New England Biz Law Update
The Securities and Exchange Commission had planned to overhaul the 8-K reporting requirements before Wall Street stock scandals dominated the commission’s attention over the past few years. The initiative was put on hold when the focus turned to drafting the Sarbanes-Oxley Act of 2002 in response to those scandals.
However, Sarbanes-Oxley didn’t leave the issue of timely reporting unaddressed. For example, Section 409 of the Act requires public companies to disclose "on a rapid and current basis" material information about changes in its financial condition or operations.
The hope at the SEC is that the revised 8-K requirements will "benefit markets by increasing the number of unquestionably or presumptively material events that must be disclosed [and] provide investors with better and more timely disclosure of important corporate events," according to the rule as printed in the Federal Register.
(The new rule can be found in the important documents section of this website.)
The New Rules
New items 1.01 and 1.02 in the revised 8-K form are triggered by the execution, amendment or termination of a material definitive agreement outside a company’s ordinary course of business. "Material" agreements include not just unusual contracts of economic significance, but also employment agreements, benefit plans and the other agreements the SEC deems significant.
The new regs require reporting of a new direct financial obligation or an obligation under an off-balance sheet arrangement (Item 2.03), as well as an acceleration of or increase in a direct financial obligation (Item 2.04).
Companies must also now report costs associated with exit or disposal activities (Item 2.05) and material impairments (Item 2.06).
Companies must also disclose delisting, failure to satisfy a listing requirement or transfer of listing (Item 3.01). A company must also file a report if it concludes that any of its previously issued financial statements should no longer be relied upon (Item 4.02).
Currently, companies are required to report unregistered sales of equity securities on a quarterly basis on either its Form 10-K or Form 10-Q. But under the new rules, they will be required to disclose on Form 8-K sales that, subsequent to their most recent Form 10-Q or Form 8-K disclosure, aggregate 1 percent (or, for small business issuers, 5 percent) or more of the number of securities of the relevant class outstanding (Item 3.02).
Companies will now have to disclose on Form 8-K, material modifications to the rights of holders of any class of a company’s registered securities (Item 3.03). Until now, this had been required on Form 10-Q.
Under the old rule, disclosure was required only when a director resigned as a result of a disagreement and formally requested that disclosure be made. But under the new rule, disclosure will be required when a director or executive officer is appointed, retires, resigns, is removed, is terminated, or, in the case of directors, does not stand for reelection (Item 5.02).
Companies with securities registered under Section 12 of the Exchange Act must file a report on amendments to its articles of incorporation or bylaws, as well as any changes to its fiscal year (Item 5.03).
Safe Harbors
To address concerns that missing the four-business-day deadline could give rise to liability under Section 10(b) and Rule 10b-5 of the Exchange Act and could cause a company to lose S-3 eligibility, the SEC provided three "safe harbors" for late 8-K filings, but only with respect to Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06 and 4.02.
"Safe harbor mainly applies to Form S-2 and S-3 eligibility and Rule 144 eligibility. To be eligible for S-2 and S-3, you have to be current on all SEC filings for sales of insiders and affiliates. To sell under Rule 144, the company has to be current on all filings," said Tom Proost of Thompson Coburn in St. Louis.
Also, the failure to timely file an 8-K for the listed items will not constitute a violation of Section 10(b) or Rule 10b-5. This lasts only until the due date of a company’s next periodic report, in which the company must make the disclosure otherwise required by 8-K, experts said.
But outside counsel warned not to rely too heavily on these safe harbors.
"What’s provided is not a blanket safe harbor. It doesn’t exempt you from claims that should have been filed on time," Proost said.
They also cautioned that these safe harbor provisions have yet to be tested.
"We don’t really know what the real world effect of these safe harbors is going to be," said John Newell of Boston’s Goodwin Procter. "They may offer more on paper than they offer in real life. There are a lot of issues involved with late filings and it’s far from clear that the safe harbors really address them all. Don’t be reading the safe harbors and think it doesn’t matter if you don’t file this stuff on time."
– Amy Johnson Conner
