Preparing for the Form 8-K Accelerated and Expanded Reporting Requirements

Originally Published on July 22, 2004

Article by Ettore A. Santucci, P.C., Joseph L. Johnson III, James A. Matarese, Scott F. Duggan and John O. Newell

Summary

Effective August 23, 2004, new SEC rules will:

• Accelerate the deadline for filing Form 8-K reports to four business days after a reportable event occurs; and
• Significantly expand the events that companies must report on Form 8-K.

The new Form 8-K rules will require companies to identify and evaluate the significance of reportable events, and then to prepare and file a report with the SEC if necessary, within a very limited period of time. In many cases this process will be complicated by the nature of the new reportable events, which will require speedy recognition and internal reporting, sound judgments about the potential materiality of these events, and timely preparation and filing of Form 8-K reports.

To prepare for the new Form 8-K requirements, companies should test their internal reporting structures, as well as their disclosure controls and procedures. This advisory discusses steps companies may wish to consider as they prepare for this significant change in SEC reporting requirements, and summarizes the principal new and amended reporting requirements of Form 8-K.

The new Form 8-K rules become effective for events that occur on or after August 23, 2004 and will apply to all companies that are required to file Form 8-K reports, including small business issuers. Investment companies and foreign private issuers are not subject to Form 8-K reporting requirements. The text of the SEC release is available on the SEC Web site at http://www.sec.gov/rules/final/33-8400.htm.

Introduction

Expanded Reporting Requirements.

A summary table listing the new Form 8-K sections and the reportable events contained in each section is included at the end of this advisory. The SEC amendments to Form 8-K will significantly expand the scope of events subject to mandatory reporting and reorganize the reporting requirements into various topics. In addition to creating eight new disclosure requirements, the SEC amendments will move two existing reporting requirements from other reports into Form 8-K and expand two other existing Form 8-K requirements. The most significant new or amended reportable events and the required disclosures are summarized in a subsequent section of this advisory.

Accelerated Filing Deadline.

The amendments will shorten the time for filing Form 8-K reports to four business days after the occurrence of an event that is subject to mandatory reporting. Voluntary disclosures of material events and Regulation FD disclosures are not affected by the shortened filing deadline. In addition, the amendments will not change the requirement that companies intending to take advantage of the exception for earnings conference calls or presentations that occur within 48 hours after a related written earnings announcement or release must submit the written earnings release on Form 8-K before the call begins. As discussed below, several of the reportable events may require companies to update a previously filed Form 8-K report, and two of these requirements (letters received under certain circumstances from auditors or departing directors) have a two business day filing deadline.

To deal with the concerns of many commenters about the originally proposed two business day filing deadline, the SEC adopted a limited safe harbor for antifraud liability under the Securities Exchange Act of 1934 for failures to report seven of the 19 mandatory reporting events. The SEC limited the safe harbor to these seven events, which are indicated on the attached summary table with an asterisk, because they will require companies to evaluate rapidly whether a reportable event has occurred and whether the event is material to the company.

The safe harbor has several significant limitations, however. First, it applies only to the seven specified reportable events. Second, it applies only to failures to file a required report, not to misstatements or omissions in reports that a company does file. Third, it does not apply if a company has a disclosure obligation that arises outside of Form 8-K – for example, when a company or an insider is purchasing or selling company securities while in possession of material nonpublic information. Fourth, the safe harbor applies only until the company’s next quarterly or annual report is due. Finally, it does not affect the SEC’s ability to impose liability for failures to file a required report within the four business day deadline. SEC enforcement staff members have indicated in oral presentations that they will scrutinize late Form 8-K filings and expect to make late filings an enforcement focus.

The SEC also adopted related amendments that provide that failures to file required Form 8-K reports on time will not affect the availability of short-form registration statements Form S-3 and Form S-2 or the ability for security holders to rely on Rule 144 for resales of company securities. However, because the mandatory Form 144 notice will continue to require selling security holders to represent that they do not have any material inside information, the amendments to Rule 144 will generally not benefit executive officers and directors of a company that fails to file a required Form 8-K report until the required disclosure has otherwise been filed in a Form 10-Q or 10-K report.

In addition to the limitations on the safe harbor outlined above, companies should bear in mind that a variety of other factors may further limit the practical usefulness of the safe harbor. Examples of these factors may include, among others: the effect of the late filing on the CEO and CFO evaluations and certifications concerning disclosure controls and procedures; the possibility that the company’s independent accountants may view a late filing as evidence of a deficiency in the company’s internal control over financial reporting; the possibility of inadvertent illegal purchases or sales of company securities by the company or insiders during an unrecognized filing deficiency; and the possibility of adverse effects on investor perceptions and market confidence.

