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The New Sec Form 8-K Rules and the Information They Can Offer About Reporting Companies

By Stephen I. Siller

The SEC'S new Form 8-K rules became effective on August 23, 2004. These rules apply to U.S. companies that are required to file periodic reports with the SEC. The new Form 8-K includes 22 items, compared to 12 items in the old Form 8-K. In general, a Form 8-K must be filed within four business days of the event reported, compared to five business days or 15 calendar days under the old Form 8-K rules.

Although the new rules governing when a Form 8-K is required to be filed are not entirely clear, what is clear is that the new rules contain eight new disclosure items:

1. entry into a material non-ordinary course agreement;
2. termination of a material non-ordinary course agreement;
3. creation of a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
4. triggering events that accelerate or increase a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
5. material costs associated with exit or disposal activities;
6. material impairments;
7. notice of delisting or failure to satisfy a continued listing rule or standard, or a transfer of a listing; and
8. non-reliance on previously issued financial statements or a related audit report or completed interim review.

In addition, the following two items were moved from being reported on a Quarterly Report on Form 10-Q to being reported on the new Form 8-K:

1. unregistered sales of equity securities; and
2. material modifications to rights of security holders.

Equally important, disclosure about the following items was expanded:

1. departure of directors or principal officers, election of directors, or appointment of principal officers; and
2. amendments to Articles of Incorporation or Bylaws and a change in fiscal year.

All of this increased and faster disclosure not only means more transparency for the benefit of shareholders and analysts, but also means that others who want or need information about the reporting company will now have more publicly available information about the reporting company and will have it more quickly.

In addition to the shareholder and analyst communities, these new Form 8-K rules will benefit anyone who is engaged or planning to be engaged in a strategic transaction with a reporting company, such as selling a business to or buying a business from a reporting company or entering into a supply, distribution, license, or other long-term or strategic relationship. The new Form 8-K will provide information that will assist a buyer, seller or other counter-party in understanding the reporting company's up-to-date strategies that may be reflected in recently-filed material contracts or other disclosures made under the new Form 8-K rules. These disclosures may be relevant to the decisions the buyer, seller or other counter-party will make in its dealings with the reporting company. For example:

• Although the SEC has not changed the definition of a “material contract” in the new Form 8-K rules, most companies previously filed material contracts four times a year in connection with their Form 10-Q or Form 10-K. Now, filings of material contracts such as acquisition agreements, joint venture agreements, license agreements, supply agreements, customer agreements and leases will be publicly available much sooner.
  
• Material financing (including off-balance sheet) transactions must now be disclosed. While this new Form 8-K item does not contain any specific numerical threshold for materiality, financial instruments will need to be disclosed.
  
• Acquisition and disposition agreements will be key documents for a strategic counter-party even though financial statements of the acquired entity, and any required pro forma financial statements covering the transaction, will be filed later, within 71 days of the date on which the relevant agreements are required to be filed. Because an acquisition could also trigger a requirement to file agreements relating to direct financial obligations when the reporting company borrows money to pay for the acquisition, or issues unregistered equity securities if equity constitutes a portion of the consideration for the acquisition, the information in those filings can also be useful to a strategic counter-party who is negotiating with the reporting company.
  
• Future acquisitions by the reporting company could be indicated, particularly when read with press releases and other publicly available information about the reporting company, if the reporting company enters into an agreement, transaction or arrangement that comprises a financing facility. The reporting company must (1) disclose in an initial Form 8-K the entering into of the financing facility or similar arrangement if entering into it is material to the reporting company, and (2) disclose in a subsequent Form 8-K any financial obligations to the extent those obligations are material to the reporting company, including when previously undisclosed non-material obligations become material.
  
• Changes in a reporting company's deals or strategies could be indicated when the reporting company amends a material contract. The new Form 8-K rules require a Form 8-K filing when the reporting company enters into a material amendment to a material contract or amendment which causes a previously non-material contract to become material. The original contract may never have been required to have been filed if it was not material previously.

With the expansion of reporting company websites and more and more information about reporting companies being increasingly available on the internet, the additional disclosure available under the new Form 8-K rules will provide yet even more current information about reporting companies to those that need or want it.If you have questions about this article or any of the new rules approved by the SEC, please feel free contact any of the following attorneys at our firm:

This article was prepared as a service to our clients and friends. This article does not constitute legal advice and should not be relied upon as legal advice by the reader or any other party.