Part I of this article appears in the May 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 In Part I, we briefly summarized the rules and their practical implications. In this Part II, we describe the rules in more depth.
New Disclosure Items
The following items were added to Form 8-K:
Entry Into Material Definitive Agreement. The rules require disclosure of entry into (or material amendment of) a material definitive agreement not made in the ordinary course of business. Companies may need to disclose material amendments to material agreements entered into before the rules' effective date, and filing is necessary if an amendment results in an agreement's becoming a material definitive agreement (even if the original agreement was not disclosed). Companies must include the parties' identity, a description of any material relationship between them and a brief description of the material terms. A non-binding letter of intent need not be disclosed. Certain transactions may trigger a requirement to file two separate Forms 8-K: the first when the agreement is signed and the second when the transaction closes. Because an agreement's sign date (and not the Board approval date) triggers the filing requirement, companies should ensure that Boards approve such agreements before they are signed (or at least before the related Form 8-K is filed). In certain circumstances, a Form 8-K may constitute the first public announcement of a business combination for purposes of Rules 165 and 14d-2(b), and may thus trigger a filing obligation under those rules. A company may indicate on the cover page of the Form 8-K that it is simultaneously satisfying its filing obligations under all three rules, as long as the Form 8-K contains all information required by these rules.
Termination of Material Definitive Agreement. The new rules also require disclosure of termination of a material definitive agreement not made in the ordinary course of business. Companies must make disclosures comparable to those for new agreements or amendments and describe the material circumstances surrounding the termination (and any material early termination penalty). Companies need not disclose negotiations regarding termination, and need not disclose termination (if they have a good faith belief that no termination has occurred) until they receive a termination notice. Termination does not include expiration on a stated termination date or when obligations have been completed.
Creation of Financial Obligations. A company must disclose the creation of a material direct financial obligation (defined as a long-term debt obligation, capital lease obligation, operating lease obligation or short-term debt obligation arising outside the ordinary course), regardless of whether it is a party to the transaction. For example, a loan agreement entered into by an affiliate that benefits from the company's pre-existing guarantee would trigger the disclosure requirement. The company must describe the transaction, the amount (including payment terms, events that may cause the obligation to increase or accelerate, and recourse provisions against a third party) and other material terms.2 A company must likewise disclose if it becomes directly or contingently liable for a material obligation arising out of an off-balance sheet arrangement, including material terms under which it may become a direct obligation. No Form 8-K need be filed until there is an enforceable agreement (whether or not subject to conditions under which the obligation will arise or be created or issued) or, if no agreement exists, until the transaction closes. If the event relates to a security that has been (or will be) sold pursuant to an effective registration statement, no Form 8-K need be filed if the prospectus contains the required information and is timely filed under Rule 424.
Trigger Events as to Financial Obligations. A Form 8-K must be filed if a trigger event causes the increase or acceleration of a direct financial obligation and the consequences are material to the company. A trigger event is an event of default or acceleration (or similar event) as a result of which (a) a direct financial obligation or obligation arising under an off-balance sheet arrangement is increased or accelerated or (b) a contingent obligation arising out of an off-balance sheet arrangement becomes a direct financial obligation. The company must briefly describe the trigger event, the relevant transaction, the amount and payment terms, and other material obligations (including those that may become direct financial obligations).
Exit or Disposal Activities. If a board of directors, board committee or authorized officer commits a company to an exit or disposal plan (or otherwise disposes of a long-lived asset) or terminates employees under a plan of termination described in SFAS No. 146, under which the company will incur a material write-off or restructuring charge under GAAP, the company must disclose the plan or termination and reasons for the charge, the expected completion date, the estimated total amount (or range of amounts) expected to be incurred, and the amount (or range of amounts) of the charge that will result in future cash expenditures. If it cannot make a good faith estimate, it must file the Form 8-K without estimates and then amend it to include estimates within four business days after it formulates the estimates.
Material Impairments. A company also must disclose when its board, board committee or authorized officer concludes that the company must record a material charge for impairment of assets (including securities or goodwill) under GAAP, and must describe the impaired assets, the circumstances leading to the conclusion, and similar estimates. No Form 8-K filing is required, however, if the conclusion is made in connection with year or quarter-end financial statement preparation, review or audit and the plan is disclosed in the relevant Form 10-K or 10-Q. As with exit or disposal activities, if good faith estimates cannot be made, the Form 8-K must be filed and later amended.