Preparing for the New Rules

As the summary above indicates, the new Form 8-K requirements will impose significant new reporting burdens on public companies. The effective operation and structure of a company’s disclosure controls and procedures will be more critical than ever. Because the safe harbor for late filings provides only limited relief, minimizing the possibility of late Form 8-K filings should be an area of focus as companies establish procedures to comply with the new Form 8-K requirements. Companies should evaluate and consider enhancements to their internal reporting and disclosure structures before the new Form 8-K requirements become effective on August 23, with particular focus on:

• Which company personnel are authorized to take actions that may be reportable, or would have first knowledge that a reportable event will occur or has occurred?
• Which company personnel must report information internally, and to whom is what information reported?
• How promptly and how frequently (immediate versus quarterly) is internal reporting required?
• What internal education and training will ensure that reportable events are recognized and promptly reported internally?
• How well adapted are the company’s disclosure processes and disclosure committee structure for complying with the new Form 8-K events and deadlines?

Potential areas of particular concern include the following:

• Material agreements that may be entered into, amended or terminated;
• Material direct financial obligations and off-balance sheet arrangements that may be created, or may be accelerated or increased after a triggering event; and
• Material asset impairment determinations, and determinations related to exit, disposal or termination plans under applicable accounting standards.

Some or all of the considerations outlined in the following paragraphs may be helpful in evaluating how well prepared a company is to comply with the new Form 8-K requirements.

Corporate Operations and Authority Structure.

As a starting point, companies may wish to identify existing material contracts, financial obligations, off-balance sheet arrangements and other documents, commitments or relationships that could trigger reporting requirements under Form 8-K. This review should also identify which personnel could take actions that could trigger a reporting obligation. Examples of these actions include signing or approving new material agreements or amendments of existing material agreements, making determinations about accounting matters subject to reporting under the new Form 8-K rules, involvement in changes in directors or senior officers, sales of securities in private offerings, and involvement in matters related to the listing of the company’s securities.

This review will depend to a large extent on the nature of the company’s business and its organizational structure. As part of this review, a review of historical and anticipated events that would be reportable under the new Form 8-K requirements may help to identify individuals or functional areas of the company that are likely to have the earliest knowledge of a potentially reportable event. The results of this evaluation will help to indicate where the company should focus internal education efforts, create new reporting channels, and in some cases change existing authority to take actions that could lead to a reportable event.

This review could also include developing and maintaining a database of material agreements, material direct financial obligations, material off-balance sheet arrangements, and other potentially reportable company obligations, arrangements or conditions that will facilitate ongoing compliance with the Form 8-K requirements. Companies may also wish to consider incorporating specific review of potential disclosure obligations into internal procedures that relate to any event that could result in a Form 8-K filing obligation. Company procedures should include the capability to file a required Form 8-K report and make any related public disclosures within four business days after any reportable event occurs.

Corporate Reporting Channels.

The structure of the company’s internal reporting channels is closely related to the authority of company personnel and the structure of the company’s functional areas. For example, among other considerations, companies should review internal requirements and procedures for obtaining approvals and how various business and legal notices are handled. Reporting policies for internal control purposes are not necessarily the same as for SEC disclosure purposes, so companies should consider whether modifications of their reporting structures, as a whole, would be advisable to facilitate timely compliance with the new Form 8-K requirements. Where personnel or functional areas are identified as being likely to have early knowledge of reportable events, this should be reflected in the structure and timing requirements of their reporting responsibilities to provide the earliest possible internal notice to the company’s disclosure committee.

Internal Training.

After reviewing the issues outlined above, companies should consider what steps would be appropriate to train personnel about how and when they must report various events and actions internally. Training should be targeted to an individual’s or group’s business function and responsibilities, and should facilitate both recognition of reportable events and timely internal responses. Companies should tailor this training so that it is specifically relevant, and avoid "over-training" that may be neither efficient nor effective. In some cases, training should include the potential requirements for follow-up reporting required for some reportable events after the initial report. These are noted in the relevant sections below under the "Updating Requirement" captions. Training should be supplemented with easily understood checklists or reference materials. In addition, companies should update training when necessary and should provide "refresher" training at annual or other appropriate intervals.

Disclosure Policies.

