Effective August 23, 2004, the deadline for filing a Form 8-K will be shortened to four business days. In addition to the existing disclosure items, there are eight new disclosure triggers, two disclosure items transferred from periodic reports (Q’s and K’s), and two expanded existing disclosure triggers. The final rule can be viewed athttp://www.sec.gov/rules/final/33-8400.htm.
In order to assist clients in meeting the new four business day requirement, we have put a checklist on our website at www.thelebrechtgroup.com/forms. Clients seeking our guidance in preparing their 8-K’s should complete the checklist and fax or email it to our attention as soon as possible after a triggering event, along with any documents that will be filed as exhibits (electronically if possible to expedite the edgarization process).
The eight new disclosure triggers, described more fully below, are:
- entry into a material agreement not made in the ordinary course of business;
- termination of a material agreement not made in the ordinary course of business;
- creation of a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
- triggering events that accelerate or increase a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
- material costs associated with exit or disposal activities;
- material impairments;
- notice of delisting or failure to satisfy a continued listing rule or standard; transfer of listing; and
- non-reliance on previously issued financial statements or a related audit report or completed interim review (restatements).
The two disclosure items transferred, in part, from the periodic reports are:
- unregistered sales of equity securities; and
- material modifications to rights of security holders.
The expanded existing disclosure items are:
- departure of directors or principal officers, election of directors, or appointment of principal officers (former Item 6 – resignations of directors); and
- amendments to Articles of Incorporation or Bylaws and change in fiscal year (former Item 8 – change in fiscal year).
The final rule retained the following items in essentially their existing form:
- changes in control of registrant (formerly Item 1);
- completion of acquisition or disposition of assets (formerly Item 2);
- bankruptcy or receivership (formerly Item 3);
- changes in registrant’s certifying accountant (formerly Item 4);
- other events (formerly Item 5)
- financial statements and exhibits (formerly Item 7)
- Regulation FD disclosure (formerly Item 9);
- amendments to the registrant’s code of ethics, or a waiver of a provision of the code of ethics (formerly Item 10);
- temporary suspension of trading under registrant’s employee benefit plans (formerly Item 11); and
- results of operations and financial condition (formerly Item 12).
New Disclosure Items
Entry into a Material Definitive Agreement
New Item 1.01 requires the disclosure of material definitive agreements entered into by a company that are not made in the ordinary course of business. Under this new Item, a company must also disclose any material amendment to a material definitive agreement, even if the initial entry into the agreement occurred prior to the effectiveness of the amendments to Form 8-K.
This new Item parallels Item 601(b)(10) of Regulation S-K (material contracts to be filed as exhibits) with regard to the types of agreements that are material to a company. Any material agreement that is enforceable must be disclosed, whether or not performance is subject to stated conditions. For example, a material definitive agreement that is binding and subject to customary closing conditions (such as the delivery of legal opinions or comfort letters, completion of due diligence or regulatory approval) must be disclosed. A non-binding letter of intent or memorandum of understanding that also contains some binding, but non-material elements (such as a confidentiality agreement or a no-shop agreement), however, need not be filed under the new Item because the binding provisions are not material.
There is no exception in the M&A context under this new Item, which covers business combination agreements and other definitive agreements that relate to extraordinary corporate transactions. Accordingly, the filing of the Form 8-K may constitute the first “public announcement” for purposes of Rule 165 under the Securities Act (business combination) and Rule 14d-2(b) or Rule 14a-12 under the Exchange Act (tender offer or proxy solicitation) and thereby trigger a filing obligation under those rules. To avoid duplicative filings, a company may check one or more boxes on the cover page of the Form 8-K to simultaneously satisfy the company’s filing obligations under the other applicable rules.
There will frequently be a relationship between the disclosure provided under new Item 1.01 and the existing Item 2 of Form 8-K (completion of acquisition or disposition of assets), which will remain in effect with a new reference number, Item 2.01. Typically, a company will report its entry into a material definitive agreement to acquire or dispose of assets under new Item 1.01, and then later disclose the closing of the acquisition or disposition transaction under Item 2.01. Unlike Item 2.01, however, new Item 1.01 does not contain a bright-line reporting threshold.
