- SEC Proposes to Restructure Form 8-K and Accelerate Form 8-K Filings
- August 11, 2003
- Law Firm: Perkins Coie LLP - Seattle Office
For the first time in 25 years, the Securities and Exchange Commission plans to significantly restructure Form 8-K. Under the SEC's June 17, 2002 proposal, a reporting company would be required to disclose many events on Form 8-K that currently are not required to be disclosed or are included only in annual or quarterly reports. If adopted, the new rules would require Form 8-K disclosure of the following events:
- Entry into a material agreement outside the ordinary course of business;
- Termination of a material agreement outside the ordinary course of business;
- Termination or reduction of a business relationship with a customer that constitutes a specified amount of the company's revenues;
- Creation of a material financial obligation, whether direct or contingent;
- Events triggering a material financial obligation, whether direct or contingent;
- Exit activities, including material write-offs and restructuring charges;
- Any material charge of impairment to assets;
- A change in a rating agency decision, issuance of a "credit watch" or a change in company outlook;
- Notice of delisting or failure to comply with the listing standards of an exchange;
- Conclusion or notice that security holders should not rely on previously issued financial statements or a related audit report;
- Creation of a material limitation, restriction or prohibition regarding the company's employee benefit, retirement and stock ownership plans;
- Unregistered sales of equity securities by the company;
- Material modifications to rights of holders of the company's securities;
- A director's departure or a director's election other than by security holders at an annual meeting, or the appointment or departure of a principal officer; and
- Any material amendment to the company's articles of incorporation or bylaws.
In addition, the SEC proposes to accelerate the filing deadline for certain Form 8-K disclosures to two business days following a triggering event, instead of the current five to 15 calendar days following an event. The proposal would create a new safe harbor for certain Form 8-K filing violations and would allow a two-business day extension of the Form 8-K filing deadline if a company provided proper notice on Form 12b-25. The SEC expects to make any changes prospective, and accordingly, events occurring prior to adoption of the rules would not trigger disclosure under the new requirements.
New Structure and Disclosures under Form 8-K
The proposal reorganizes Form 8-K into eight sections. Five of these sections describe the key new events a company must disclose in the Form 8-K. These sections are described below.
Section 1. Business and Operations
- Entry into or termination of a material agreement. When an issuer enters into, terminates or materially amends a material agreement outside of the ordinary course of the company's business, Form 8-K will mandate disclosure of the agreement. Material agreements could include letters of intent, non-binding agreements and agreements assumed or assigned through succession, if material. The company must file, or incorporate by reference, the material agreement as an exhibit to the Form 8-K. Proposed Form 8-K does not necessarily require disclosure of agreements still under negotiation. The proposed rules cover disclosure of material agreements relating to business combinations and other extraordinary corporate actions, which also may trigger separate filing obligations under Rule 165 under the Securities Act of 1933 or Williams Act Rule 14d-2(b) or Rule 14a-12.
- Termination or reduction of a business relationship with a customer. Companies will now need to file a Form 8-K when a customer terminates or reduces the scope of a business relationship with the company and the loss of revenues to the company from the termination or reduction equals 10% or more of the company's consolidated revenues.
Section 2. Financial Information
- Creation of or event "triggering" a direct or contingent financial obligation that is material to the company. Form 8-K will mandate disclosure when a company or a third party enters into a transaction or takes action that creates a material direct or contingent financial obligation (e.g., loans, sales of debt securities or private placements) for the company. The proposal broadly defines "triggering event" to include an event (e.g., a default) that creates or gives a party to an agreement the right to cause an unconditional material or direct contingent financial obligation. The company will file as an exhibit to the Form 8-K, or incorporate by reference, the agreement or document creating or subjecting the company to the direct or contingent financial obligation.
- Exit activities including material write-offs and restructuring charges. A company will disclose a definitive commitment to a course of action, including a plan to terminate or exit an activity, if the company would incur a material write-off or restructuring charge under generally accepted accounting principles (GAAP) due to the commitment.
- Material impairments. New Form 8-K will require disclosure when a company concludes it has an obligation to record (not at the time of actual recording) a material charge for impairment to one or more of its assets, including impairment of securities or goodwill, under GAAP.
Section 3. Securities and Trading Market
- Rating agency decisions. If a company receives notice of or a communication regarding a change in the company's credit rating or outlook, a refusal to assign a credit rating, placement of the company on "credit watch" or similar action from a rating agency to whom the company provides information, it must disclose that information on new Form 8-K.