Several of the new Form 8-K requirements, particularly those related to material non-ordinary course agreements and asset acquisitions and dispositions, incorporate existing SEC requirements and guidance (Item 601(b)(10) of Regulation S-K for material contracts, Rule 11-01 of Regulation S-X for material acquisitions, and Item 303(a)(5) of Regulation S-K for financial obligations). While this approach offers the benefit of consistency, it will require companies to consider carefully their current internal reporting and SEC disclosure policies to be sure that they work properly in the context of the shorter deadlines and higher visibility of Form 8-K filings and avoid inconsistencies between their Form 8-K reports and other SEC filings.

Disclosure Committee Structure.

Each company should evaluate how well adapted the structure of its disclosure committee is in light of the new Form 8-K requirements. Committee membership and procedures that are well suited to quarterly and annual reporting requirements, which are generally more comprehensive in scope and occur at regular intervals, may not work well for the more discrete but episodic reporting requirements of Form 8-K after August 23. Companies should consider the effects of the shortened filing deadline and the potentially complicated accounting and legal disclosure requirements when reviewing their current disclosure committee structure and procedures. One possible response would be to create a subcommittee to handle the new Form 8-K reports.

Outside Professional Advisors.

The nature of many of the new Form 8-K reportable events makes it inevitable that companies will need to work more closely with their independent auditors and counsel. The disclosure committee (or a subcommittee designated to handle Form 8-K reporting) will need to be aware of the need for – and have immediate access to – advice from independent accounting and legal advisors.

Filing Mechanics Issues.

Unlike Section 16 reports, the SEC has not extended same-day EDGAR electronic filing hours to 10 p.m. Eastern time. As a result, companies must file Form 8-K reports by 5:30 p.m. Eastern time in order to avoid next-day treatment by the EDGAR system, which could result in the filing being late. This effectively shortens the time available for companies located outside of the Eastern time zone to file Form 8-K reports, and should be considered by these companies when planning for the new Form 8-K requirements.

New and Amended Disclosure Events

The new Form 8-K requirements include several significant new reportable events, as well as several significant amendments to existing Form 8-K events and additional events relocated from other SEC reports. The discussion that follows summarizes the most significant new and amended requirements, with particular emphasis on those that are likely to present the greatest compliance challenges. Due to the length and complexity of these requirements, readers should be aware that the following discussion is only a broad outline of these events and the related disclosures. Companies should refer to the complete text of Form 8-K and related SEC rules, and obtain qualified professional accounting and legal advice, when evaluating disclosure obligations.

Form 8-K continues to require a company to report changes in control of the company; bankruptcy or receivership of the company; changes in the company’s auditor; amendments to, and waivers of, the company’s code of ethics; suspension of trading under company benefit plans; and earnings releases and similar information about the company’s results of operations. In addition Form 8-K still provides for optional filing or furnishing of other material information and Regulation FD disclosures.

The original SEC proposal would have required a "mini-MD&A" section that discussed management’s analysis of the effect of several of the new reportable events. Although the SEC did not adopt this requirement, the SEC has stressed that Form 8-K reports are subject to Rules 10b-5 and 12b-20. Form 8-K reports must therefore include not only the specific information required by Form 8-K, but also any additional information required to make the statements in the report not misleading under the circumstances. Companies will need to consider whether each Form 8-K satisfies these more general disclosure requirements. In addition, companies must remember that they may be subject to other obligations to disclose material information, such as known events, contingencies, uncertainties or trends, in other SEC filings even if they determine that no Form 8-K report would be required.

Entering into, Amending or Terminating a Material Non-Ordinary Course Agreement

Items 1.01 and 1.02 will require companies to file a Form 8-K report when they enter into, materially amend or terminate a material definitive agreement that is not made in the ordinary course of business. The SEC eliminated the proposed requirement to disclose entry into non-binding agreements, but Form 8-K will require companies to report entry into a material agreement even if the agreement is subject to conditions. Disclosure of a termination is not required if the agreement expired on its stated termination date or as a result of all parties completing their obligations under the agreement. An instruction states that Item 1.02 does not require disclosure during negotiations or discussions concerning termination unless and until the agreement is terminated.

The disclosure requirements for Items 1.01 and 1.02 are generally similar, and include:

• The date on which the agreement was entered into, amended or terminated;
• The identity of the parties to the agreement or amendment and a brief description of any material relationships between the company and its affiliates and any other parties to the agreement;
• A brief description of the terms and conditions of the agreement or amendment that are material to the company; and
• For terminations, a brief description of the material circumstances surrounding the termination and any material early termination penalties incurred by the company.

