United States: New Form 8-K Disclosure Requirements Significantly Increase Number Of Items Public Companies Need To Disclose, And Shorten Time For Disclosure After August 23, 2004

New Form 8-K Disclosure Requirements Significantly Increase Number Of Items Public Companies Need To Disclose, And Shorten Time For Disclosure After August 23, 2004

On August 23, 2004, new rules went into effect which significantly increase the number and type of events that must be reported by public companies on SEC Form 8-K, and which shorten the deadline for filing a Form 8-K in most cases to four business days from the occurrence of the triggering event. These new requirements, which were adopted by the SEC in response to the provisions of the Sarbanes-Oxley Act of 2002 that require public companies to disclose material information on a "rapid and current basis," will have a dramatic impact on financial institutions that are public companies, as well as their borrowers, customers, vendors and competitors that are public companies.

The SEC’s new rules substantially revise Form 8-K and clarify a number of related matters. Among other things, the new rules: (i) add eight new disclosure items to Form 8-K; (ii) transfer two existing disclosure items from periodic reports (i.e., annual and quarterly reports on Forms 10-K and 10-Q) to Form 8-K; and (iii) expand the required disclosure under two items previously covered by Form 8-K. In addition, the new rules shorten the filing deadline for most items to four business days after occurrence of the triggering event.

The new disclosure items added to Form 8-K are as follows:

• Material Definitive Agreements— Entering into, amending or terminating (other than termination in accordance with its terms) a material definitive agreement outside the ordinary course of business;

• Material Financial Obligations or Off-Balance Sheet Arrangements— The occurrence of certain triggering events (e.g., events of default) that result in the increase or acceleration of a material direct financial obligation or off-balance sheet arrangement;

• Exit or Disposal Plans—Approval or authorization of an exit or disposal plan which will result in a material charge under GAAP;

• Material Charge for Impairment— Determination that a material charge for impairment to one or more of the company’s assets is required under GAAP;

• Delisting or Failure to Comply with Listing Standards—Notice from a national securities exchange (NYSE or AMEX) or NASDAQ that the company is being delisted or failed to satisfy listing standards; and

• Non-Reliance on Financial Statements— Determination that previously issued financial statements, audit reports or interim financial statement reviews should not be relied on.

The disclosure items transferred from periodic reports are:

• Unregistered Sales of Securities— Sales by the company of its equity securities in a transaction that is not registered under the Securities Act of 1933; and

• Modification of Rights of Security Holders—Material modifications to rights of security holders and the general effect of the modification.

The expanded disclosure items are:

• Departure and Election of Directors and Principal Officers—Departure of directors and principal officers (regardless of circumstances) and election or appointment of new directors or principal officers; and

• Amendment to Articles or Bylaws or Change of Fiscal Year—Amendments to articles or bylaws (if not disclosed in previously filed proxy statement) and changes to the company’s fiscal year.

In order to comply with the new Form 8-K requirements, public companies will have to implement a number of procedures that could impact a broad cross-section of the company. Some practical considerations for financial institutions—both for themselves if they are a public company, and for their borrowers, customers, vendors and competitors that are public companies—are as follows:

As part of the new rules put in place under the Sarbanes-Oxley Act, the SEC added Rule 13a-15(d), which requires public companies to have disclosure controls and procedures. Rule 13a-15(d) defines "disclosure controls and procedures" as controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted with the SEC under the Exchange Act are recorded, processed, summarized and reported within the required timeframes. The new Form 8-K requirements will require public companies to assess their disclosure controls and procedures, to ensure that they have in place controls and procedures that cover all the new and expanded Form 8-K disclosure items, such that these events are recorded, processed, summarized and reported within four business days of the triggering event. All persons involved in this process must be made aware of the new requirements and the four business-day filing deadline, to ensure timely filing of required reports.

Expanding the Form 8-K Compliance Team. The new Form 8-K requirements will command a much broader approach to Form 8-K compliance, rather than just involving the legal department, the corporate secretary’s office and/or the compliance area, as illustrated by the following examples:

• Accounting/Finance Department. Determinations with respect to certain financial matters, including approval or authorization of a material charge for impairment, approval or authorization of an exit or disposal plan which will result in a material charge under GAAP and determinations with respect to nonreliance on financial statements, must be reported on Form 8-K within four business days. Accordingly, persons in the finance, accounting or other departments who are responsible for these determinations must be included in the company’s Form 8-K compliance team, to ensure that these events are reported on a timely basis. If determinations with respect to these matters are made by the board of directors or a committee of the board, prompt notice of the board or committee action must be given to the persons responsible for timely filing of a Form 8-K.

• HR Department. In light of the required disclosures with respect to changes in the company’s principal officers, personnel from the human resources or other department responsible for employee matters should participate in Form 8-K compliance. Moreover, the definition of material definitive agreements generally covers any compensatory plan, contract or agreement with the company’s CEO or its other executive officers. Accordingly, under new Form 8-K, any new agreement or amendment to an agreement with any of these persons will generally trigger a filing obligation, and the persons responsible for these agreements will have to notify the Form 8-K team.

• Material Definitive Agreements. Under the new rules, a public company will be required to file a Form 8-K any time it enters into, amends or terminates (other than termination in accordance with its terms) any material definitive agreement. The 8-K will have to describe the agreement or amendment and provide certain other information. In order to be in a position to comply with these obligations, public companies will have to ensure that they have procedures in place to identify material definitive agreements; notify the proper persons if these agreements are entered into, amended or terminated; and prepare and make the required filings in a timely manner. Any employee who is likely to be involved in negotiating or executing a material agreement, such as a member of the legal department and senior management, must be included in this process. An afterthe- fact email or "survey" to ascertain whether any material contracts have been executed will probably not be sufficient to ensure compliance, unless these reminders were to be sent on a daily basis (which would seem to be an extremely cumbersome and ineffective process).

The primary credit facility for virtually every public company is a material contract. Accordingly, under the new rules, borrowers will have a period of four business days from entering into or amending their credit facility to file a Form 8-K describing the agreement or amendment. The borrower may need the cooperation of the lender and its counsel to meet this deadline. For example, while a copy of the agreement or amendment does not have to be filed with the initial 8-K (a copy must be filed with the next periodic quarterly or annual report), the SEC encourages public companies to file the agreement or amendment with the 8-K if feasible. The lender and its counsel may be asked to provide an electronic version of the agreement or amendment to the borrower or its counsel, to facilitate filing as an exhibit to the initial 8-K. The lender and its counsel may also be asked to assist in reviewing the description of the credit facility or address confidentiality issues.

The expanded Form 8-K disclosure items will provide public access to a much broader range of information about public companies on a more expedited basis. Use of the company’s website or the SEC’s EDGAR database to access this information will enable financial institutions to obtain a significant amount of information about their public company borrowers, customers and vendors, as well as their competitors, on a more rapid and current basis. In addition, financial institutions may be able to track developments in a particular industry or market segment by watching reports on Form 8-K by a particular group of public companies. In this regard, the new Form 8-K requirements may provide financial institutions with the ability to better identify opportunities in their target markets, as well as keep a closer watch for signs of trouble in particular industries.

This article is presented for informational purposes only and is not intended to constitute legal advice.