- Notice of delisting or failure to satisfy listing standards. Any notice from an exchange or association stating that the company or its securities no longer satisfy the applicable listing standards or the securities have been delisted will trigger a Form 8-K filing obligation. The proposed rules require a discussion of the effects of and planned response to, the failure to satisfy the listing standards or the delisting.
- Unregistered sales of equity securities. A company will need to disclose sales of its equity securities that are not registered under the Securities Act. (Currently, companies provide this information in quarterly and annual reports.)
- Material modifications to rights of securities holders. A company will need to disclose material modifications to the rights of registered security holders and the general effect of the modifications on the security holders. (Again, this would replace a company's current obligation to report this information only in quarterly reports.)
Section 4. Matters Related to Accountants
- Non-reliance on previously issued financial statements or a related audit report. A company will need to file a Form 8-K when it determines previously issued financial statements are no longer reliable or when its current or previous independent accountants notify the company that the company should not rely on a previously issued audit report. The required disclosure must include a description of the company's plan to remedy the reliance problem. If the triggering event is notice from an independent accountant of the non-reliability of the financial statements, the company must provide the accountant with a copy of the Form 8-K no later than one business day following filing and request a letter from the accountant addressed to the SEC regarding the accountant's agreement or disagreement with the disclosures. The company must file the accountant's response letter within two business days after receipt as an exhibit to a Form 8-K amendment.
Section 5. Corporate Governance and Management
- Departure of directors; election of directors; appointment or departure of principal officers. Under the proposed requirements, a company must file a Form 8-K when a director departs for any reason, not only (as currently required) when a director departs over a disagreement and the director furnishes a letter to the company describing the disagreement and requesting its public disclosure. If the director's departure is related to a disagreement over company operations or policies, the company must disclose circumstances of the departure and summarize and file as an exhibit to Form 8-K any departure-related correspondence from the director regardless of whether the director requests disclosure. The company must provide the director with a copy of the Form 8-K no later than one business day following filing and must request a letter from the director addressed to the SEC regarding the director's agreement or disagreement with the disclosures. The company then must file this letter within two business days after receipt as an exhibit to a Form 8-K amendment. The proposed requirements also require Form 8-K disclosure of the election of a director other than by security holders at an annual meeting and the departure or appointment of certain principal officers.
- Amendments to articles of incorporation or bylaws. A company will need to file a Form 8-K when it amends charter documents if the company has not disclosed the amendment in a previously filed proxy or information statement.
- Material events regarding the employee benefit, retirement and stock ownership plans. Under the proposed Form 8-K requirements, a company must disclose when it knows of any event that would materially limit, restrict or prohibit participants in broadly-based employee benefit, retirement or stock ownership plans from acquiring, disposing of or converting their holdings other than restrictions regarding knowledge of or access to material non-public information. This proposed item does not require disclosure of temporary "black-out" periods for executives and directors based on their presumed knowledge of material non-public information, for example, during the period of an earnings release or merger negotiations.
Shortened Filing Deadline
The proposal accelerates the filing deadline to two business days following the Form 8-K triggering event (currently five to 15 days). However, the proposed shortened deadline does not affect the required deadlines for Regulation FD disclosures, voluntary disclosures or the deadlines for disclosure of insider transactions prescribed by the SEC's April 12, 2002 proposal.
Liability Issues and Proposed Safe Harbor
Information on Form 8-K (other than information provided pursuant to Regulation FD) will continue to be considered "filed" under Section 18 of the Exchange Act. Information considered "filed" is subject to liability under the Exchange Act unless a safe harbor is available for certain forward-looking information.
The proposed rules create a new safe harbor from liability under Sections 13(a) and 15(d) of the Exchange Act for failure to make a timely Form 8-K filing if:
- On the Form 8-K due date, the company maintained sufficient procedures to provide reasonable assurances that it was able to collect, process and disclose, within the specified time period, the information required to be disclosed by Form 8-K; and
- No officer, employee or agent of the company knew, or was reckless in not knowing, that a report on Form 8-K was required to be filed, and once an executive officer of the company became aware of the failure to file, the company promptly (and not later than two business days after becoming aware of the failure) filed a Form 8-K with the required information and stating the date, or approximate date, on which the report should have been filed.
This proposed safe harbor does not provide protection from violations of other securities laws, including Rule 10b-5 of the Exchange Act and Sections 11, 12 and 17 of the Securities Act. Also, despite the safe harbor, a company that fails to make a timely 8-K filing would be ineligible to use short-form registration statements for one year (unless it makes a timely 12b-25 filing and files the Form 8-K within two days of the 12b-25 filing) and its shareholders would not be able to rely on Rule 144 of the Securities Act.