right value of the acquiree and the difficult road toward the merger. The third problem is the difficulty of predicting any regulatory outcome and external factors (customers, community, union,…)

3 The lack of reliable data (private company and foreign companies) affect the significance test it is why I recommend the SEC to revise this rule and add the quality, attractiveness and reliability to the S-X Rule 1-02 (w). As we know tests we now use can be affected by just a little manipulation of impairment valuation change. It is why it makes sense to accept revenue test and fair value investment test as new tools to test company for significance. I believe the incoming revenue recognition rule will not impact this position. It does not matter that companies leaders must work very hard to win on the market share price competition (maximization of shareholder value) for this test. Investors must understand why these companies did choose or are not choosing to ‘marry’ [merge] each other based on how others are valuing them. (external valuators, customers by the revenues and market place by market share price) Investors voting on this merger will evaluate this information based on external assessments (both are not under pressure or have not incentive to lie or inflate any value)

4 Pretax income test can be manipulated and will result into questionable positive /negative tests. Fair value investment test can increase utility of this information because it is simple to understand by average investor. In short, this test is not ‘ora-quick’ test to keep, SEC must eliminate these tests with chains of questionable and aggressive results and replace it with the reliable tests.

5 SEC can improve the utility of the pro forma information by increasing its frequency (quarterly and annually). SEC should not change its methodologies, add any comparative pro form income statements or modify the requirements the restrictions for pro forma income adjustments. Aggregate small acquisitions requirements must provide pro forma information if they test positive for significance in annual basis after updating it regularly. When registrant cannot provide a pro forma disclosure because of lack of data or reliable data (private and/or foreign acquire), it should be required to provide abbreviated narrative disclosure if the auditor determines this fact

6 Yes, SEC should modify the requirement to provide Rule 3-05 financial statements by filing pro forma information for impending acquisitions that are individually significant or insignificant but significant as aggregate; all under SA 1933 and SEA 1934. SEC should allow companies to cure noncompliance with S-X 3-

05 with a reduction of the ‘black out’ period to a year and provide relief from complying with US GAAP and US GAAS in certain cross border transactions where financial statements of the target must either be prepared in accordance with US GAAP or reconcile under item 18 of Form 20-F.

7 No, I did read no complaint related to this amount of time, 71 days to file form 8-K/A to include pro forma disclosure or comply with Rule S-X 3-05 is sufficient time to collect, assess, disclose .

8 Certain registration statements should continue to require accelerated and additional disclosures as compared to the Form 8-K requirements

9 The proposed significance tests will determine the nature and extent of disclosure under Rule 3-0510 These proposed changes in significance tests will add quality and reliability to this information. At the same

token, I believe it will add the utility of this information by average reasonable investors. These revenue test and fair value investment test are easy to assess, collect and provide to the investing public

11 The proposed changes I did describe on top will improve the readability of this disclosure and its understanding by shareholders who will make an informed decision during the merger vote and approval.

12 I recommend a full replacement of the actual tests of significance with just 2 tests –revenue test and fair value investment test but I do not favor rising any percentage threshold at this time

13 Merger is tied to the top executive compensation package. It is tied to their reputation and megalomaniac goal and vision. That said executives have incentives to lie for financial and non-financial incentives. It is why I will not recommend the SEC to shift control from the prescriptive disclosures to the principle disclosure oriented giving top executives opportunities to merge just to increase their compensation package or/and goal of leading a big company. In sum, let registrants comply to prescriptive rules a least to empower consistency among registrants.

14 Foreign private issuers must provide similar disclosure on Form 6-K because it will align the disclosure philosophy. It will be issue about data and data sharing but if the acquiree is a US registrant it will be easy. It will be some kind of reconciliation or use of IFRS and negotiation with local regulators

15 Scaled disclosure must apply to EGC with abbreviated disclosure requiring less data (mostly historical data)16 Investment companies deserve different Rule 3-5 applied to the size of investment filed on Form N2. That

said, it will make sense for the SEC to revisit investment companies rules and add requirement of pro forma schedule of investments after fair value investment test.

17 At this time, FASB is working on what it calls clarifying the definition of business. There is an exposure draft which is still under re-deliberation. That said, we can not say at this time what will be the final rule of the definition of business. In the meantime, I believe we must keep relying on the definition of business under S-X Article 11-01 (d)

Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons18 Rule S-X 3-09 dictated the financial information needed to disclose equity method investees. This rule

requires summarized financial information for annual disclosure on Form 10-K or N6 and interim disclosure on Form 10-Q for the aggregate of all equity method investees if significance tests, ruled by 1-02 (w), exceeds 10 %. There are costs and operational challenges to obtain stub financial statements for only a portion or quarter of the year.

19 SEC should revise the rule and apply the proposed S-X rule 1-03(w) for tests. Registrants need reliable data in order to prepare a good disclosure to help investors make an informed investment and voting decisions.

20 Beside reliable data, the cost of the disclosure and its low utility, SEC should limit the scope of s-x rule 3-09 to equity method investees that are not carried at fair value. No audited financial disclosure should be required for disposed equity investment. Changes to the requirements in the year of acquisition can facilitate compliance and reduce pre-filing requests for exemption and waivers to the SEC staff. This will give more opportunities for registrant to add quality, transparency and reliability to their disclosure but it may not directly increase the utility of the information by average reasonable investors and sophisticated investors may find it more useful

21 Investors may not need interim financial information about equity method investees under Article 10 and S-X Rule 8-03, without any adverse change since precedent year end or quarter end

22 Summarized financial information will be more useful to investors (mostly sophisticated investors) if it is disclosed separately for individually material investees. SEC should consider adding disclosure of the respective ownership interest to this requirement. If this disclosure can cause any competitive harm to the registrant, it will be omitted and the reason of this omission must be disclosed.

23 Yes, it will be appropriate for the SEC to revisit Rule 3-09 and correct it because it is one of its subsets24 It is less useful that means with a little trust from investors but it does not make any financial sense to

spend that much for an insignificant information.25 Yes, significance tests if performed well, can appropriately determine the nature, timing and extent of

disclosure under Rule 3-09 and the related requirements26 I did already indicate proposed changes to Rule 1-02 (w) with just 2 tests, revenue tests and fair value

investment tests for significance tests. The only challenge to this proposed test is the reliability of the data of the company

27 With the proposed changes to the test, it will add reliance and readability to the disclosure helping investors to make an informed investment and voting decisions.

28 No, SEC should not shift control of the significance test to the management of the registrant. The first concern is a lack of consistency and the second is the lack of incentive for management to provide a reliable test.

29 Others are recommended the use of greater than 10% for individual significance test, greater than 20% for the aggregate of individually insignificant equity investees and greater than 80% for audited financial statements, I am not sure they will test better

30 I do not believe that interim disclosure should become optional. The interim financial information should be based on material adverse changes since previous year end and quarter end. SEC must determine what to omit, when and how

31 SRC and EGC must provide a scaled disclosure because of lack of reliable data and the size of their investment

32 Investment companies should follow a different standard of S-X Rule 3-09. For instance, their test of significance should be based on fair value investment test. In addition, we can create 2 groups of investment companies, investment in an operating portfolio business (with summarized financial information) and investment in an entity accounted for as an investment company (with schedule of investments)