Corporate Compliance: SEC Adopts Rules Requiring Disclosure On A Rapid And Current Basis

Friday, October 1, 2004 - 01:00

Justin P. Klein
Ballard Spahr Andrews & Ingersoll,

On August 23, the Securities and Exchange Commission's (SEC) final rules
amending Form 8-K, which is used by reporting companies to disclose important
corporate events on a current basis, became effective. The final rules add eight
new disclosure items, transfer two existing disclosure items from other periodic
reports and expand two existing disclosure items. The SEC also shortened the
reporting deadline to four business days for all items (except voluntary and
Regulation FD disclosures). The amendments are part of the SEC's response to the
disclosure goals set out in Section 409 of the Sarbanes-Oxley Act, which
requires public companies to disclose, on a "rapid and current basis," certain
material information regarding changes in a company's financial condition or

This article summarizes the eight new, two transferred and two expanded
disclosure items in Form 8-K and suggests practical tips that companies can take
to comply with the expanded and accelerated reporting requirements. Readers
should refer to the amended Form 8-K for the details of the new and amended
disclosure requirements.

New Form 8-K Items

Item 1.01 Entry into a Material Definitive Agreement - requires a
company disclose when it enters into a material definitive agreement, or a
material amendment thereto, that is not made in the ordinary course of business
and which is enforceable against the company. Such material definitive agreement
may be filed with the Form 8-K or as an exhibit to the company's next periodic
report or registration statement.

Item 1.02 Termination of a Material Definitive Agreement - requires
disclosure if a material definitive agreement is terminated (other than by
expiration or as a result of all parties completing their obligations under such
agreement), and such termination is material to the company.

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant - requires disclosure of any
material direct long-term debt obligation, a capital lease obligation, an
operating lease obligation or a short-term debt obligation that arises other
than in the ordinary course, and any material obligation arising out of an
off-balance sheet arrangement to which the company becomes directly or
contingently liable.

Item 2.04 Triggering Events that Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement - requires
disclosure of any material consequences of a triggering event that causes an
increase or the acceleration of direct financial obligation of the company, or
the material consequences of any triggering event that causes a company's
obligation under an off-balance sheet arrangement to increase or be accelerated,
or become a direct financial obligation.

Item 2.05 Costs Associated with Exit or Disposal Activities - requires
disclosure when a company's board or authorized officer 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 under which material charges
will be incurred under GAAP.

Item 2.06 Material Impairments - requires disclosure when a company's board
or authorized officer concludes that a material charge for impairment to one or
more of its assets (including securities or goodwill) is required under GAAP,
except where 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 plan is disclosed in the company's periodic report for that period.

Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule
or Standard; Transfer of Listing - Part (a) of this item requires disclosure of
receipt of a notice from a company's principal securities exchange/association
that lists the company's stock, indicating that the company or its securities
does not satisfy a rule or standard for continued listing or that the principal
exchange/association is seeking to delist such company's securities. Disclosure
must be provided even if the company has the benefit of a grace period or
similar extension period during which it may cure the deficiency triggering the
disclosure requirement. Part (b) requires disclosure if the company notifies the
principal exchange that it is aware of any material noncompliance with a rule or
standard for continued listing. Part (c) requires disclosure if the principal
exchange issues a public reprimand letter or similar communication indicating
that the company has violated a rule or standard of the exchange or association.
Part (d) requires disclosure if the company's board or authorized officer has
taken definitive action to cause the company's delisting.

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review - requires disclosure if and when (a) a
company's board or authorized officer concludes that any previously issued
financial statements no longer should be relied upon because of an error in such
financial statements or (b) a company's independent accountant notifies the
company 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 the company receives such notice, the company must provide the independent
accountant with a copy of the disclosures it is making under this Item no later
than the same day it files these disclosures with the SEC. The company also must
request that the independent accountant furnish to the company as promptly as
possible a letter addressed to the SEC stating whether the accountant agrees
with the statements made by the company and, if not, indicating the statement
with which it disagrees. The company must then amend its previously filed Form
8-K by filing the independent accountant's letter as an exhibit to the filed
Form 8-K within two business days after the company's receipt of the letter.

