[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Rules and Regulations]
[Pages 12020-12022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7071]



=======================================================================
-----------------------------------------------------------------------

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

[[Page 12021]]
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.

    \1\ Paragraph 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].
---------------------------------------------------------------------------

    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

    \2\ See 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.
---------------------------------------------------------------------------

    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

    \3\ Actions 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.
---------------------------------------------------------------------------

    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

    \4\ ASR 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.''
    \5\ ASR 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 * * *''
---------------------------------------------------------------------------

    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?

[[Page 12022]]

    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

    \6\ See, 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.
---------------------------------------------------------------------------

[FR Doc. 96-7071 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-P