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Additional Form 8-K Disclosure Requirements and Acceleration of Filing Dates

Client Advisory

May 21, 2004

Introduction

The Securities and Exchange Commission recently approved the adoption of final rules which amend Form 8-K under the Securities Exchange Act of 1934.[1]  The proposed amendments are responsive to the “real time issuer disclosure” mandate in Section 409 of the Sarbanes-Oxley Act of 2002 and are intended to provide investors with better and faster disclosure of important corporate events.  The final SEC rules, which will become effective as of August 23, 2004,

  • reorganize the Form 8-K disclosure items into topical categories,
  • increase the number of events that are reportable on Form 8-K, by adding eight new disclosure items to Form 8-K, transferring two disclosure items from Form 10-K and Form 10-Q to Form 8-K, and expanding two existing Form 8-K disclosure items,
  • shorten the Form 8-K filing deadline for most reportable events to four business days after the occurrence of an event, and
  • create a limited safe harbor from liability for failure to file certain of the required Form 8-K reports.
The following is a brief description of the principal amendments to Form 8-K.

New Form 8-K Disclosure Items
Entry into a Material Definitive Agreement

New Item 1.01 requires disclosure of material definitive agreements entered into by a company that are not made in the ordinary course of business, and any material amendment to a material definitive agreement (even if the underlying agreement previously has not been disclosed).  Only agreements which provide for obligations that are material and enforceable by or against a company are required to be disclosed under this item, regardless of whether the material definitive agreement is enforceable subject to stated conditions.  The SEC encourages companies to file the material agreement as an exhibit to the Form 8-K when feasible (particularly when no confidential treatment is requested); however, this is not a requirement and a company may delay the filing of the exhibit until its next periodic report or registration statement.

If the material agreement relates to a business combination or other extraordinary corporate transaction, and the filing of Form 8-K constitutes the first public announcement for purposes of Rule 165 under the Securities Act of 1933 and Rule 14-1(b) or Rule 14a-12 under the 1934 Exchange Act, a company may check one or more boxes on the cover page of Form 8-K to indicate that it is simultaneously satisfying its filing obligations under such rules, provided that the Form 8-K contains all of the information required by these rules.

Termination of a Material Definitive Agreement

New Item 1.02 requires disclosure of the termination of a material definitive agreement, if such termination is material to the company and is not as a result of expiration of the agreement on a stated termination date or completion of all of the parties’ obligations under such agreement.  Disclosure under this item is not required until the agreement has been terminated, and therefore no disclosure is required during negotiations or discussions regarding termination.

If the company believes, in good faith, that a material definitive agreement has not been terminated, it is not required to file a Form 8-K under this item, unless the company has received a notice of termination pursuant to the agreement; however, if there is uncertainty as to whether such an agreement has indeed terminated and a company nevertheless elects to file a Form 8-K under this item, it may include a statement of its good faith belief and its reasons for such belief.  If a company’s conclusion as to termination changes due to a loss of, or change in, its good faith belief, an amendment to Form 8-K under this item would be required.

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement

New Item 2.03 requires disclosure on Form 8-K if a company becomes (i) obligated under a material direct financial obligation[2], or (ii) directly or contingently liable for a material obligation arising out of an off-balance sheet arrangement.[3]

Disclosure of a direct financial obligation under this item is required when a company enters into an agreement enforceable against it, whether or not subject to conditions, under which such obligation will arise or be created, or if there is no such agreement, upon the closing or settlement of the transaction or arrangement under which such obligation arises or is created.  Disclosure regarding a contingent obligation under an off-balance sheet arrangement is required under this item even if a company is not a party to the transaction or agreement creating such obligation, in which case the four business day period for reporting the event under this item will begin on the earlier of the fourth business day after the contingent obligation is created or arises and the day on which an executive officer becomes aware of the contingent obligation.  A company must disclose it entry into a facility, program or similar arrangement that creates or may give rise to direct financial obligations in connection with multiple transactions, and disclose its obligations, if material, as they arise or are created (including when a series of previously undisclosed individually immaterial obligations become material in the aggregate).

A Form 8-K filing is not required under this item if the obligation required to be disclosed is a security, or a term of a security, that has been or will be sold pursuant to an effective registration statement and the sale prospectus contains the information required by this item.