Delistings. The new rules require a company to report on Form 8-K:
its receipt of notice from the principal trading exchange or market for a class of its equity securities that it no longer satisfies listing requirements (in which case it must provide a copy of the notice and describe the breached listing requirement and its planned response that the company has taken all necessary steps), that an exchange has applied to the SEC (or the market has taken all necesary steps) to delist a class of its securities;
its receipt of a public reprimand letter from such an exchange or market;
its notice to such an exchange or market that it is aware of material non-compliance with a continued listing standard (in which case it must disclose the standard and any action it has determined to take regarding noncompliance); and
its taking of definitive action toward delisting or transferring a listing to another exchange or market.
A company must provide the required disclosure even if it has the benefit of a grace or cure period. No disclosure is required, however, if delisting is the result of the extinguishment of rights pertaining to the entire class, substitution of other instruments representing the entire class, or redemption or repayment at maturity of the entire class.
Non-Reliance on Financial Statements. A company must file a Form 8-K if its board of directors, a board committee or an authorized officer concludes that any of its previously issued financial statements no longer should be relied upon due to an error. It must briefly describe the facts underlying its conclusion and state whether the audit committee (or full board if no committee exists) or authorized officer discussed the conclusion with its accountants. If a company receives notice from its accountants that disclosure should be made (or action should be taken) to prevent future reliance on a previously issued audit report or completed interim financial statements, it must briefly describe the information provided by the accountants and state whether the audit committee (or full board) or authorized officer discussed the notice with the accountants. The company must provide the accountants with a copy of its disclosure no later than the filing date and request a letter from the accountants stating whether they agree with the disclosures (and any response must be filed, by amendment, as an exhibit to the Form 8-K).
Moved Disclosure Items
The new rules moved to Form 8-K the reporting of the following items:
Unregistered Sales. Sales of unregistered securities, which previously were reported on Forms 10-Q and 10-K. No Form 8-K need be filed if the securities sold since the most recent disclosure of such sales do not exceed 1% (5% for small business issuers) of the outstanding securities of that class.
Material Modifications. Modifications to rights of holders of a class of registered securities, which previously were reported on Form 10-Q.
Expanded Disclosure Items
The rules also expanded two existing disclosure items:
Director and Officer Changes. A company must now disclose if:
a director resigns or declines to stand for reelection as a result of a disagreement with the company, known to an executive officer, on any matter relating to the company's operations, policies or practices, or is removed for cause (in which event it must disclose the circumstances and describe any correspondence received from the director and file a copy as an exhibit), provide the director with the Form 8-K no later than the business day after it is filed and request that the director provide a letter (addressed to the SEC) stating whether he or she agrees with the disclosures (and any response must be filed, by amendment, as an exhibit to the Form 8-K within two business days after receipt);
a director retires, resigns or is removed or refuses to stand for reelection for any reason other than as a result of a disagreement or for cause;
a new director is elected other than by a vote of securityholders at an annual meeting (in which event it must briefly describe any arrangement pursuant to which the director was elected, any committee to which the director has been (or is expected to be) named and any transaction between it and the director);
its principal executive officer, president, principal financial officer, principal accounting officer or principal operating officer resigns or is terminated (in which event it must disclose the reasons therefor); and
it appoints a new principal executive officer, president, principal financial officer, principal accounting officer or principal operating officer (in which event it must briefly describe any arrangement pursuant to which the officer was selected, the officer's background, any transactions with the company, and any employment agreement), except that, if it intends to issue a press release, it may wait to file a Form 8-K until it issues the release.
Charter Amendments and Fiscal Year Changes. A company must disclose any amendment to its charter or bylaws or changes in its fiscal year.
Note On Exhibits
To allow companies to prepare appropriate confidentiality treatment requests, the new rules allow companies to postpone filing material definitive agreements as exhibits so long as they are filed as exhibits to the next periodic report or registration statement. 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 the full text, see http://www.sec.gov/rules/final/33-8400.htm. For the text of the proposing release, see http://www.sec.gov/rules/proposed/33-8106.htm.
2 If neither the company nor an affiliate is a party to the transaction or agreement creating the contingent obligation arising under the off-balance sheet arrangement, the four business day period would begin on the earlier of the fourth business day after the obligation is created or arises and the day on which an executive officer becomes aware of the obligation.
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.