Staff Accounting Bulletin No. 96

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 211
[Release No. SAB 96]
Staff Accounting Bulletin No. 96 AGENCY: Securities and Exchange Commission. ACTION: Publication of Staff Accounting Bulletin. SUMMARY: The interpretations in this staff accounting bulletin express certain views of the staff regarding treasury stock acquisitions following a business combination accounted for as a pooling￾of-interests. EFFECTIVE DATE: March 19, 1996. FOR FURTHER INFORMATION CONTACT:
Mary Tokar or Brian Heckler, Office of the Chief Accountant (202–942–4400), or Kurt Hohl, Division of Corporation Finance (202–942–2960), Securities and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins are not rules or interpretations of the Commission nor are they published as bearing the Commission’s official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws. Dated: March 19, 1996. Margaret H. McFarland, Deputy Secretary. Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is amended by adding Staff Accounting Bulletin No. 96 to the table found in Subpart B.
PART 211—[AMENDED]
Staff Accounting Bulletin No. 96 The staff hereby adds Section F to Topic 2 of the Staff Accounting Bulletin Series. Topic 2–F provides guidance regarding the effect of treasury stock acquisitions following consummation of a business combination accounted for as a pooling-of-interests. Topic 2–F: Treasury Stock Acquisitions Following Consummation of a Business Combination Accounted for as a Pooling-of-Interests Facts: An issuer, concurrently with the development of a plan for a business combination, formulates a plan to reacquire treasury stock after the consummation date of the combination. The treasury stock will not be reacquired directly from former shareholders of the combining company. Question 1: Does the staff believe that an intention to reacquire treasury stock precludes accounting for a business combination as a pooling-of-interests? Interpretive Response: Yes, except in certain limited circumstances. The staff believes that an intention to reacquire treasury stock is part of the plan of combination (a ‘‘planned transaction’’) if the intention is formulated concurrently with the development of the plan of combination. However, the staff does not believe that planned transactions that merely defer actions that would be permitted prior to consummation preclude the application of pooling-of-interests accounting to the combination. Accordingly, the staff has not objected to planned transactions involving reacquisitions of either untainted treasury stock (as discussed in Accounting Series Release Numbers 146 and 146–A) or tainted treasury stock up to the limits permitted under paragraph