Triggering Events that Accelerate or Increase a Direct Financial Obligation
or an Obligation under an Off-Balance Sheet Arrangement

New Item 2.04 requires a company to file a Form 8-K report if a triggering event (which includes an event of default, event of acceleration or similar event) occurs causing (i) the increase or acceleration of a direct financial obligation[4] or an obligation under an off-balance sheet arrangement, or (ii) a contingent obligation under an off-balance sheet arrangement to become a direct financial obligation; and the consequences of the event are material to the company.

Similar to new Item 2.03, disclosure of a triggering event in respect of an obligation under an off-balance sheet arrangement is required under this item whether or not a company is also a party to the transaction or agreement under which such event occurs.  Disclosure is not required unless and until a triggering event has occurred in accordance with the terms of the relevant agreement, transaction or arrangement (including any required notice of the occurrence of a triggering event and the satisfaction of all conditions to such occurrence, except the passage of time).  Similar to new Item 1.02, disclosure is not required if a company believes, in good faith, that a triggering event has not occurred, unless the company has received a notice pursuant to the terms of the agreement that such event has occurred; however, if a company nevertheless elects to file a Form 8-K under this item, it may include a statement of its good faith belief and its reasons for such belief, in which case an amendment under this item may be required if the company’s conclusion as to the triggering event changes due to a loss of, or change in, its good faith.

Costs Associated with Exit or Disposal Activities

New Item 2.05 requires disclosure on Form 8-K when the board of directors, a committee of the board of directors, or an authorized officer or officers, if board action is not required, 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 FASB Statement of Financial Accounting Standards No. 146 (Accounting for Costs Associated with Exit or Disposal Activities), as a result of which material charges will be incurred by the company under applicable generally accepted accounting principles, or GAAP.  A company must file a Form 8-K regarding its commitment to a course of action under which it will incur a material charge even if at the time of filing it is unable to make a good faith estimate of the amount of the charges, in which case the company must file an amendment to its Form 8-K to include an estimate within four business days after it formulates one.

Material Impairments

New Item 2.06 requires disclosure on Form 8-K when a company’s board of directors, a committee of the board of directors, or an authorized officer or officers, if board action is not required, concludes that a material charge for impairment to one or more of its assets, including, without limitation, an impairment of securities or goodwill, is required under applicable GAAP.  No Form 8-K disclosure is required pursuant to this item if such conclusion is made in connection with the preparation, review or audit of financial statements at the end of a fiscal quarter or year and the conclusion is disclosed in the company’s report under the Securities Exchange Act of 1934 for such period.

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing

New Item 3.01 requires a company to file a Form 8-K if any of the following events occurs in connection with the delisting of any class of a company’s common equity from the national securities exchange or association that maintains the principal listing for such class of securities:

(i)         The company receives a notice from such exchange or association indicating that: (a) the company or such class of its securities does not satisfy a rule or standard for continued listing on the exchange or association; (b) the exchange has submitted to the SEC an application to delist such class of the company’s securities; or (c) the association has taken all necessary steps under its rules to delist the security.

(ii)        The company has notified such exchange or association that it is aware of any material noncompliance with a rule or standard for continued listing on the exchange or association.

(iii)       The exchange or association issues a public reprimand letter or similar communication indicating that the company has violated a rule or standard of the exchange or association.

(iv)       The company’s board of directors or a committee thereof, or if board action is not required, an authorized officer or officers, has taken definitive action to cause the delisting of such class of its common equity from such exchange or association, or the transfer of its securities to another exchange or quotation system.

Disclosure under this item is required even if the company has the benefit of a grace period or similar extension period during which it may cure the deficiency that triggers the disclosure requirement.  However, the SEC noted in its final rule that an early warning notice that merely informs a company that it is in danger of non-compliance with a continued listing standard will not trigger a disclosure obligation under this item.  It is anticipated that in the typical involuntary delisting process two Form 8-K filings would be required: an initial filing when the company receives or gives notice that it no longer complies with a continued listing standard; and a second filing upon the company’s receipt of a notice regarding the actual delisting of its securities.

Non-Reliance on Previously Issued Financial Statements or a Related Audit Report
or Completed Interim Review

New Item 4.02 requires a company to file a Form 8-K (i) when its board of directors, a committee of the board of directors, or an authorized officer or officers, if board action is not required, concludes that any of the company’s previously issued financial statements covering one or more years or interim periods should no longer be relied upon because of an error in such financial statements, or (ii) if a company receives advise or notice from its independent accountant that disclosure should be made or action should be taken to prevent future reliance on a previously issued audit report or completed interim review related to previously issued financial statements.

