Legal Alert: The SEC Proposes New Form 8-K Disclosure Events and Filing Deadlines
November 15, 2002 I. Executive Summary In a series of releases over the past few months, the Securities and Exchange Commission (the “SEC”) has proposed rule changes that would dramatically change the content and timing of current disclosures required by publicly traded companies. If the proposed changes are adopted, many events that companies currently disclose in their quarterly or yearly filings, or do not disclose at all, will be required to be disclosed in a current report on Form 8-K. Moreover, the proposed rule changes would dramatically shorten the Form 8-K filing deadline to two business days following the occurrence of the event in question. Public companies should consider evaluating their disclosure controls and procedures in light of the possible adoption of these rules, and should plan for the increased volume and speed of disclosure that will be required if they are adopted. (For more information about the requirements to maintain and evaluate disclosure controls and procedures, see our Legal Alert dated September 12, 2002). II. Overview of Proposed Changes to Form 8-K The SEC’s first proposals to amend Form 8-K appeared in a release dated June 12, 2002. Among other changes, the proposals would: add 11 new disclosure events; move two disclosure events from annual and quarterly reports onto Form 8-K; shorten the filing deadline to two business days after the occurrence of a disclosure event; create a safe harbor for certain violations of Form 8-K filing requirements; and provide a two business day extension of the Form 8-K filing deadline. (The Form 8-K would retain the existing disclosure requirements concerning completion of acquisitions or dispositions, bankruptcy, changes in accountants and changes in control.)
Since this release, the SEC has published two additional releases containing additional proposed Form 8-K disclosure events: On October 22, 2002, the SEC proposed rules to implement Section 306 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which prohibits insider trading during employee benefit plan blackout periods. The proposal would make the imposition of a plan blackout period a Form 8-K disclosure event. On November 6, 2002, the SEC proposed rules to implement Sections 404, 406, and 407 of Sarbanes-Oxley. Among these proposals is a rule that would require public companies to disclose in their Form 10-K whether they have adopted a code of ethics that covers their principal executive officers and senior officers. The proposal would make any change to, or waiver of, the code of ethics a Form 8-K disclosure event. The purpose of the proposed Form 8-K changes is to provide investors and the public with more complete and timely information regarding material corporate events. The proposed rules will also further the goals set forth by Congress in Section 409 of Sarbanes-Oxley that public companies provide real time disclosure of information concerning material changes in their financial condition or operations. All public companies (other than foreign private issuers) subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) would be subject to the new proposed rules. The SEC releases describing the proposed rules are available at www.sec.gov/rules/proposed/33-8106.htm, www.sec.gov/rules/proposed/338138.htm, and www.sec.gov/rules/proposed/34-46778.htm. III. Compliance Date The SEC anticipates that the proposed rules would be effective 60 days after adoption. We believe that the SEC will probably adopt some or all of these rules during the first quarter of 2003. IV. Accelerated Filing Deadline and Late Filing Notice The proposed rules would require companies to file current reports on Form 8-K within two business days (instead of the current five business days or 15 calendar days) of a reportable event. The accelerated filing deadline would not apply to Forms 8-K that report voluntary disclosures or Regulation FD disclosures. Companies that are unable to file a Form 8-K on time will be required to file a notice of late filing under Rule 12b-25 of the Exchange Act. Under the proposed rules, the notice of late filing must be filed with the SEC no later than one business day after the due date of the Form 8-
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K. The proposed rules grant companies that properly file a notice of late filing an automatic twobusiness day extension to file the Form 8-K. If a Form 8-K is filed within two business days after its original due date, the Form 8-K would be deemed to be timely filed. (The current rules do not provide a mechanism by which a company can file a Form 8-K late and still be deemed to have timely filed the Form 8-K.) V. Disclosure Events A. Proposed New Form 8-K Disclosure Items The SEC has proposed to add the following 13 new disclosure items to Form 8-K: Entry into a material agreement, including letters of intent and other non-binding agreements, not made in the ordinary course of business; Termination of a material agreement not made in the ordinary course of business; Termination or reductions of a business relationship with a customer when the amount of loss of revenue to the company from such termination or reduction constitutes 10% or more of the company’s revenues; Creation of a direct or contingent financial obligation that is material to the company (e.g., direct obligations such as registered sales of debt securities, bank loans or credit facilities, and contingent obligations such as guarantees and keepwell agreements); Events triggering a direct or contingent financial obligation, such as an event of default or an event of acceleration, that is material to the company, including any default or acceleration of an obligation; Exit activities including material write-offs and restructuring charges; Any material impairment of an asset, including impairment of securities or goodwill; A change in a rating agency decision, issuance of a credit watch or change in a company outlook (only to the extent that the company receives a notice or other communication from the rating agency to whom the company previously provided information);
