GT Alert

Soon to be Effective 8-K Changes May Require Enhanced Disclosure Procedures

June 2004
By Ira N. Rosner, Greenberg Traurig, Miami Office

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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 basis."

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 following:

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.

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 registrant.

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 5.02); or
• 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.

Footnotes

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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