If a Form 8-K is filed under this item in respect of advice or notice received from a company’s independent accountant, the company must provide the accountant with a copy of its disclosures no later than the day it files them with the SEC, and also must request the accountant to promptly furnish to it a letter addressed to the SEC stating whether the accountant agrees with the statements made by the company and, if not, the respects in which it does not agree.  The company must then file such letter as an exhibit to the filed Form 8-K, by amendment to such filing, within two business days of its receipt.

New Form 8-K Disclosure Items Transferred from Periodic Reports
Unregistered Sales of Equity Securities

New Item 3.02 requires disclosure on Form 8-K of certain sales of a company’s equity securities in a transaction that is not registered under the Securities Act of 1933.  This disclosure is currently required in a company’s annual report (on Form 10-K or Form 10-KSB) and quarterly report (on Form 10-Q or Form 10-QSB).  The disclosure of a sale of unregistered equity securities on Form 8-K has, however, been limited to a quantitative threshold: a Form 8-K filing is not required if the equity securities sold in the aggregate since the company’s last Form 8-K or periodic report constitute less than 1% (or 5% for a “small business issuer”) of the company’s outstanding securities of that class.  A company will be required to continue to report unregistered sales of equity securities that are less than such threshold in their periodic reports.  The obligation to disclose information under this item is triggered when a company enters into an agreement enforceable against it, whether or not subject to conditions, under which the equity securities are to be sold, or if there is no such agreement, within four business days after the occurrence of the closing or settlement of the transaction.

Material Modifications to Rights of Security Holders

New Item 3.03 requires a company to disclose material modifications to the rights of the holders of any class of the company’s registered securities and to briefly describe the general effect of such modifications on such rights.  The substance of this disclosure is currently required in a company’s quarterly report (on Forms 10-Q or 10-QSB). 

Expanded Form 8-K Disclosure Items

Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

New Item 5.02 broadens the scope of the disclosure currently required under Form 8-K when a director resigns or declines to stand for re-election and expands the events that require disclosure with respect to changes in the service of directors and principal officers.  The following events trigger disclosure under new Item 5.02:

(a)        A director has resigned or refuses to stand for re-election to the board of directors since the last annual meeting of stockholders because of a disagreement with the company, known to an executive officer of the company, on any matter relating to the company’s operations, policies or practices, or if a director has been removed for cause from the board of directors.  Any written correspondence furnished by the director to a company concerning the circumstances surrounding such resignation, refusal or removal must be filed as an exhibit to the Form 8-K.  A company must provide the director with a copy of its disclosures no later than the day it files them with the SEC, and must also provide the director with the opportunity to furnish to it a letter addressed to the company stating whether such director agrees with the company’s disclosures and, if not, the respects in which he or she does not agree.  The company must then file any such letter it receives as an exhibit to the filed Form 8-K, by amendment to such filing, within two business days after its receipt.

(b)        A company’s principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or any person performing similar functions retires, resigns, or is terminated from that position, or a director retires, resigns, is removed or declines to stand for re-election under circumstances not described in the foregoing paragraph.

(c)        A company appoints a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or person performing similar functions.  If a company intends to make a public announcement of such appointment other than by means of a report on Form 8-K, it may delay filing a Form 8-K under this item until the day it makes such public announcement.

(d)        A new director is elected to the board of directors, except by a vote of security holders at an annual or special meeting.

Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

New Item 5.03 expands the disclosure currently required under Form 8-K if a company determines to changes its fiscal year from that used in its most recent filing with the SEC, by also requiring a company with securities registered under Section 12 of the Securities Exchange Act of 1934 to disclose any amendment to its articles of incorporation or bylaws.  A company is not, however, required to file a Form 8-K under this item if a proposal for the amendment was disclosed in a proxy or information statement filed with the SEC, or if the change of fiscal year was by means of a submission to a vote of security holders through the solicitation of proxies or otherwise or by an amendment to its articles of incorporation or bylaws.  A company is only required to file the text of an amendment to the articles of incorporation or bylaws as an exhibit to Form 8-K under this item, in which case it must file the restated articles of incorporation or bylaws as an exhibit to its next periodic report.