A company must disclose material amendments to a material definitive agreement even if the underlying agreement previously has not been reported on Form 8-K, either because the company entered into the agreement before the new Form 8-K requirements became effective or because the amendment itself results in the agreement becoming a material definitive agreement.

Updating Requirement.

Although the SEC eliminated the proposed requirement to file material agreements and amendments as exhibits to Form 8-K reports, companies must file material agreements and amendments as exhibits to their next 10-Q, 10-K or registration statement. Among other things, this should allow companies a better opportunity to seek confidential treatment of sensitive terms of the agreement. However, the SEC has encouraged companies to file agreements with the Form 8-K when feasible, particularly if the company will not be seeking confidential treatment of the agreement.

Items 1.01 and 1.02 of Form 8-K parallel the exhibit filing requirements of Item 601(b)(10) of Regulation S-K with regard to the types of agreements that are material to a company for other SEC filings, such as Form S-3 and S-1 registration statements and Form 10-Q and 10-K reports. Companies should therefore consider how they will deal with material agreements generally and ensure that they will not be treated inconsistently without adequate review. These following key principles apply to Items 1.01 and 1.02:

• Agreements of the type that ordinarily accompany the kind of business conducted by the company will be deemed to have been made in the ordinary course of business and therefore will not be subject to disclosure under Item 1.01 or 1.02 of Form 8-K;
• The following categories of agreements, among others, are specifically included in the reporting requirement unless immaterial in amount or significance:
• Any agreement to which directors, officers or significant stockholders are parties;
• Any agreement upon which the company’s business is substantially dependent, as is the case of continuing agreements to sell the major part of the company’s products or services;
• Any agreement calling for the acquisition or sale of any property, plant or equipment for consideration exceeding 15% of the company’s consolidated fixed assets; and
• Any material lease under which the company’s assets are held.

For guidance on whether an agreement might be significant enough to trigger disclosure, companies can look to the following sources, among others, as they craft compliance policies:

• Item 101(c)(1)(vii) of Regulation S-K, which requires the narrative description of a company’s business in its Form 10-K to disclose any customer which in the aggregate accounts for over 10% of consolidated revenues and the loss of which would have a material adverse effect on the company as a whole;
• Item 601(b)(10)(ii)(C) of Regulation S-K, which provides that an agreement relating to the acquisition or sale of assets for consideration that exceeds 15% of the company’s consolidated fixed assets must be filed as an exhibit to specified SEC filings; and
• Item 601(b)(10)(ii)(B) of Regulation S-K, which requires disclosure of any agreement upon which the company’s business is substantially dependent, as in the case of continuing agreements to sell the major part of the company’s products or services; this standard is directly and expressly binding in complying with Item 1.01 of Form 8-K, but is also the least specific among the various possible approaches because it contains no quantitative threshold.

Although quantitative standards such as the examples above may be helpful in evaluating the materiality of an agreement or amendment, companies should remember that SEC Staff Accounting Bulletin No. 99 prohibits exclusive reliance on quantitative standards. Materiality judgments will require careful evaluation of all relevant factors.

Companies should be aware that an agreement that is subject to closing conditions, including satisfactory conclusion of due diligence conditions, may be a "definitive" agreement subject to reporting under Item 1.01 when the company enters into the agreement. Item 1.01(b) of Form 8-K states that "a material definitive agreement means an agreement that provides for obligations that are material to and enforceable against the company, or rights that are material to the company and enforceable by the company against one or more other parties to the agreement, in each case whether or not subject to conditions." In a footnote to the adopting release, the SEC further stated that "a material definitive agreement which is subject to customary closing conditions such as . . . completion of due diligence must be disclosed under Item 1.01 when such agreement is enforceable against or by the company, despite the fact that such conditions have not yet been satisfied. However, if a company enters into a non-binding letter of intent . . . that also contains some binding, but non-material elements, such as a confidentiality agreement or a no-shop agreement, the letter . . . does not need to be disclosed because the binding provisions are not material."

With respect to disclosure of the termination of material agreements, the SEC made it clear in Instruction 1 to Item 1.02 that no Form 8-K disclosure is required during negotiations or discussions regarding termination of a material definitive agreement unless and until the agreement has been terminated. In addition, Instruction 2 to Item 1.02 states that no disclosure is required if a company believes in good faith that an agreement has not been terminated, unless the company receives notice of termination. Therefore, in most cases contract counterparties will not be able to use the threat of potential negative market reaction to Form 8-K disclosure of potential early termination or non-renewal of an agreement to pressure the company during negotiations because Item 1.02 does not require companies to report either a threatened termination of a material agreement or its expiration on its stated termination date. In situations where a company believes that termination of a material agreement is possible, but has received no formal notice to that effect, the company may choose to disclose that possibility voluntarily, accompanied by a statement that the company believes the agreement is still in effect. In that case, the company may be required to file a subsequent amendment to the Form 8-K if the agreement is later terminated. As noted earlier, companies should be aware that SEC rules may require disclosure of known events, contingencies or uncertainties in other SEC filings, such as registration statements and quarterly and annual reports, even in instances where Form 8-K does not require disclosure.