Federal Register / Vol. 61, No. 58 / Monday, March 25, 1996 / Rules and Regulations 12021 1Paragraph 48 of APB Opinion 16, captioned ‘‘Absence of planned transactions,’’ states, ‘‘Some transactions after a combination is consummated are inconsistent with the combining of entire existing interests of common stockholders. Including those transactions in the negotiations and terms of the combination, either explicitly or by intent, counteracts the effect of combining stockholder interests’’ [emphasis added]. 2See the computational guidance provided by the FASB’s Emerging Issues Task Force, in its discussion of Issue 87–16, regarding how tainted treasury shares (net of shares ‘‘cured’’ through reissuance) should be aggregated with other ‘‘paragraph 47 exceptions’’ (e.g., dissenters’ shares) when testing for satisfaction of the requirements of paragraph 47 of APB Opinion 16. The 10% limitation described above normally is computed by reference to the number of shares issued to effect the combination. In some circumstances, such as those where the smaller of the combining companies is the issuer, the 10% limitation might be further constrained. Additionally, while an issuer may cure tainted treasury stock acquired prior to consummation, issuing shares to effect the pooling would not cure tainted treasury stock. 3Actions that the staff has determined provide evidence of an intention to reacquire shares after consummation of a combination include use of projections or forecasts reflecting post￾consummation acquisitions of treasury stock or decisions to reacquire treasury stock where those decisions were made by management having the requisite authority to commit the enterprise to such a plan. Any statement made prior to consummation of a business combination that a company intends to reacquire treasury stock after consummation of that combination also is evidence of a planned transaction. These examples are illustrative only and do not include all instances in which the staff may conclude that a company has formulated an intention to reacquire treasury stock. 4ASR 146 comments that, ‘‘in determining the purpose of treasury stock acquisitions, it is ordinarily appropriate to focus on the intended subsequent distribution of common shares rather than on the business reasons for acquiring treasury shares [emphasis added]. For example, shares may be reacquired because management believes the company is overcapitalized or considers that ‘‘the price is right,’’ but such reasons do not overcome the presumption that they were acquired in contemplation of effecting business combinations to be accounted for as poolings of interests.’’ 5ASR 146 states that ‘‘the mere assertion that common shares are acquired for such purposes [as stock option or purchase plans or stock dividends] even where the assertion is formalized by action of the board of directors reserving the treasury shares, does not provide persuasive evidence [that the acquisition of treasury stock is
unrelated to a business combination]. * * * Accordingly, the Commission concludes that treasury shares acquired in the restricted period for recurring distributions should be considered ‘‘tainted’’ unless they are acquired in a [seasoned] systematic pattern of reacquisition * * *’’ 47 of APB Opinion 16, Business Combinations. Paragraph 48 of APB Opinion 16 provides that some planned transactions preclude accounting for a combination as a pooling-of-interests. This prohibition extends not only to transactions explicitly agreed to, but also to intended transactions.1 Specifically, paragraph 48(a) of APB Opinion 16 identifies the intention to reacquire the common stock issued to effect the combination as a planned transaction that is inconsistent with a pooling-of-interests. Paragraph 48(a) of APB Opinion 16 does not specify a period after which an otherwise prohibited reacquisition of treasury stock is permitted. However, based on related planned transaction guidance in paragraph 48(c) of APB Opinion 16, which precludes application of pooling￾of-interests accounting if a company plans to make significant dispositions of assets within two years of consummation, the staff has not required a period longer than two years for other prohibited planned transactions. In applying the 90% test of paragraph 47 of APB Opinion 16 at the consummation date, the staff believes that, unless the shares to be reacquired would be untainted, the maximum number of shares that may be reacquired within two years of consummation of the combination pursuant to any planned transaction should be aggregated with other ‘‘paragraph 47 exceptions.’’ If the total paragraph 47 exceptions exceed 10% of any combining company’s outstanding shares, the staff believes that application of pooling-of-interests accounting to the combination would not be appropriate.2 Question 2: Does the staff believe that an intention to reacquire treasury stock should be considered part of the plan of combination if the intention is not announced until after consummation of the business combination? Interpretive Response: Yes. The staff believes that the formulation of an intention to reacquire treasury stock, and not the announcement of that intention, is the action that precludes application of pooling-of-interests accounting. Further, it is difficult to conclude that an action that occurs shortly after a business combination is consummated is not evidence of an intention formulated concurrently with development of the plan of combination. Accordingly, the staff considers whether a registrant’s actions, both prior to and following consummation of a business combination, provide evidence of an intention to reacquire shares after the combination.3 In applying this interpretive guidance, the staff presumes that reacquisitions of treasury stock within six months following consummation of a business combination are planned transactions that are part of the combination plan. Other actions that may occur less
than six months after consummation of a business combination provide persuasive evidence of a prior intention that was part of the combination plan. For example, the staff believes that the announcement of an intention to reacquire shares made within six months following consummation of a business combination provides persuasive evidence of an intention that was part of the combination plan. The staff generally has not questioned the use of pooling-of-interests accounting as a result of reacquisitions of treasury stock made more than six months after the combination is consummated in circumstances in which there is no evidence that the reacquisitions of treasury stock were planned transactions. Question 3: Prior to initiation of a business combination, a company announced a plan to reacquire tainted treasury stock, but suspended reacquisitions pursuant to that plan prior to consummation of the combination. Does the staff believe that an intention to resume reacquisitions of treasury stock after consummation of the combination pursuant to a pre￾existing plan can be distinguished from other intentions to reacquire treasury stock after the combination? Interpretive Response: No. The staff believes that an intention to resume reacquiring tainted treasury stock pursuant to a pre-existing plan cannot be distinguished from an intention to reacquire treasury stock formulated concurrently with development of the plan of combination. As the Commission commented in ASR 146, it is difficult to separate reasons for reacquiring treasury stock from intentions to reacquire shares that are
part of the plan of combination, even if
the reason for the acquisition of such shares is reissuance for recurring distributions.4 Unless treasury stock reacquired will be untainted treasury stock, the assertion that those shares were acquired for reasons other than the business combination is not sufficient to separate the intention to resume reacquiring treasury stock from other planned transactions to reacquire shares issued to effect the combination.5 Question 4: Paragraph 48(a) of APB Opinion 16 prohibits application of pooling-of-interests accounting when there is an intention to reacquire, either directly or indirectly, the common stock issued to effect the combination. In the opinion of the staff, does an intention to reacquire treasury stock from parties other than former shareholders of the combining company after consummation of a business combination represent an intention to reacquire shares issued to effect the combination?

12022 Federal Register / Vol. 61, No. 58 / Monday, March 25, 1996 / Rules and Regulations 6See, for example, paragraph 47(b) of APB Opinion 16, which notes that the choice of an issuer in a combination is a matter of convenience. This interpretive response also recognizes the fungible nature of common stock. The Commission has commented on the fungibility of shares of common stock when addressing cures of tainted treasury stock in ASR 146, noting that there is no substantive difference between treasury stock and newly-issued stock. Interpretive Response: Yes. The staff believes that the identity of the seller of the treasury stock is not the deciding factor in determining whether the issuer has reacquired stock issued to effect the combination. For example, the staff believes that a reacquisition of treasury stock in an open market transaction results in an indirect reacquisition of shares issued to effect the combination.6 [FR Doc. 96–7071 Filed 3–22–96; 8:45 am] BILLING CODE 8010–01–P