Effective August 23, 2004, all U.S. public reporting companies must begin disclosing a raft of new, and in the words of the SEC, “unquestionably and presumptively material” events on a revamped Form 8-K. Further, the filing deadline will be four business days from the triggering event, with the exception of Regulation FD information, voluntary disclosures and certain exhibits.
We believe that these changes will require public companies to reevaluate their disclosure controls and procedures. Disclosure procedures must allow, at the very least, the reporting of more information about material company events to a centralized compliance or SEC filing officer to permit the timely filing of the new Form 8-K.
Under the SEC’s March 16, 2004 release amending Form 8-K, there are eight new disclosure items based on the following triggering events:
- Entry into a material, non-ordinary course, definitive agreement or a material amendment of a material agreement – non-binding agreements (such as letters of intent) are not covered and the material agreement need not be filed as an exhibit to the relevant Form 8-K;
- Termination of a material non-ordinary course agreement where the termination is material to the company – termination by expiration on a stated termination date or as a result of all parties performing are not covered;
- Creation of a material direct financial obligation or a material direct or contingent obligation under an off-balance sheet arrangement;
- Acceleration of or increase in a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
- Board or officer action committing the company to an exit or disposal activity, under which material charges will be incurred;
- Board or officer determination of material impairments to any assets;
- Notice of delisting or failure to satisfy a continuing listing rule or standard, including notifications by the principal national exchange or securities association to the company or by the company to the exchange or association; public reprimands in lieu of delisting; board or officer commitment to seek voluntary withdrawal from listing or transfer of listing; and
- Non-reliance on previously issued financial statements or related audit report or completed interim review, including notifications of non-reliance from the company’s independent accountants and board or officer determination of non-reliance.
The new Form 8-K also includes the following two disclosure items that were transferred, in part, from periodic annual and quarterly reports:
- Unregistered sales of equity securities constituting 1% or greater of the company’s outstanding securities of that class (5% or greater for small business issuers); and
- Material modifications of the rights of securities holders.
The SEC also expanded two previous Form 8-K triggering events as follows:
- Departure of a director if an executive officer knows such departure was due to a disagreement with the company and removal of a director for cause; retirement, resignation or termination of a principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or person performing a similar function (“executives”); departure of a director other than as result of a disagreement or for cause; appointment of a new executive or appointment of a new director without shareholder vote; and
- Amendments to the articles of incorporation or bylaws and changes in fiscal year end.
We believe that the impact of these new rules is important in several aspects. First, the new rules greatly expand the universe of material information that must be disclosed in a timely manner. Form 8-K disclosures have now moved from narrowly written to broadly construed significant events.
Second, companies will lose the ability to decide how and when to make disclosures. Many companies will have to rethink how to deal with both positive and negative events since there will be little or no ability to avoid disclosure of the new types of company information. For example, a Form 8-K disclosure is required upon notice from a company’s lender that an event of acceleration has occurred under a loan regardless of whether the lender has taken any further action.
Finally, the rapidly accelerated filing deadline will create significant internal administrative concerns for many companies. All companies need to implement essential procedures to collect information, evaluate its materiality and prepare and file the related Form 8-K by the four business day deadline.
The new SEC rules provide for a safe-harbor from public and private claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for failure to file a Form 8-K in time with respect to a limited number of the new disclosure items. This safe harbor lasts only until the due date of the company’s next periodic report for the same period. The safe harbor also does not apply to any other separate duty to disclose that a company may have. The safe harbor will not affect the SEC’s ability to enforce any of the new Form 8-K filing requirements, nor will it provide protection for material misstatements or omissions in Form 8-Ks.
In addition, the SEC provided an exception for loss of Form S-2 or S-3 eligibility for failure to timely file a Form 8-K with respect to the same limited number of new disclosure items to which the safe harbor applies. Despite this exception, Form S-2 or S-3 eligibility may be lost if the new Form 8-K disclosure is not filed by the date on which the Form S-2 or S-3 is filed.
For additional information, please contact:
Doug Harmon (704-335-9020 or email@example.com,
Peter Shea (704-335-9054 or firstname.lastname@example.org), or
Scott Thomas (704-335-9026 or email@example.com).
This Client Alert is intended to inform readers of recent events in securities law. It should not be considered as providing conclusive answers to specific legal problems.