Completion of Acquisition or Disposition of Assets

Item 2.01 retains most of the requirements of former Item 2 of Form 8-K with respect to the completion of acquisitions and dispositions of a significant amount of assets otherwise than in the ordinary course of business. The main exceptions are elimination of disclosures of (i) the formula or principle used in determining the price where no material relationship exists between the company and the seller or purchaser of the assets, (ii) the source of funding for an acquisition where no material relationship exists between the company and the source of the funding, and (iii) the former and future use of the acquired assets. The SEC amendments will not change the current 75 calendar day deadline for filing required historical and pro forma financial information.

In the adopting release, the SEC highlighted the fact that there will frequently be a relationship between Items 1.01 and 2.01 because many material acquisitions or dispositions will need to be reported under Item 1.01 when the company enters into a binding agreement. However, Item 2.01 includes a bright-line test of significance (generally, 10% of the company’s consolidated assets for acquisitions or dispositions of assets and for dispositions (20% for acquisitions) of a "business" that is significant under Item 11-01 of Regulation S-X). Though the different standards in Item 601 of Regulation S-K and Item 2.01 of Form 8-K may result in some transactions being reportable under Item 1.01 but not Item 2.01, the SEC dismissed commenters’ fear of potential confusion. It seems advisable to consider filing a Form 8-K to report the closing of any previously reported binding contract of purchase or sale under Item 1.01, even if an Item 2.01 report is arguably not required by Form 8-K.

Creation or Acceleration of a Material Direct Financial Obligation or Off-Balance Sheet Arrangement

Items 2.03 and 2.04 will require disclosure of information about the creation of, or the occurrence of triggering events that accelerate or increase, a material direct financial obligation or an off-balance sheet arrangement. These two items require generally similar disclosure, including among other things:

• The date on which the obligation arose or on which the triggering event occurred;
• A brief description of the transaction or agreement under which the obligation was created, accelerated or increased, and of the triggering event, if relevant;
• The amount of the obligation, including terms of payment and acceleration and/or increase, giving effect to the occurrence of the triggering event if applicable, and any other material terms of the obligation; and
• In the case of triggering events, any other material obligations that may arise, increase or accelerate, or become direct obligations of the company, as a result of the triggering event.

In addition, if a company becomes directly or contingently liable for a material obligation that arises out of an off-balance sheet arrangement, or if a triggering event causes a company’s obligations under an off-balance sheet arrangement to increase, accelerate or to become a direct obligation, the company must disclose the following information:

• The date on which the company became directly or contingently liable or on which the triggering event occurred;
• A brief description of the nature and amount of the obligation and its material terms, including the terms under which a contingent obligation may become direct and the maximum potential undiscounted future payments that the company may be required to make, and of the triggering event and its effects, if applicable; and
• In the case of a triggering event, any cross-defaults that may arise as a result of the triggering event, if applicable.

Items 2.03 and 2.04 introduce a new defined term, "direct financial obligation," but the first three types of obligations listed, like the definition of "off-balance sheet arrangement," reflect related existing MD&A disclosure requirements contained in Item 303(a) of Regulation S-K. Form 8-K defines "direct financial obligation" as any of the following:

• A long-term debt obligation;
• A short-term debt obligation that arises other than in the ordinary course of business;
• A capital lease obligation;
• An operating lease obligation; or
• For purposes of Item 2.04 only, an obligation arising out of an off-balance sheet arrangement that is accrued as a probable loss contingency under FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.

"Short-term debt obligation" is defined in Form 8-K as a payment obligation under a borrowing arrangement that is scheduled to mature within one year, or, for those companies that use the operating cycle concept of working capital, within a company’s operating cycle that is longer than one year, as discussed in Accounting Research Bulletin No. 43, Chapter 3A, Working Capital. A capital lease is generally a lease with one of the following characteristics: a term of 75% or more of the useful life of an asset; automatic transfer of ownership at the end of the lease; a bargain purchase option; or rent payments having a present value equal to 90% or more of the fair value of the asset after adjustment for any investment tax credit. An operating lease is generally a lease that is not a capital lease.