The required disclosures under new Item 1.01 include: (i) identity of the parties; (ii) brief description of any existing material relationship between the company or its affiliates and any of the parties; and (iii) brief description of the material terms and conditions of the agreement or amendment. The material definitive agreement or amendment need not be filed as an exhibit to the Form 8-K, but will have to be filed as an exhibit to the company’s next periodic report or registration statement pursuant to Item 601(b)(10) of Regulation S-K. The SEC encourages companies, however, to file the agreement or amendment with the Form 8-K, particularly when no confidential treatment is requested.
Termination of a Material Definitive Agreement
If a material definitive agreement not made in the ordinary course of business is terminated and such termination is material to the company, a Form 8-K filing is required under new Item 1.02. This new Item will not be triggered by expiration of the agreement on a stated termination date or from all parties completing their obligations under the agreement. Further, no disclosure will be required prior to actual termination of the agreement, even during negotiations or discussions regarding a termination. Similarly, no disclosure is required if the company believes in good faith that the agreement has not been terminated, although a filing would be triggered upon a change in that belief.
The required disclosures under the Item include: (i) identity of the parties; (ii) brief description of any existing material relationship between the company or its affiliates and any of the parties; (iii) brief description of the material terms and conditions of the agreement; (iv) brief description of the material circumstances surrounding the termination; and (v) any material early termination penalties incurred by the company.
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
New Item 2.03 requires the filing of a Form 8-K when the company becomes (i) obligated under a material direct financial obligation or (ii) directly or contingently liable for a material obligation arising out of an off-balance sheet arrangement. A “direct financial obligation” means a long-term debt obligation, capital lease obligation or operating lease obligation, as those terms are used in Item 303(a)(5) of Regulation S-K (table of contractual obligations in MD&A), as well as any short-term debt obligation that arises other than in the ordinary course of business. An “off-balance sheet arrangement” is defined in Item 303(a)(4) of Regulation S-K (MD&A).
The principal triggering event for reporting under the new Item is entering into an agreement enforceable against the company, whether or not subject to conditions, under which the obligations will arise or be created or issued. If there is no such agreement, the Form 8-K must be filed within four business days after the closing or settlement under which the obligation arises or is created. Off-balance sheet disclosure may be required whether or not the company is also a party to the arrangement giving rise to the contingent obligation under the off-balance sheet arrangement.
If a company enters into a credit facility or similar arrangement that may give rise to direct financial obligations in connection with multiple transactions, the company must disclose the entering into of the facility or arrangement. In addition, the company must disclose its material obligations under the facility or arrangement as they arise, including when a series of previously undisclosed individually immaterial obligations become material in the aggregate.
No disclosure is required under the new Item when the obligation is a security that is sold pursuant to an effective registration statement, so long as the prospectus is timely filed.
The required disclosures under new Item 2.03 include: (i) brief description of the transaction or agreement creating the direct financial obligation or off-balance sheet arrangement; (ii) amount of the obligation and, in the case of a direct financial obligation, the terms of its repayment; (iii) in the case of an off-balance sheet arrangement, the maximum potential amount of future payments (undiscounted) that the company may be required to make, if different; and (iv) brief description of the other material terms and conditions of the obligation or arrangement.
Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
A Form 8-K filing is required under new Item 2.04 if a triggering event in accordance with the terms of an agreement or other arrangement:
- causes the increase or acceleration of a direct financial obligation (including an obligation arising out of an off-balance sheet arrangement that is accrued under SFAS No. 5 as a probably loss contingency) or off-balance sheet arrangement, or
- causes a company’s 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. If an agreement provides that the increase or acceleration is dependent upon the sending to the company of notice or the satisfaction of specified conditions to the occurrence of the triggering event (except the passage of time), no disclosure will be required until the sending of the notice or the satisfaction of the conditions. Further, no disclosure is required if the company believes, in good faith, that no triggering event has occurred, although a filing would be triggered upon a loss of or change in that belief.
The required disclosures under new Item 2.04 include: (i) brief description of the obligation or arrangement; (ii) brief description of the triggering event, (iii) amount of the obligation and the terms of payment or acceleration that apply; and (iv) any other material obligations of the company that may arise, increase or be accelerated as a result of the triggering event or the increase or acceleration of the obligation.
Costs Associated with Exit or Disposal Activities
New Item 2.05 requires a Form 8-K filing when the board of directors, one of its committees, or an authorized officer or officers if board action is not required, commits the 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 paragraph 8 of FASB Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” under which material charges will be incurred under generally accepted financial principles applicable to the company.
