08.23.2004

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Updates

The SEC's recent amendments to Form 8-K, which are effective for reportable events that occur on or after August 23, 2004, expand the number of reportable events and accelerate the filing deadline for most items to four business days. For events that occur prior to August 23, 2004, companies should analyze their reporting obligations using prior Form 8-K and report information as required under that version of the form (although Form 8-Ks filed on or after August 23 must use the new item numbers, even if the information reported corresponds to the requirements of the prior Form 8-K).

This Update offers practical guidance on reporting material definitive agreements, filing exhibits and applying the safe harbor. You can find a list of the amended Form 8-K reporting items and due dates in our chart and a summary of the other key provisions in our March 30, 2004 Update.

Must Report "Material Definitive Agreements" Within Four Business Days

Beginning on August 23, 2004, a public company must, within four business days, file a current report on Form 8-K to report:

    • entry into a new material definitive agreement not made in the ordinary course of business (Item 1.01);

       

    • material amendment of an existing material definitive agreement (Item 1.01); and/or

       

    • termination, whether by the company or another party, of a current material definitive agreement (Item 1.02).

What is a "Material Definitive Agreement"? The SEC defines a "material definitive agreement" as 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. An agreement is reportable on Form 8-K, even if the ultimate enforceability of the agreement is contingent on other factors, including, for example, obtaining third-party approvals, completing due diligence or achieving certain milestones. Companies should assess materiality in light of both quantitative and qualitative factors.

The definition of "material definitive agreement" parallels the "material contract" definition in Item 601(b)(10) of Regulation S-K, which generally specifies that material contracts not made in the ordinary course of business must be filed as exhibits to periodic reports and registration statements. An agreement made in the ordinary course of business generally is not a material contract unless the company's business is substantially dependent on the agreement.

Traps for the Unwary

Some "Nonbinding" Agreements May Trigger Form 8-K Report. Although a nonbinding letter of intent that contains binding confidentiality or no-shop provisions would not be deemed to contain material binding terms (stated in a footnote to the SEC adopting release), the determination of whether a nonbinding letter of intent contains binding material terms requires careful review of the facts and circumstances of each particular case. Before signing even a nonbinding instrument, officers must evaluate with counsel whether the instrument contains binding terms that, individually or together, could be deemed material.

Agreements Can Become Material Over Time. An agreement that is not material when made can become material over time as the business relationship between the parties evolves, for example, through sales growth to a specific customer. If the parties do not amend the agreement in connection with the changed relationship, it does not appear that a Form 8-K would be required, although the agreement would need to be filed with the company's next periodic report. If the parties amend the agreement in these circumstances, the company must report the amended agreement on Form 8-K.

Most Management Contracts and Compensation Plans Must Be Reported as Material Definitive Agreements

Because management contracts and compensation plans and arrangements are generally considered "material contracts" under Item 601(b)(10)(iii) of Regulation S-K, a company must, within four business days, report its establishment, material amendment and/or termination of any management contract or equity compensation, option, pension, retirement, deferred compensation, bonus, incentive, profit sharing or other compensatory plan, contract or arrangement in which any director or executive officer participates. However, some exceptions to this general requirement include:

    • any compensatory plan, contract or arrangement in which no director or named executive officer (which includes the chief executive officer and the other executive officers for whom compensation disclosure is required to be included in the company's proxy statement for an annual shareholders meeting) participates, if immaterial in amount or significance; and

    • any compensatory plan or arrangement that is available to employees, officers, or directors generally and which provides the same method of allocation of benefits between management and non-management participants.

A company must also report its establishment, material amendment and/or termination of any nonshareholder-approved equity compensatory plan, contract or arrangement in which any employee participates, unless immaterial in amount or significance.

Disclosure of Compensation Agreements in Connection With Officer Appointments. In addition, if the company appoints a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or person performing similar functions, Item 5.02(c) of Form 8-K will also require disclosure of the material terms of any employment or compensation agreement.

Trap for the Unwary: Companies May Be Required to Report Grant of Individual Compensatory Awards

Because individual option grants or bonus awards to directors or named executive officers (generally the chief executive officer and the other most highly paid executive officers for whom compensation disclosure must be included in the company's proxy statement) and to other executive officers (if material in amount or significance) may be "material contracts" pursuant to Item 601(b)(10)(iii) of Regulation S-K, these awards may be required to be disclosed pursuant to Item 1.01 of amended Form 8-K even if the compensation plan under which the award is made has been previously adopted and disclosed.

The instructions to Item 601(b)(10) provide an exception to the individual agreement disclosure requirement for agreements under a compensatory plan if copies of the plan and forms of agreements (if the agreements contain material terms in addition to the terms of the plan) have been filed and the individual agreements contain no other provisions that must be disclosed for an investor to understand the individual's compensation arrangement. We are hopeful that the SEC will provide guidance with respect to the circumstances, if any, in which individual equity grants or bonus awards made pursuant to plans that have already been disclosed are subject to Form 8-K reporting.

Should Material Definitive Agreements Be Filed as Exhibits to Form 8-K?

The SEC encourages, but does not require, companies to file a copy of the reported agreement as an exhibit to the Form 8-K. Any agreement not filed as a Form 8-K exhibit must be filed as an exhibit to the company's next periodic report or registration statement.