In general, a reportable event occurs under Item 2.03 on the date on which the company enters into a binding agreement, whether or not the agreement is subject to conditions. If there is no written agreement, the reportable event occurs upon the closing or settlement of the transaction. In the case of Item 2.04, the reportable triggering event occurs when all requirements of the relevant agreement, transaction or arrangement have been satisfied, including, if required, the sending to the company of notice of the occurrence of a triggering event and the satisfaction of all required conditions, other than the passage of time. If the company believes in good faith that no triggering event has occurred, no disclosure is required solely by reason of Item 2.04 unless the company has received notice of a triggering event.

Companies should note that the instructions for Items 2.03 and 2.04 require that companies file Form 8-K reports to disclose the creation of a material off-balance sheet arrangement or the occurrence of a related material triggering event even if the company is not a party to the transaction or agreement. An instruction to Item 2.03 further provides that if neither the company nor any of its affiliates is a party to the transaction or agreement creating the contingent obligation arising under the off-balance sheet arrangement in question, the four business day period for reporting the event under Item 2.03 begins on the earlier of (i) the fourth business day after the contingent obligation is created or arises and (ii) the day on which an executive officer of the company becomes aware of the contingent obligation.

SEC instructions also require that companies report under Item 2.03 when they enter into or create facilities, programs or similar arrangements that create or may give rise to direct financial obligations in connection with multiple transactions. In these cases, companies must file a Form 8-K report within four business days after the company enters into the facility, program or similar arrangement, and disclose the company’s obligations, to the extent material, as they arise or are created under the facility or program (including when a series of previously undisclosed obligations that were individually immaterial becomes material in the aggregate).

Companies should also note that if a direct financial obligation that would be subject to disclosure under Item 2.03 is a security, or a term of a security, that has been or will be sold pursuant to an effective SEC registration statement filed by the company, the company is not required to file a Form 8-K pursuant to Item 2.03, as long as the prospectus relating to the sale contains the information required by Item 2.03 and is filed within the required time period under SEC rules. Securities issued in offerings exempt from SEC registration, such as debt securities intended to be eligible for resale under Rule 144A, are not covered by this exception.

The degree to which the definitions of direct financial obligation and off-balance sheet arrangement follow applicable MD&A definitions will place a premium on making sure that a company’s internal reporting and disclosure processes can swiftly report and evaluate the materiality of obligations and arrangements that currently are subject to reporting not more frequently than quarterly or, in the case of short-term debt obligations, may not be reported at all if they arise and mature within a single fiscal quarter.

Some companies will also need to be aware of the possibility that entering into joint venture or similar arrangements involving unconsolidated entities that are subject to variable interest treatment under FASB Interpretation No. 46, Consolidation of Variable Interest Entities, may require a Form 8-K report under specified circumstances if the arrangement qualifies as an "off-balance sheet arrangement" and the amount is potentially material to the company. Similarly, the occurrence of a triggering event under such an arrangement may require a Form 8-K report, as may triggering events related to obligations arising from off-balance sheet arrangements that become subject to accrual as probable loss contingencies.

Material Exit/Disposal Costs or Material Impairments

Items 2.05 and 2.06 will require companies to disclose information about material charges that may result from action by the board of directors, a board committee or authorized officers in connection with any of the following:

• Committing the company to an exit or disposal plan, or otherwise disposing of a long-lived asset;
• Terminating employees under a plan of termination covered by FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities; or
• Concluding that the value of company assets, including without limitation securities or goodwill, has been materially impaired.

The disclosure requirements for these events include generally:

• The date on which the directors or officers concluded that action or an impairment charge was required and information about the action or impairment, including a description of the related facts and circumstances and, in the case of exit or disposal activities, the expected completion date;
• An estimate of the total amount or range of amounts involved (including estimates of the total amount or range of amounts involved for each major type of cost associated with exit, disposal or termination actions); and
• An estimate of the amount or range of amounts that will result in future cash expenditures.

Updating Requirement.

If the company is unable to make good faith estimates of any of these amounts or ranges when it files the Form 8-K report, it must file an amendment disclosing the estimated amounts or ranges within four business days after it makes these estimates.

