Providing Projections to Investment Banks in the Face of Regulation FD
It is not uncommon for an officer of a company to speak to investment bankers regarding financing options or capital-raising strategies for his company. In connection with these discussions, the officer will typically provide the investment bankers with projections or other material nonpublic information. How can an officer do so without running afoul of the selective disclosure requirements of Regulation FD?
Regulation FD addresses selective disclosure by companies. The regulation provides that when a company, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons, it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
There are exclusions from coverage under Regulation FD. For example, there is an exclusion (Rule 100(b)(2)(ii) of Regulation FD) for communications made to any person who expressly agrees to maintain the disclosed information in confidence. This exclusion recognizes that companies and their officers may properly share material nonpublic information with outsiders, for legitimate business purposes, when the outsiders are subject to a confidentiality agreement. Moreover, the SEC Division of Corporation Finance staff has published several Regulation FD Compliance and Disclosure Interpretations that state that an express agreement to maintain the information in confidence is sufficient for an issuer to rely on the exclusion in Rule 100(b)(2)(ii) and not be subject to Regulation FD's requirement to publicly disclose the information provided.
OUR TAKE: Companies should require investment banks to sign confidentiality agreements―whether as part of the engagement letter or a separate agreement―before sharing material nonpublic information with them. Companies should not rely simply on an oral understanding or a duty of trust or confidence when a written agreement can clearly establish the confidentiality and nondisclosure obligations, especially when an investment bank may have competing interests in a transaction.