Soon to be Effective 8-K Changes May Require Enhanced Disclosure Procedures
By Ira N. Rosner, Greenberg
Traurig, Miami Office
View or download the PDF version of this Alert.
As the effective date of new current reporting requirements under Securities
and Exchange Commission Form 8-K nears, public companies need to ensure
that their disclosure controls and procedures will meet the challenges created
by these rules. Earlier this year, the SEC announced final rules which greatly
revised the reporting regime under Form 8-K with an effective date of August
23, 2004. In addition to reorganizing existing reporting items into new
topical sections, the new rules significantly expand mandatory reporting
for a series of events that affect day to day operations. What is more,
the new rules generally establish a uniform four business day reporting
requirement in observance of Congress’ mandate under Sarbanes-Oxley to create
real time reporting of corporate developments. Given that some of the new
reporting requirements may cover areas that might previously have been viewed
as ordinary course or not requiring reporting until the filing of a periodic
report, public companies will need to be more sensitive to the potential
to report transactions and events on a current basis.
|"Given that some of the new reporting
requirements may cover areas that might previously have been viewed
as ordinary course or not requiring reporting until the filing of
a periodic report, public companies will need to be more sensitive
to the potential to report transactions and events on a current
While many of the 8-K topics remain significant events that currently
have the attention of senior management, such as acquisitions or dispositions
of significant assets or businesses, changes in control or changes in accountants,
some of new topics are distinctly operational in nature. Accordingly, these
will require greater participation by financial reporting and management
executives to ensure timely communication of operational developments so
that the reporting obligations can be assessed and, if necessary, fulfilled.
In addition, many of the new 8-K items will require management to make rapid
and sensitive materiality determinations and quickly compile financial impact
estimates. In its release, the SEC also stressed the need for 8-K reports
to provide “all other material information, if any, that is necessary to
make the required disclosure, in the light of the circumstances under which
it is made, not misleading.” Moreover, certain topics that may previously
have been reported on a voluntary basis without a specific due date under
old “Item 5 – Other Events” are now mandatory reports falling under the
four day requirement.
While there are new items, such as “Item 3.01 Notice of Delisting,” that
are likely to have the full attention of senior management from the outset,
key reporting subjects under the new 8-K rules that may pose particular
challenges to registrants’ disclosure controls and procedures include the
Item 1.01 Entry into a Material Definitive Agreement requires
current reporting if a registrant enters into a non-ordinary course material
agreement1. While senior management should ordinarily be aware of such agreements,
what is viewed as ordinary course by the SEC rules will require care and
attention in determining reporting obligations.
Item 1.02 Termination of a Material Definitive Agreement requires
current reporting if a non-ordinary course material agreement (as defined
for Item 1.01 purposes) is terminated other than as a result of expiration
in accordance with its terms.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation
under an Off-Balance Sheet Arrangement of a Registrant requires current
reporting if a registrant incurs certain direct material financial obligations
such as long term debt or capital leases, or becomes contingently liable
for a material obligation under an off-balance sheet obligation, such as
a guarantee. If a registrant enters into a facility that creates or may
in the future create direct financial obligations, such as a credit facility
under which advances would be classified as long term debt, that event would
require reporting, as well as the creation of obligations as they arise
under the facility to the extent material. Accordingly, registrants may
have to report the drawing of an advance under a credit facility that provides
for term loans constituting long term debt. Also, short term debt arising
other than in the ordinary course will require current reporting under this
Item 2.04 Triggering Events that Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement requires
current reporting upon the occurrence of a “triggering event” that causes
an increase in or accelerates a direct financial obligation or a contingent
obligation under an off-balance sheet arrangement that in any case is material.
Thus the default of the primary obligor under an obligation that is guaranteed
by a registrant would require disclosure on Form 8-K if material to the
Item 2.05 Costs Associated with Exit or Disposal Activities requires
detailed disclosures if a board of directors, board committee or authorized
officer commits a registrant to an exit or disposal plan, disposition of
long-lived assets or terminates employees under a plan falling under paragraph
8 of Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The required disclosures include an
estimate of costs or expenses to be incurred unless at the time of filing
a good faith estimate is not possible. In that case, the Form 8-K must be
amended when the estimate is available.
Item 2.06 Material Impairments requires disclosure if a board
of directors, board committee or authorized officer concludes that a material
charge for impairment of assets is required pursuant to GAAP. This would
include a charge to goodwill. As with Item 2.05, an estimate of the charge
is required at the time of filing or when such estimate becomes available.
The revised Form 8-K rules also added additional new items triggering
current reporting, although most of these should not pose internal reporting
challenges. For example, current reports are now required if the registrant:
- receives notice of delisting or failure to satisfy a continued listing
rule (Item 3.01);
- determines that it can no longer rely on previously issued financial
statements, related audit reports or interim reviews (Item 4.02);
- has a departure or addition of a principal officer or director (Item
- amends its articles of incorporation or bylaws (Item 5.03).
In addition, reporting of unregistered sales of equity securities and
material modifications to the rights of security holders, previously required
in periodic reports on Form 10-K or 10-Q, are now required in Form 8-K.
The SEC has also recognized that the expanded reporting regime and
shortened deadlines may impose significant burdens on management.
Accordingly, the SEC has provided a limited safe harbor under Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 if a
registrant does not timely file a Form 8-K covering Items 1.01, 1.02,
2.03, 2.04, 2.05, 2.06 and 4.02(a) described above. However, if
disclosure of an event would be required other than pursuant to Form 8-K
(for example, a disclosure of a material development required generally
under Rule 10b-5), the safe harbor would not be available. Also, the
safe harbor extends only until the due date of periodic report of the
company for the relevant period in which the Form 8-K is not filed.2
In any event, the new Form 8-K requirements will require additional management
vigilance and planning. Public companies should carefully review the new
rules and, together with counsel, assess whether they will require any changes
in their disclosure controls and procedures.
1 Generally, “material agreement” and “ordinary
course” are defined for these purposes consistently with Item 601(b)(10)
of Regulation S-K.
2 For example, if the event giving rise to the
Form 8-K filing occurred during the first quarter, then the safe harbor
expires on the due date of the first quarter Form 10-Q or 10-QSB.
© 2004 Greenberg Traurig
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