The required disclosures under the Item include: (i) description of the course of action, including the facts and circumstances leading to the expected action and expected completion date; (ii) for each major type of cost associated with the course of action, estimate of the total amount or range of amounts expected to be incurred in connection with the action; (iii) estimate of the total amount or range of amounts to be incurred in connection with the action; and (iv) estimate of the amount or range of amounts of the charge that will result in future cash expenditures. Because the company may not be able to make the required estimates at the time the course of action is decided and the Form 8-K must be filed, the Item permits later disclosure of such estimates by amendment to the Form 8-K within four business days after the estimates can be made.
Material Impairments
New Item 2.06 requires disclosure on Form 8-K when the board of directors, one of its committees, or an authorized officer or officers of the company 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 generally accepted accounting principles. No disclosure will be required, however, if the company’s conclusion regarding the material charge 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 Exchange Act report for that period.
The required disclosures under the Item include: (i) description of the impaired assets and the facts and circumstances leading to the conclusion that the charge for impairment is required; (ii) estimate of the amount or range of amounts of the impairment charge; and (iii) estimate of the amount or range of amounts of the impairment charge that will result in future cash expenditures. If the estimates cannot be determined at the time of the board’s conclusion, they may be provided by amendment to the Form 8-K within four business days after they can be determined.
Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing
New Item 3.01(a) requires a company to report on Form 8-K its receipt of a notice from the national securities exchange or national securities association that maintains the principal listing for any class of the company’s common equity (the “principal exchange”), indicating that:
- the company or such class of its securities does not satisfy a rule or standard for continued listing on the exchange or association;
- the exchange has submitted an application under Exchange Act Rule 12d2-2 to the SEC to delist such class of the company’s securities; or
- the association has taken all necessary steps under its rules to delist the security from its automated inter-dealer quotation system.
New Item 3.01(b) requires reporting of a notice by the company to the principal exchange that the company is aware of a material noncompliance with a rule or standard for continued listing on the principal exchange. An early warning notice from the principal exchange indicating that the company may fall out of compliance upon certain conditions will not trigger the reporting requirement. Disclosure under Items 3.01(a) or (b) will be required if the company has fallen out of compliance, even if the principal exchange offers a cure period prior to delisting.
The required disclosures under Item 3.01(a) and (b) include: (i) the rule or standard that the company has failed to satisfy; and (ii) any action or response that, at the time of filing, the company has determined to take. If the company has not determined to take any action at the time of the filing, no disclosure need be made in the initial Form 8-K filing or by any amendment.
New Item 3.01(c) requires the company to summarize the contents of any public reprimand letter or similar communication from the principal exchange indicating that the company has violated a rule or standard of the principal exchange. Finally, new Item 3.01(d) requires that, if the company’s board of directors, one of its committees or the authorized officer or officers if board action is not required, has taken definitive action to cause the listing of a class of its common equity to be withdrawn from the principal exchange, the company must describe the action taken. Such a definitive action would include transfer of the company’s listing to another exchange or quotation system, as well as a delisting of the class of securities.
The safe harbor against liability under Exchange Act Section 10(b) and Rule 10b-5 for a late Form 8?K will not be available for a Form 8-K required to be filed by new Item 3.01.
Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
Under new Item 4.02(a), a Form 8-K must be filed when the board of directors, one of its committees, 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 not be relied upon because of an error in those financial statements (as addressed in Accounting Principles Board Opinion No. 20). Similarly, new Item 4.02(b) requires a Form 8-K filing if the company is advised by, or receives 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.
The required disclosures include: (i) identification of the financial statements and years or periods covered that should no longer be relied upon; (ii) brief description of the facts underlying the company’s conclusion to the extent known to the company at the time of filing, or of the information provided by the accountant, as applicable; and (iii) statement of whether the board, audit committee or authorized officer, as applicable, discussed with the company’s independent accountant the subject matter giving rise to the conclusion or notice.
The company must provide the accountant with a copy of the Form 8-K disclosure no later than the day of the filing and request a letter addressed to the SEC addressing whether the accountant agrees with the company’s conclusion. The company must then amend the Form 8-K to file the letter as an exhibit within two business days of receipt.
Items Transferred from Periodic Reports
Unregistered Sales of Equity Securities
New Item 3.02 requires disclosure on Form 8-K of the information specified in paragraphs (a) and (c) through (e) of Item 701 of Regulation S-K regarding the company’s sale of equity securities in a transaction that is not registered under the Securities Act. This disclosure is currently required in Item 2(c) of Form 10-Q and Item 5(a) of Form 10-K.
