Part II of this article appears in the June 2004 issue of The Metropolitan Corporate Counsel.On March 11, 2004, the SEC adopted new rules, effective August 23, 2004, regarding disclosure on Form 8-K.1 The rules, which apply to any domestic company that is subject to the Exchange Act's reporting requirements, both increase the number of events to be reported and reduce the time in which to file such reports, thus responding to the Sarbanes-Oxley Act's mandate of "real time issuer disclosure." In adopting the new disclosure structure, the SEC sought to increase transparency, enhance investor confidence in the financial markets and reduce opportunities for misuse of information pending its disclosure.
In Part I of this article, we briefly summarize the new topical categories and disclosure items and certain other aspects of the new rules, and we make some suggestions as to how to best comply with the new disclosure structure. In Part II of this article, we describe in more depth the details of the new rules and their requirements.
New Topical Categories
The rules have reorganized the disclosure structure, so that items now fall within the following topical categories:2
Section 1 - Business and Operations
×Item 1.01 - Entry into Material Definitive Agreement
×Item 1.02 - Termination of Material Definitive Agreement
×Item 1.03 - Bankruptcy or Receivership
Section 2 - Financial Information
×Item 2.01 - Completion of Acquisition or Disposition of Assets
×Item 2.02 - Results of Operations and Financial Condition
×Item 2.03 - Creation of Financial Obligations
×Item 2.04 - Triggering Events relating to Financial Obligations
×Item 2.05 - Exit or Disposal Activities
×Item 2.06 - Material Impairments
Section 3 - Securities and Trading Markets
×Item 3.01 - Delistings
×Item 3.02 - Unregistered Sale of Equity Securities
×Item 3.03 - Material Modification of Holders' Rights
Section 4 - Accountants and Financial Statements
×Item 4.01 - Change in Certifying Accountant
×Item 4.02 - Non-Reliance on Financial Statements
Section 5 - Corporate Governance and Management
×Item 5.01 - Changes in Control
×Item 5.02 - Departures, Elections, Appointments of Directors and Officers
×Item 5.03 - Amendments to Charter or Bylaws, Fiscal Year Changes
×Item 5.04 - Employee Benefit Plan Suspensions
×Item 5.05 - Code of Ethics
Section 6 - [Reserved for Future Use]
Section 7 - Regulation FD Disclosure
Section 8 - Other Events
Section 9 - Financial Statements and Exhibits3
New And Changed Disclosure Items
New Disclosure Items. The new rules add the following eight items and events to those that must already be disclosed on Form 8-K:
Entry into a material definitive agreement;
Termination of a material definitive agreement;
Creation of a direct financial obligation or an obligation under an off-balance sheet arrangement of a company;
Triggering events that accelerate or increase a direct financial obligation under an off-balance sheet arrangement;
Costs associated with exit or disposal activities;
Notice of delisting or failure to satisfy a continued listing rule or standard (or transfer of listing); and
Certain instances of non-reliance on previously issued financial statements or a related audit report or completed interim review.
Moved Disclosure Items. The rules also require to be reported on Forms 8-K the following two items that were previously required to be included in annual and quarterly reports:
Unregistered sales of equity securities; and
Material modifications to security holder rights.
Expanded Disclosure Items. Additionally, the rules expand the following existing disclosure items:
Instead of merely having to disclose resignations of directors due to a disagreement, companies will need to disclose when:
×a director is elected or removed for cause;
×a director retires, resigns or refuses to stand for re-election for any reason;
×certain new officers are elected; and
×certain officers retire, resign or are terminated; and
Amendments of articles of incorporation or bylaws (if the amendment was not proposed in a previously filed proxy statement).
Deadlines, Safe Harbor And Other Considerations
Filing Deadlines. The rules require all Form 8-K disclosures (other than Regulation FD and voluntary disclosures) to be made within four business days of the occurrence of the event being reported, accelerating the current reporting time frame (from five business days for disclosure about changes in independent accountants and resignation of directors and from fifteen calendar days for all other disclosures).
Safe Harbor. Because many of the new disclosure items require management to quickly assess the materiality of an event and determine whether a disclosure obligation has been triggered, the SEC adopted a safe harbor relating to all eight newly added disclosure items (other than the items relating to delistings and receipt of an accountant's notice of non-reliance on financial statements). Under the safe harbor, no failure to timely file a Form 8-K that is required solely pursuant to Form 8-K will be deemed to be a violation of Exchange Act Section 10(b) or Rule 10b-5. The safe harbor terminates on the due date of the quarterly or annual report for the period in which the Form 8-K was not timely filed. Note that the safe harbor applies only to a failure to file a Form 8-K and not to material misstatements or omissions in a filed Form 8-K (whether or not timely filed). Note also that the safe harbor will not apply to liability for misstatements or omissions in registration statements that would have been corrected by a timely filed Form 8-K incorporated by reference. The safe harbor will not limit the SEC's ability to enforce any Form 8-K filing requirements.