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Movement of the company’s securities from one exchange or quotation system to another, delisting of the company’s securities from an exchange or quotation system, or a notice that a company does not comply with a listing standard; Conclusion or notice that security holders no longer should rely on the company’s previously issued financial statements or a related audit report; Any changes to, or waivers of, a company code of ethics covering the principal executive officer or senior financial officers; Any material limitation, restriction or prohibition, including the beginning and the ending of lock-out periods, regarding the company’s employee benefit, retirement and stock ownership plans; and The imposition of any employee benefit plan blackout period, including the duration of the blackout period, the reasons for the blackout, and description of the classes of equity securities and transactions affected. (This proposed disclosure event, which seemingly overlaps with the disclosure event described in the preceding bullet, was contained in the SEC’s October 22, 2002 release. In the final rules, this proposal is likely to supercede the disclosure event in the preceding bullet, which was proposed in the June 12, 2002 release.) B. Shifting Annual and Quarterly Reporting Requirements to Form 8-K The SEC also proposed to move the following two items from Form 10-K and Form 10Q to Form 8-K: unregistered sales of equity securities by the company; and material modifications to rights of holders of the company’s securities. C. Expansion of Existing Form 8-K Disclosure Items Finally, the SEC proposed to expand the current Form 8-K item regarding certain director resignations to require disclosure of: the resignation of a director for any reason, the appointment or departure of a principal officer, and the election of a new director.
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D. Analysis of Effect of Disclosure Event Significantly, throughout the proposed rules, there are requirements that companies provide explanations in the Form 8-K regarding management’s analysis of the expected effect of the disclosure event on the company. The SEC specifically prohibits companies from using general boilerplate-type statements that an event may have a material adverse effect on the company because of the limited usefulness of such disclosure. Instead, the SEC encourages companies to provide quantitative information whenever possible to explain the expected effect of the disclosure event on the company. VI. Consequences of Late Filings A company would not be eligible to register new equity compensation plans on Form S-8 until the company files all delinquent Form 8-Ks. In addition, a company that fails to file a Form 8-K in a timely manner would not be eligible to use short form registration statements, such as Form S-3. Finally, persons who hold restricted securities of the company for less than two years and affiliates who hold company securities for more than one year could not rely on Rule 144 during the period in which the company is delinquent in filing a required Form 8-K. VII. Safe Harbor for Late Form 8-K Filings Under the proposed rules, a company would not be liable under the reporting provisions of Sections 13(a) or 15(d) of the Exchange Act for failure to file a Form 8-K if: the company, on the Form 8-K due date, had in place sufficient procedures to provide reasonable assurances that it is able to collect, process and disclose, within the specified time period, the information required to be disclosed on Form 8-K; no officer, employee or agent of the company knew, or was reckless in not knowing, that a Form 8-K was required to be filed; and once an executive officer of the company became aware of the company’s failure to file a required Form 8-K, the company promptly (no later than two business days after becoming aware) filed a Form 8-K containing the required information and stating the date or approximate date on which the report should have been filed. The safe harbor would not protect a company from liability under Section 10 of, or Rule 10b-5 under, the Exchange Act, or Sections 11, 12, or 17 of the Securities Act of 1933. In
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addition, the safe harbor would not afford the company protection from the consequences of a late filing as discussed above. With respect to the first prong of the safe harbor, it is important that companies are mindful of the fact that they will have to revise their disclosure controls and procedures to cover any new disclosure event subsequently added to Form 8-K by the SEC – both for purposes of Rule 13a-15 of the Exchange Act and the proposed safe harbor. VIII. Additional Form 8-K Disclosure Events on the Horizon As described above, the SEC has continued to propose additional Form 8-K disclosure events since the initial Form 8-K proposals on June 12, 2002. Because of the Congressional mandate contained in Section 409 of the Sarbanes-Oxley Act regarding real time disclosures of information concerning material changes in a company’s financial condition or operations, we expect the SEC to promulgate additional rules to increase the number of corporate events required to be disclosed on Form 8-K in the coming months. It is interesting to note that the proposed rules and, to the extent applicable, the SEC’s adoption of additional Form 8-K disclosure events to comply with Section 409 of SarbanesOxley may be moving us in the direction of imposing a continuous duty on companies to update their public disclosures. IX. Further Information This publication has been prepared solely for informational purposes and is not intended as legal advice. For more information about the matters discussed in this Legal Alert, please contact the Sutherland Asbill & Brennan LLP attorney with whom you work, or any of the attorneys listed below. ATLANTA Robert J. Pile 404.853.8487 Geoffrey W. Edwards 404.853.8294 WASHINGTON, D.C. Cynthia M. Krus 202.383.0218 Harry S. Pangas 202.383.0805
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