Under the new Item, no Form 8-K need be filed if the equity securities sold in the aggregate since the company’s last report filed under the new Item or last periodic report, whichever is more recent, constitute less than 1% of the company’s outstanding securities of that class (with a higher threshold for small business issuers).
The triggering event for a filing is the company’s entry into an enforceable agreement, whether or not subject to conditions, under which unregistered equity securities are to be sold. If there is no such agreement, the triggering event is the occurrence of the closing or settlement of the transaction or arrangement under which the equity securities are sold.
Material Modifications to Rights of Security Holders
Material modifications to the rights of the holders of any class of the company’s registered securities and the general effect of such modifications on such rights, must now be reported under new Item 3.03 of Form 8-K. The substance of the disclosure is the same as previously required by Items 2(a) and (b) of Form 10-Q. Once disclosure under the new Item has been made on Form 8-K, the disclosure need not be repeated in any subsequently filed periodic report.
Expanded Disclosure Items
Departure of Directors Due to Disagreement or for Cause
New Item 5.02(a) requires a report on Form 8-K when:
- a director resigns or refuses to stand for re-election due to a disagreement with the company on any matter relating to the company’s operations, policies or practices, or
- a director is removed for cause.
To trigger the filing requirement, the disagreement must be known to an executive officer of the company. This new Item expands the scope of former Item 6 of Form 8-K, which required disclosure only when a departing director provided a letter and requested the matter be publicly disclosed.
The required disclosures under Item 5.02(a) include a brief description of the circumstances representing the disagreement that management believes caused, in whole or in part, the director’s resignation, refusal to stand for re-election or removal. In addition, any written correspondence furnished to the company by the director concerning the surrounding circumstances, refusal or removal must be filed as an exhibit to the Form 8-K, whether or not the director has requested the company to do so. The company must provide the director with a copy of the disclosures no later than the day the company files the Form 8-K, and give the director an opportunity to furnish a letter addressed to the company as promptly as possible stating whether the director agrees with the Form 8-K disclosures and, if not, why not. Finally, the company must file any letter it receives from the director as an exhibit to an amendment to the previously filed Form 8?K within two business days after receipt of such letter.
Departure of Principal Officers and Certain Directors
New Item 5.02(b) requires a report on Form 8-K when the 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. A report is also required when a director retires, resigns, is removed or declines to stand for re-election and a report is not required under Item 5.02(a). The reasons for such a departure need not be disclosed.
Appointment of Principal Officers
Under new Item 5.02(c), a report must be made if the company appoints a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or person performing similar functions, or if a new director is elected to the board other than by a vote of security holders at an annual meeting or special meeting convened for such purpose. The required disclosures under Item 5.02(c) include information regarding the background of the officer or director and certain related transactions with the company, and a brief description of the material terms of any employment or appointment agreement between the company and the officer or director. If a company needs time to make proper introductions within the company before publicly announcing the appointment of an officer, the company may delay disclosure under Item 5.02(c) until the day on which the company first makes public announcement of the appointment if the company intends to make a public announcement of the appointment other than by means of Form 8-K.
The reporting requirements of new Item 5.02(a), (b) and (c) do not apply to a company that is a wholly-owned subsidiary of a reporting company.
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
New Item 5.03 expands existing Item 8 of Form 8-K, which addresses change in a company’s fiscal year. Under new Item 5.03, any determination by the company to change its fiscal year by means other than 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, must be reported.
In addition, new Item 5.03 requires a company with a class of equity securities registered under Section 12 of the Exchange Act to disclose on Form 8-K any amendment to its articles of incorporation or bylaws that was not proposed in a previously filed proxy statement. If an amendment to the articles of incorporation or bylaws is reported on Form 8-K, the company need only file the text of the amendment as an exhibit to the filing. If it does so, it must file the restated articles of incorporation or bylaws as an exhibit to its next periodic report.
Other Changes to Existing Items
As indicated above, the SEC retained the existing Form 8-K items. However, in addition to redesignating the items, it also effected various changes. For example, Item 2.01 (formerly Item 2), which pertains to acquisitions and dispositions of assets, has been revised as follows:
- disclosure of the source of funding, and the principle followed in determining the purchase price, will be required only where a material relationship is disclosed between the counter-party and the company, or any of its affiliates, directors or officers, or any of their associates; and
- disclosure will no longer be required regarding the nature of the business in which the acquired assets were used and whether the acquirer intends to continue such use.
