Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A recent public company acquisition transaction addresses FASB’s new revenue recognition standard. In the transaction, Envestnet (NYSE: ENV), a provider of systems for wealth management and financial wellness, announced that it will acquire FolioDynamix, a provider of integrated wealth management technology solutions.  Envestnet will acquire FolioDynamix in a cash transaction for $195 million, subject to certain closing adjustments.  The transaction is expected to close in the first quarter of 2018 and is subject to customary closing conditions.

Although FolioDynamix does not appear to be a public registrant, other filings disclose it is 98% owned by Actua Corporation, which is listed on the NASDAQ Global Select Market. The purchase price is adjusted for working capital. The stockholders of FolioDynamix indemnify Envestnet for certain matters. Thus it has many attributes of a private company transaction.

The heart of the provisions addressing revenue recognition are set forth in Section 7.11 of the merger agreement. From a high level, the target’s representative must provide certain information related to revenue recognition to Envestnet specified on a schedule by certain dates. Envestnet may comment on the information.  The information is to be provided to Envestnet’s and Actua’s audit committee by a specified date. In certain circumstances, delivery of the information is a condition to Envestnet’s obligation to close.  See Section 9.02(j).

Given that FolioDynamix is almost wholly owned by a public company, one can surmise it was well down the road in implementing the new revenue recognition standard and is therefore well positioned to comply with its obligations in the merger agreement (although it’s most recent 10-Q says its assessment is ongoing). But that raises an issue for private companies looking to make an exit in 2018 to a possible public company acquirer.  Upon closing in 2018, as far as I know, the public company will have to recognize revenue in accordance with the new standard for the acquired company’s customer contracts. Many private companies have not yet taken the extensive efforts to adopt the new standard.  They may not be able to look to a public company acquirer if they cannot provide the public company with adequate information to recognize revenue after closing, assuming the revenue is material to the public company.  One possibility is this will tilt the playing field in favor of private equity sponsors in certain transactions.