Accelerated Filing Deadline

The proposed amendments to Form 8-K require U.S. public companies to file required reports on Form 8-K within four business days of a triggering event (shortening the current filing deadline of five business days or 15 calendar days, depending on the  particular event).  The amendments do not affect the current filing deadline for disclosures under Regulation FD (Item 7.01), voluntary disclosures (Item 8.01) and certain exhibits.

Limited Safe Harbor; Eligibility to Use Form S-2 and S-3 and to Rely on Rule 144

The SEC adopted a new limited safe harbor from public and private claims under the anti-fraud provisions of Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934 for a failure to timely file a Form 8-K regarding seven disclosure items[5].  The safe harbor for such items (Rule 13a-11(c) and Rule 15d-11(c)) states that no failure to file a report on Form 8-K that is required solely pursuant to the provisions of Form 8-K shall be deemed to be a violation of such Section 10(b) and Rule 10b-5.  Accordingly, material misstatements or omissions in a Form 8-K and failure to disclose information required to be disclosed apart from under a Form 8-K will continue to be subject to liability under such Section 10(b) and Rule 10b-5.  The safe harbor extends only until the due date of the company’s next periodic report, in which the company must provide the required disclosure.

In addition, the SEC revised Form S-2 and Form S-3 under the Securities Act of 1933 to provide that companies that fail to timely file a Form 8-K under the seven items specified in footnote 5 of this advisory will not lose their eligibility to use such forms[6], provided that a company is current in its Form 8-K filings with respect to such items at the time it files a Form S-2 or Form S-3.

The SEC also revised Rule 144(c) under the Securities Act to provide that the “current public information” condition under Rule 144(c) will be satisfied even though the company has not filed all required Forms 8-K.  Rule 144(c) currently provides in part that if the company is subject to the reporting  requirements of the Securities Exchange Act of 1934, a security holder of that company may sell securities in reliance on Rule 144 only if the company filed all reports required to be filed under that Act during the 12 months preceding such a sale.



Questions regarding securities law issues may be directed to Steven J. Glusband (glusband@clm.com), John K. Whelan (whelan@clm.com) and Stephen V. Burger (burger@clm.com) of our New York office (212-732-3200).  Sharon Rosen assisted in the preparation of this advisory.

Endnotes

[1] SEC Release No. 33-8400 (March 16, 2004).

[2] Item 2.03 defines “direct financial obligation” as any long-term debt obligation, capital lease obligation or operating lease obligation, as each such term is defined in Regulation S-K, or short-term debt obligation that arises other than in the ordinary course of business.

[3] Item 2.03 refers to Item 303(a)(4)(ii) of Regulation S-K for the definition of the term “off-balance sheet arrangement”, under which such term means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has:  (A) any obligation under a guarantee contract that has any of the characteristics identified in paragraph 3 of FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (November 2002) (“FIN 45”), as may be modified or supplemented, and that is not excluded from the initial recognition and measurement provisions of FIN 45 pursuant to paragraphs 6 or 7 of that Interpretation; (B) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets; (C) any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the company’s own stock and classified in stockholders’ equity in the registrant’s statement of financial position, and therefore excluded from the scope of FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (June 1998), pursuant to paragraph 11(a) of that Statement, as may be modified or supplemented; or (D) any obligation, including a contingent obligation, arising out of a variable interest (as referenced in FASB Interpretation No. 46, Consolidation of Variable Interest Entities (January 2003), as may be modified or supplemented) in an unconsolidated entity that is held by, and material to, the company, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with, the registrant.

[4] Item 2.04 defines the term “direct financial obligation” by reference to the definition in Item 2.03, but adds an obligation arising out of an off-balance sheet arrangement that is accrued under the FASB Statement of Financial Accounting Standards No. 5 (Accounting for Contingencies) as a probable loss contingency.

[5] Items 1.01 (Entry into a Material Definitive Agreement), 1.02 (Termination of a Material Definitive Agreement), 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant), 2.04 (Triggering Events that Accelerate or Increase a Direct Financial Obligation under an Off-Balance Sheet Arrangement), 2.05 (Costs Associated with Exit or Disposal Activities), 2.06 (Material Impairments), 4.02(a) (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review (in the case where a company makes the determination and does not receive a notice described in Item 4.02(b) from its accountant)).

[6] With respect to the other Form 8-K items, failure to timely file a Form 8-K pursuant to any of such items will continue to result in a loss of Form S-2 or Form S-3 eligibility for the 12 months following the Form 8-K due date.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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