Additionally, in Item 5.01 (formerly Item 1), which pertains to changes in control of the company, the requirements have been rearranged and revised, although the SEC believes no substantive changes were made. The SEC noted that Form 8-K permits incorporation by reference of disclosure from an earlier filing. Hence, if the change of control occurs as a result of a previously reported merger agreement, any relevant details of the agreement could be furnished by incorporation by reference of that earlier report.
Further, Item 5.04 (formerly Item 11), regarding pension plan blackout periods, has been revised to require the filing of Form 8-K within four business days after receipt of the required ERISA notice or, if not received, on the same date on which the company transmits a timely notice to an affected officer or director within the time period prescribed by Regulation BTR. Additionally, the item also requires the filing of updated notices under Regulation BTR.
Other Timing Issues
Limited Safe Harbor
Because several of the new Form 8-K items may require management to quickly assess the materiality of an event or to determine whether a disclosure obligation has been triggered, the final rule provides a limited safe harbor against liability for a late Form 8-K under Exchange Act Section 10(b) and Rule 10b-5. The safe harbor protection will extend until the company’s next periodic report is due. Of the new disclosure items described below, the safe harbor covers all but notice of delisting or failure to satisfy a continued listing rule or standard or a transfer of listing. The safe harbor will also not apply to any existing, transferred or expanded items. Additionally, the scope of the safe harbor will not affect the SEC’s ability to enforce any of the filing requirements. Finally, the safe harbor will not extend to material misstatements or omissions in the filing or to any other duty to disclose, such as at times when a company is buying or selling its own securities.
Form S-2/S-3 Eligibility
Failure to file a timely Form 8-K for the seven new disclosure items will not in itself disqualify a company from the use of Form S-2 and S-3 registration statements because the registrant has not filed all reports required to be filed during the last 12 calendar months. At the time the registration statement is filed, however, the registrant must be current in its Form 8-K filings. Failure to file a timely Form 8-K for any other items will continue to disqualify a company from the use of the short-form registration statements.
Rule 144 Current Public Information
The final rule amends Rule 144 to clarify that the rule’s “current public information” condition may be satisfied even though a company has not filed all required Form 8-K reports during the 12 months preceding a sale of securities pursuant to Rule 144.
Other Matters Related to Form 8-K Filings
In the release relating to the final rule, the SEC reminds reporting companies that, although the new items specify the disclosures required once a reporting requirement is triggered, Section 10(a) and Rule 10b-5 continue to prohibit material misstatements and omissions in any Form 8-K filing. Additionally, the SEC noted that where an event is reportable under more than one item, the company can file a single Form 8-K, but must identify by item number and caption all applicable items.
In addition to the amendments to Form 8-K, the final rule makes corresponding amendments to Forms 10-Q and 10-K and Item 601 of Regulation S-K. Item 601 of Regulation S-K will also be amended to clarify that a company need only file the exhibits marked in the “8-K” column of the Exhibit Table that are relevant to a particular report on Form 8-K. An instruction to Form 8-K also makes clear that if a report contains disclosures intended only to be “furnished” and not “filed,” the applicable exhibits will be deemed furnished, unless otherwise specified, even if the Form 8-K contains other items.
Form 8-K Numbering System
The format and number system will be changed as follows:
Section 1 – Registrant’s Business and Operations
Item 1.01 Entry into a Material Definitive Agreement
Item 1.02 Termination of a 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 a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
Item 2.05 Costs Associated with Exit or Disposal Activities
Item 2.06 Material Impairments
Section 3 – Securities and Trading Markets
Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing
Item 3.02 Unregistered Sales of Equity Securities
Item 3.03 Material Modifications to Rights of Security Holders
Section 4 – Matters Related to Accountants and Financial Statements
Item 4.01 Changes in Registrant’s Certifying Accountant
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
Section 5 – Corporate Governance and Management
Item 5.01 Changes in Control of Registrant
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
Item 5.04 Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans
Item 5.05 Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics
Section 6 – [Reserved]
Section 7 – Regulation FD
Item 7.01 Regulation FD Disclosure
Section 8 – Other Events
Item 8.01 Other Events
Section 9 – Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits
Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Rancho Santa Margarita, California. He can be reached at (949) 635-1240 orblebrecht@thelebrechtgroup.com with questions or comments.
Please visit our website at www.thelebrechtgroup.com for further information.