Forms S-2 and S-3. In order to minimize impact on raising capital, the Form S-2 and S-3 eligibility requirements were amended so that companies may still use such Forms if they have, during the twelve calendar months and any portion of a month immediately preceding the filing of the applicable registration statement, timely filed all Forms 8-K required to be filed, with exceptions for failure to timely file Forms 8-K that are required to be filed solely under any of the eight newly added disclosure items (other than the items relating to delistings and receipt of an accountant's notice of non-reliance on financial statements). On or prior to the actual time of a Form S-2 or S-3 filing, however, companies must have filed the disclosure required by any of the newly added disclosure items covered by the safe harbor.
Section 906 Certifications. The SEC clarified in the new rules that the Section 906 certification requirement does not apply to Form 8-K filings.
Rule 144. Rule 144 was amended to remove the requirement that a company have filed all required Forms 8-K during the twelve months preceding a Rule 144 sale to satisfy Rule 144's "current public information" condition.
Exhibits. If a Form 8-K contains Regulation FD disclosure or disclosure as to results of operations and financial condition, whether or not the Form 8-K contains disclosures as to other items, all related exhibits to that Form 8-K will be deemed "furnished" (and not filed) unless the company specifies otherwise.
The new disclosure requirements place a significant burden on companies because of assessments that must be made regarding whether disclosure is required and the shortened time frame for making the assessments and for preparing disclosures that are accurate and complete. The safe harbor provides only limited protection. Companies should assess their disclosure controls and procedures in light of the new requirements. Possible changes and enhancements to existing procedures include:
instituting continuing education programs to periodically remind relevant management of possible triggering events; and
appointing specific "point persons" to be notified of the possible triggering events, with authority to collect data to analyze materiality, determine and prepare appropriate disclosures, convene disclosure committee meetings and obtain input and signoff from senior management (and perhaps from the board or audit committee as well).
In addition, companies will need to exercise special care to avoid material misstatements or omissions in a rush to satisfy the new filing requirements. It may well be that, in some cases, serial Form 8-K filings may be required to update disclosures as new data becomes available or ramifications become apparent, and the first Form 8-K filing with respect to a triggering event may need to indicate a level of uncertainty with respect thereto.1 The Release is entitled Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Securities Act Release No. 33-8400 and Exchange Act Release No. 34-49424 (March 16, 2004). For full text, see http://www.sec.gov/rules/final33-8400htm. The rules were proposed on June 17, 2002; for the text of the proposing release, see http://www.sec.gov/rules/proposed33-8106.htm.
2 Prior to the rules' adoption, the only events requiring a Form 8-K filing were changes of control, certain asset acquisitions and dispositions, bankruptcy or receivership, changes in certifying accountant, resignations of directors, changes in fiscal year, code of ethics amendments or waivers, temporary trading suspensions under employee benefit plans and public announcements disclosing material non-public information regarding results of operations or financial condition for a completed fiscal period.
Additionally, companies must furnish exhibits and list any financial statements and pro forma financial information included as part of Form 8-K in connection with a business acquisition. The Form 8-K rules allow companies to disclose other events that are of importance to shareholders and to use Form 8-K as a non-exclusive method to satisfy their public disclosure requirements under Regulation FD.
The SEC had proposed other new Form 8-K items that were not adopted, including those for changes in agency ratings (the SEC indicated that it is continuing to consider the appropriate regulatory approach to these disclosures) and those relating to termination or reduction of certain business relationships with customers (the SEC agreed with certain comments, including that a reduction of customer orders can be difficult to discern as such reductions can happen over time).
3 Companies amending their Forms 8-K after August 23, 2004 will need to use the new numbering system. A single Form 8-K may satisfy multiple disclosure items, so long as the items are identified by number and caption.
M. Ridgway Barker is Chair of the Securities Practice Group of Kelley Drye & Warren LLP. Randi-Jean G. Hedin is a Partner in the Securities Practice Group. Acknowledgement is given to Jeanne R. Solomon, an Associate at Kelley Drye & Warren LLP, for her efforts in the preparation of this article.