Trap for the Unwary: Best Practice May Be to File Agreements With Form 8-K When Practicable

Because the Form 8-K disclosure must contain sufficient information not to be misleading, and must not contain any material misstatements or omissions, companies must take steps to ensure that all material information concerning an agreement disclosed on Form 8-K pursuant to any item is disclosed. To ensure compliance with this requirement, some companies may choose to file agreements with Form 8-K, where practicable, to ensure that the disclosure is complete. However, if an agreement is filed with Form 8-K, any request for confidential treatment of sensitive information in the agreement must be made no later than the date the Form 8-K is filed.

Limited Safe Harbor Applies to Items 1.01 and 1.02

Companies should keep in mind that failure to file a Form 8-K to report information required by Items 1.01 or 1.02 relating to a material definitive agreement will:

    • not trigger liability under the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5, as long as the reported information is included in the company's next periodic report or registration statement;

    • not bar the company from using registration statement Forms S-2 and S-3 as long as the company becomes current in its periodic reporting obligations before filing a registration statement on Form S-2 or S-3; and
    • not violate the "current public information" requirement under Rule 144 of the Securities Act.

Trap for the Unwary: Safe Harbor Doesn't Cover All Potential Liability

Potential Liability Under Section 10(b), Rule 10b-5 and Section 13(a) of the Exchange Act. The limited "safe harbor" from anti-fraud liability applies only to your failure to file a required report on Form 8-K; it will not protect you against Rule 10b-5 liability resulting from material misstatements or omissions contained in a filed report on Form 8-K. Additionally, the safe harbor has no effect on the SEC's ability to enforce the Form 8-K filing requirements under Section 13(a) or 15(d) of the Exchange Act.

Lessons From the Siebel Case. In the SEC's most recent action against Siebel Systems, Inc., the SEC contended that Siebel should have filed a Form 8-K to disclose the material nonpublic information that the CEO selectively disclosed. Because Siebel did not do so, nor did it use another method of Regulation FD-compliant disclosure to satisfy its obligation, its failure to furnish a Form 8-K constituted a violation of Rule 13a-15 under the Securities Act, which requires companies to maintain disclosure controls and procedures "designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits" under the Exchange Act "is recorded, processed, summarized and reported, within the time limits specified in the Commission's rules and forms." You can find more information about the Siebel case at http://www.sec.gov/litigation/litreleases/lr18766.htm. To avoid liability, companies must maintain appropriate disclosure controls and procedures to ensure that required information is disclosed properly and within required timelines, including information required by all items of amended Form 8-K.

Practical Tips

Monitor Effectiveness of Disclosure Controls and Procedures. To meet the challenges of real-time reporting of material contracts, each public company should monitor its current internal disclosure controls and procedures and consider what new disclosure controls or procedures, tailored to the company's particular circumstances, are required to ensure that information about Form 8-K disclosure events is identified, evaluated and reported within required deadlines.

Other Steps to Consider. Here are some specific steps that may be useful in assessing the effectiveness of existing disclosure controls and procedures and creating improvements when needed:

    • Identify officers and others to whom the board of directors has delegated authority to execute material definitive agreements or otherwise take actions that trigger a Form 8-K disclosure obligation; consider limiting the number of people who have authority to act on the company's behalf; consider whether officers and directors need additional education regarding when their actions can trigger such obligations and how the specific terms of an agreement can affect disclosure requirements.

    • Evaluate current procedures for monitoring company-wide contracting and compensation activities and events relating to existing contracts and compensatory arrangements; if monitoring doesn't currently occur continuously or at least daily, consider implementing more frequent monitoring.
    • Evaluate the size and composition of the company's current disclosure committee and consider forming a smaller subcommittee for Form 8-K disclosure to improve response time.
    • Evaluate current lines of communication from investor relations and each major function to and from the disclosure committee (or the company's general counsel or other appropriate person who is designated to report to the disclosure committee and to educate potential reporting persons); consider whether these lines of communication are widely understood and whether additional documentation or education is needed; consider whether sufficient redundancy is built into the system to ensure that information flow to and from the disclosure committee continues even if one or more of the persons in the line of communication are unavailable.
    • Evaluate existing procedures for identifying required disclosure for quarterly and annual reports; consider whether additional procedures should be added to ensure that any missed Form 8-K disclosures are included in the Form 10-Q or 10-K.
    • Evaluate current materiality thresholds and triggers; consider whether these thresholds and triggers should be revisited; consider whether the company's officers or disclosure committee members would benefit from additional education on this topic.
    • Evaluate the company's current material agreements that have been filed as exhibits to reports on Forms 10-K, 10-Q or 8-K; consider whether each agreement is still material.
    • Evaluate the activities that the company undertakes that are most likely to trigger required Form 8-K disclosure; consider whether existing procedures are sufficient to meet new reporting requirements and deadlines.
    • Evaluate the company's current financial obligations and off-balance sheet arrangements; consider whether existing processes are sufficient to monitor changes and ensure timely reporting, and improve as needed.

Additional Information

This Update is intended only to offer practical guidance on reporting material definitive agreements, filing exhibits and applying the safe harbor under the SEC final rules amending Form 8-K. You can find the full text of the SEC final rules amending Form 8-K at http://www.sec.gov/rules/final/33-8400.htm and the full text of the SEC's technical amendments to the final rules at http://www.sec.gov/rules/final/33-8400a.htm.