Notice of Delisting or Transfer or Failure to Satisfy a Standard for Continued Listing

Item 3.01 of Form 8-K will require disclosure of several events relating to the listing of any class of a company’s common equity securities. These include:

• SRO Delisting Notice
– the company receives notice from a national securities exchange or national securities association (an "SRO") that the company or a class of its equity securities no longer meets the listing requirements or standards of the SRO or that the SRO has taken all action necessary under its rules to delist a class of the company’s equity securities;
• Company Noncompliance Notice
– the company notifies an SRO that it is aware of any material noncompliance with a listing standard;
• SRO Reprimand Letter
– an SRO issues a public reprimand letter indicating noncompliance with a listing standard; and
• Company Action to Delist
– the company’s board of directors, a board committee or an authorized officer takes definitive action or adopts a board resolution to terminate or transfer listing.

It is important to note that Form 8-K requires disclosure even in cases where there is a grace or extension period available. Further, most of the events subject to disclosure under Item 3.01 are not subject to a materiality threshold. Because SRO listing standards in many cases are not qualified by materiality standards, companies should note that in some cases even arguably immaterial compliance issues may result in required disclosure.

The required disclosure for these events generally includes the date of the notice or action, a description of the related facts and/or applicable listing standard, and, where relevant, the company’s anticipated action or response. Involuntary delisting of a company’s securities will typically result in two reportable events: first when the company gives or receives notice of noncompliance, and then when the SRO actually delists the security.

These disclosure requirements do not apply to securities traded on the OTC Bulletin Board or similar quotation services that have no listing standards, nor do they apply where the delisting occurs as a result of redemption, conversion or payment at maturity of an entire class of securities or other specified legal actions that affect an entire class of securities.

Unregistered Sales of Equity Securities

Item 3.02 will require accelerated disclosure of unregistered sales of securities since the company’s most recent report under Item 3.02 of Form 8-K or Form 10-Q or 10-K report that are, individually or in the aggregate, equal to or greater than 1% (5% for small business issuers) of a company’s total outstanding shares. The date of the reportable event is the date on which the company enters into a binding agreement to sell the securities, even if the purchase agreement is subject to conditions that are not yet satisfied. If there is no written agreement, the date of the reportable event is the closing or settlement date. The required disclosure is generally the same as the disclosure currently required by Item 701 of Regulation S-K for Form 10-Q and 10-K reports. Disclosure of unregistered sales of securities that do not exceed the threshold for Form 8-K reporting will continue to be required in Form 10-Q and 10-K reports.

Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Review

Item 4.02 of Form 8-K will require companies to file a report if either of the following events occurs:

• The company’s board of directors, a board committee or an authorized officer concludes that any of the company’s previously issued financial statements no longer should be relied upon because of an error discussed in APB Opinion No. 20; or
• The company receives advice or a notice from its independent auditor that the company should disclose or take action to prevent further reliance on a previously issued audit report or interim review of previously issued financial statements.

Form 8-K will require disclosure of the following information relating to these events:

• The date of the company’s conclusion or the auditor’s notice to the company;
• Identification of the financial statements and periods covered that should no longer be relied upon;
• A brief description of the facts underlying the company’s conclusion or the information provided by the auditor; and
• A statement whether the audit committee, or board of directors in the absence of an audit committee, or authorized officers discussed with the auditor the conclusion or the subject matter giving rise to the notice.

In the case of notice from the auditors, the company must:

• Provide the auditor with a copy of its Form 8-K disclosure not later than the day on which the company files the Form 8-K;
• Request the auditor to furnish it with a letter addressed to the SEC stating whether the auditor agrees with the company’s disclosure and, if not, the reasons why; and
• Updating Requirement
– amend its Form 8-K to file the auditor’s letter within two business days after the company receives the letter from the auditors, if the letter was not filed with the initial Form 8-K.

As a practical matter, the involvement of the company’s auditors in the disclosure process means that if an event reportable under Item 4.02 occurs, the company will want to draft the required report and obtain, if possible, the auditor’s agreement before filing the initial report. The four business day reporting deadline and two business day period for filing a letter from the auditors will require the company to act swiftly under these circumstances.

Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

Item 5.02 of Form 8-K will require disclosure of a variety of changes in a company’s senior management. Companies must report the following events:

• Resignation or refusal of a director to stand for reelection due to a disagreement known to an executive officer of the company related to the company’s operations, policies or practices, or removal for cause;
• Retirement, resignation or removal/termination of a director (other than for cause) or "principal officer";
• Appointment of a new principal officer; or
• Election of a new director other than by security holders.

The amendments to Form 8-K create a new category of officers referred to as "principal officers," which is defined as a company’s principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, and any other person serving in an equivalent position. The disclosure requirements do not apply to directors elected by security holders at an annual meeting or a special meeting held for that purpose.