Transferred Disclosure Items

Item 3.02 Unregistered Sales of Equity Securities - requires disclosure of a
company's aggregate sales of its unregistered equity securities since the
company's most recent Form 8-K or periodic report, if such sales constitute more
than 1 percent of the company's outstanding securities of that class.

Item 3.03 Material Modifications to Rights of Security Holders - requires
disclosure of material modifications to the rights of the holders of any class
of a company's registered securities and to briefly describe the general effect
of such modifications on such rights.

Expanded Disclosure Items

Item 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers - requires disclosure of (a) the
resignation or refusal to stand for re-election of a director due to a
disagreement or removal for cause, (b) retirement, resignation or termination of
certain principal executive officers and the departure of directors other than
for cause, (c) the appointment of new senior officers and (d) the election of
directors other than at an annual shareholder meeting. In addition, the company
must file as an exhibit to Form 8-K any written correspondence provided by the
director concerning the circumstances surrounding his or her departure.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year - requires disclosure of amendments to a company's articles or bylaws or a
change in a company's fiscal year that were not previously filed or disclosed in
a proxy statement or information statement.

New Safe Harbor

In light of the increased filing requirements and shortened filing deadlines,
the SEC created a limited safe harbor under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder if a company fails timely to file
under items 1.01, 1.02, 2.03-2.06 and 4.02(a). The safe harbor extends only
until the required filing date of the company's periodic report for the relevant
period. Companies that fail to file timely reports required by such items of
Form 8-K will not lose their eligibility to use Form S-2 or Form S-3
registration statements, provided that the company is current in its Form 8-K
filings at the actual time of a Form S-2 or Form S-3 filing.

In addition, the new rules modify Rule 144 under the Securities Act of 1933
to clarify that a company need not have filed all required Form 8-K reports
during the 12 months preceding a sale of securities pursuant to Rule 144 to
satisfy that rule's "current public information" condition.

Tips For Preparing For The Amended Form 8-K Requirements

In light of the new four business day filing deadline for reports on Form
8-K, companies should examine their procedures and safeguards necessary to
process relevant information up the management chain and to disclose such
information in the manner required by the rule. In this regard, companies may
consider taking the following steps:

  • Train employees about the new disclosure requirements of Form 8-K, and
    tailor training to those individuals most likely to be aware of reportable
    events, such as finance, business development and contract management personnel.

  • Develop a checklist relating to the Form 8-K disclosure requirements
    (consider posting it on the company's intranet).

  • Identify an officer or committee responsible for coordinating the company's
    Form 8-K disclosure, and ensure that there are open lines of communication
    between that person or committee and those members of management and other
    employees that may become involved with reportable items.

  • Develop a rapid response plan for accelerated preparation and review of the
    disclosures required by Form 8-K.

  • Scrutinize letters of intent and other non-binding agreements to verify that
    they do not contain binding provisions that would make them reportable under
    Item 1.01.

  • Inform appropriate management personnel that creation of off-balance sheet
    arrangements, whether or not the company is a party, may trigger a disclosure
    obligation under Item 2.03.

  • Develop procedures and contact lists with the company's auditors to
    coordinate any disclosures of material impairments required by Item 2.06.

  • Review all Form 8-K reports filed during each periodic report preparation
    process to ensure that all required exhibits were filed on Form 8-K or will be
    filed with the periodic report.

Amend disclosure controls and procedures to add provisions related to the new
Form 8-K requirements.

Justin P. Klein is a Partner in the Business &
Finance Department, Partner-in-Charge of the Securities Group, and a Member of
the Mergers and Acquisitions Group, Securitization Group, and Technology and
Emerging Companies Group of Ballard Spahr Andrews & Ingersoll, LLP. He is a
former Assistant Director of the SEC's Division of Corporation Finance.