The required disclosure for these events varies, but generally includes the officer’s or director’s name, the date of the event, any positions or committee memberships held or expected to be held, any arrangement pursuant to which a new principal officer or director was selected, and specified biographical information. In the case of a new director who was not elected at a meeting of security holders, the company must provide information concerning any related party transactions. In the case of the appointment of a new principal officer, the company must disclose specified information concerning any employment agreement with the new principal officer and file a copy of the agreement as an exhibit. For reports relating to the appointment of new principal officers only, the company may delay filing the report required by Item 5.02(c) until the day on which it otherwise publicly announces the appointment.

Updating Requirement.

To the extent that information regarding an employment contract of a newly appointed executive officer, or board committee or related party transaction information associated with a newly elected director, is not determined or is unavailable when a company files the related Form 8-K report, the company must include a statement to this effect in the report. The company must then file an amendment to the report that contains the omitted information within four business days after that information is determined or becomes available.

The new Form 8-K rules will significantly change the disclosure requirements that apply when a director resigns, declines to stand for re-election, or is removed for cause. Under the new rules, if an executive officer of the company knows that the director’s action or removal is due to a disagreement with the company concerning any matter relating to the company’s operations, policies or practices, then the company must also disclose a brief description of the circumstances representing the disagreement that management believed caused, in whole or in part, the director’s resignation, refusal to stand for reelection or removal. Note that, unlike the current Form 8-K requirements, the new Form 8-K requirements may apply even if the director does not furnish any written materials to the company concerning his or her resignation, and even if the director does not specifically request that the company disclose the director’s written correspondence concerning the disagreement. The new requirements relating to disclosure of disagreements do not apply to resignations or terminations of principal officers.

In addition to the disclosure described in the preceding paragraph, if a director furnishes the company with any written correspondence (for example, a resignation letter) concerning the circumstances surrounding his or her resignation, declination, or removal, the company must:

• File a copy of the correspondence as an exhibit to the Form 8-K regardless of whether the director requests disclosure;
• Provide the director with a copy of the disclosures it is making in the Form 8-K not later than the day on which the company files the Form 8-K;
• Provide the director with an opportunity to furnish the company with a letter addressed to the SEC as soon as possible stating whether he or she agrees with the company’s disclosures and, if not, stating any disagreements; and
• Updating Requirement
– file the director’s letter with the SEC as an exhibit in an amendment to the Form 8-K within two business days after receipt, if the letter was not filed with the initial Form 8-K.

Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

Item 5.03 will significantly expand the scope of currently required disclosure of changes in a company’s fiscal year by requiring that a company must report any amendment of its charter or bylaws that was not proposed in a previously filed proxy statement. There is no materiality threshold for these disclosure requirements.

The required disclosure generally includes the effective date of amendment and a description of the provisions adopted or changed and, if applicable, the previous provision. Form 8-K will also require companies to file, at a minimum, the text of the amendment as an exhibit to the Form 8-K report. A complete copy of the company’s charter or bylaws, as amended, must be filed as an exhibit to the company’s next Form 10-Q or 10-K report.

******

NEW FORM 8-K

Effective August 23, 2004

Section 1—Registrant’s Business and Operations

Item 1.01* Entry into a Material Definitive Agreement

Item 1.02* Termination of a Material Definitive Agreement

Item 1.03 Bankruptcy or Receivership

Section 2—Financial Information

Item 2.01 Completion of Acquisition or Disposition of Assets

Item 2.02 Results of Operations and Financial Condition

Item 2.03* Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant

Item 2.04* Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement

Item 2.05* Costs Associated with Exit or Disposal Activities

Item 2.06* Material Impairments

Section 3—Securities and Trading Markets

Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing

Item 3.02 Unregistered Sales of Equity Securities

Item 3.03 Material Modifications to Rights of Security Holders

Section 4—Matters Related to Accountants and Financial Statements

Item 4.01 Changes in Registrant’s Certifying Accountant

Item 4.02* Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review

Section 5—Corporate Governance and Management

Item 5.01 Changes in Control of Registrant

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

Item 5.04 Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans

Item 5.05 Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics

Section 6—[Reserved]

Section 7—Regulation FD

Item 7.01 Regulation FD Disclosure

Section 8—Other Events

Item 8.01 Other Events

Section 9—Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits

* Eligible for safe harbor (4.02(a) only) 

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 650 attorneys and offices in Boston, New York and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. (c) 2004 Goodwin Procter LLP. All rights reserved.