SEC FAQs on Form 8-K

By: Cydney Posner

The SEC has finally posted its long-awaited FAQs on Form 8-K.

General

• With two exceptions, a triggering event occurring within four business days before the registrant's filing of a periodic report may be disclosed in that periodic report. The event should be reported in revised Item 5 of Part II of Forms 10-Q and 10-QSB and Item 9B of Form 10-K and Item 8B of Form 10-KSB. However, the following items must be reported on Form 8-K:
  • Item 4.01, Changes in Registrant's Certifying Accountant and
  • Item 4.02, Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
• Triggering events, other than changes in directors and principal officers, apply to registrants and their subsidiaries, to the extent that the events are material to the registrant itself.

Item 1.01 Entry into a Material Definitive Agreement

• If an agreement was not material when it was entered into or amended, but later becomes material, the registrant need not file a Form 8-K under Item 1.01, unless the agreement is material to the registrant at the time of an amendment to that agreement. However, the registrant must file the agreement as an exhibit to the periodic report relating to the reporting period in which the agreement became material if, at any time during that period, the agreement was material (applying Reg S-K Item 601).
• If the registrant determines that a placement agency or underwriting agreement is a material definitive agreement, it may omit the name of the placement agent or underwriter to remain within the safe harbor of Rule 135c. The same applies to Form 8-K Item 3.02.
• Item 1.01 applies to both written and unwritten material definitive agreements. Therefore, if a "summary sheet" given to directors that sets forth meeting fees and basic compensation information memorializes terms of an agreement between the registrant and the director, it would be subject to Form 8-K disclosure and to filing under Item 601(b)(10) of Reg S-K. The Form 8-K describing the agreement should be filed within four business days after the agreement is entered into, rather than within four business days after the summary sheet is provided to the directors (because any contract or compensatory plan with a director is material and must be filed, including written descriptions of oral agreements).
• If a registrant enters into an employment agreement with a director or a "named executive officer" (NEO), or enters into an amendment of that agreement that is material to the registrant, then the registrant must file a Form 8-K under Item 1.01, unless the employment agreement or amendment is not required to be disclosed under Item 601(b)(10)(iii)(C) of Reg S-K. The registrant must file an Item 5.02(c) Form 8-K if the officer is newly appointed to one of the positions specified in that Item.
• If the registrant enters into an employment agreement with an executive officer who is not a named executive officer, or enters into an amendment of that agreement that is material to the registrant, disclosure is required under Item 1.01 if the agreement is not "immaterial in amount or significance" within the meaning of Item 601(b)(10)(iii)(A) of Reg S-K, unless it falls under the 601(b)(10)(iii)(C) exceptions. "Immaterial in amount or significance" should be considered from the perspective of a reasonable investor and in light of established standards of materiality.
• If the registrant's board adopts or materially amends an equity compensation plan in which NEOs are eligible to participate, a Form 8-K is required (unless within the exceptions under 601(b)(10)(iii)(C)). However, where the plan is adopted or amended subject to shareholder approval, the obligation to file a Form 8-K is triggered upon receipt of shareholder approval. The same analysis applies to the grant of stock options to NEOs.
• If the board grants an equity award to an NEO, other executive officer or director under an equity compensation plan that has been disclosed under Item 1.01 and has been or will be filed (including, if the plan provides broad discretion as to the terms of its awards, filing of each form of award agreement or notice used under the plan for awards to directors or executive officers), the registrant need not file a Form 8-K to report the grant so long as
  • the Form 8-K reporting adoption of the plan discloses all material terms and conditions of the award (other than the identity of the recipient, the grant date, the number of securities covered by the award, the price(s) at which the recipient may acquire the securities and the vesting schedule) and
  • the grant is consistent with those material terms and conditions (unless disclosure of particular provisions in the personal agreement is necessary for an investor's understanding of that individual's compensation under the plan).
• If the plan was adopted before the August 23, 2004 effective date of the Form 8-K amendments and, therefore, no Form 8-K was previously filed, the same analysis applies if the registrant previously filed the plan (and grant forms, if the plan provides broad discretion) as an exhibit and the filed plan (and the form of award agreement or notice) discloses all material terms and conditions of the award as described above. A Form 8-K would be required, however, if a grant is made using an award agreement that is materially different from the material terms and conditions of the form that was previously disclosed in the Form 8-K announcing adoption of the plan.
• If the registrant had not previously disclosed or filed the form of award agreement prior to adoption of the Form 8-K amendments, it may now file a Form 8-K disclosing the material terms of the form of award agreement as described above, and then need not file a Form 8-K for each individual grant (unless necessary for an investor's understanding of that individual's compensation under the plan).
• If the board adopts a cash bonus plan under which NEOs or other executives may participate, a Form 8-K is triggered (unless, with respect to other executives, the plan is immaterial in amount or significance), even if no specific performance criteria, performance goals or bonus opportunities have yet been communicated to plan participants. If the plan is adopted subject to shareholder approval, the receipt of shareholder approval would instead be the trigger. Once the board adopts specific performance goals and business criteria for one or more participants, a new Form 8-K must be filed. However, the registrant is not required to disclose actual target levels for specific quantitative or qualitative performance factors or factors or criteria involving confidential commercial or business information, if disclosure would have an adverse effect upon the registrant.
• The actual payment of a cash award pursuant to a previously disclosed cash bonus plan could require further disclosure if the registrant exercised discretion to pay the bonus even though the specified performance criteria were not satisfied. If, on the other hand, a cash award is paid that is consistent with the performance criteria, no Form 8-K would be required (because Instruction 1 to Item 601(b)(10) would not require the executive officer's personal agreement under the plan to be filed as an exhibit under those circumstances).

Item 1.02 Termination of a Material Definitive Agreement

• If the registrant receives written advance notice of termination of a material definitive agreement that requires advance notice, the registrant must report the termination on a Form 8-K, even though the registrant intends to negotiate with the counterparty and believes in good faith that the agreement will ultimately not be terminated. Although Instruction 1 to Item 1.02 notes that no disclosure is required solely by reason of that Item during negotiations or discussions regarding termination of a material definitive agreement unless and until the agreement has been terminated, and Instruction 2 indicates that no disclosure is required if the registrant believes in good faith that the material definitive agreement has not been terminated, Instruction 2 clarifies that, once notice of termination pursuant to the terms of the agreement has been received, a Form 8-K is required, notwithstanding the registrant's continued efforts to negotiate a continuation of the contract.
• If a material definitive agreement automatically expires on a specified date, but is continued for successive one-year terms unless one party sends a non-renewal notice during a window period in advance of the automatic renewal, receipt of the advance notice during the window period would trigger Form 8-K Item 1.02 disclosure. However, automatic renewal in accordance with the terms of the agreement (i.e., no non-renewal notice is sent) does not trigger the filing of an Item 1.01 Form 8-K.
• If a material definitive agreement expires by its terms on a stated date unless renewed and neither party sends a renewal notice, no Form 8-K is required. However, if one party sends a renewal notice that is not rejected by the rejection deadline, an Item 1.01 Form 8-K is required. The trigger would be the passage of the rejection deadline, not the sending of the renewal notice.

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

• Instruction 2 to Item 2.03 states that if the registrant is not party to the transaction creating the contingent obligation arising under the off-balance sheet arrangement, the four-business day period begins on the earlier of (1) the fourth business day after the contingent obligation is created or arises, and (2) the day on which an executive officer becomes aware. How can a registrant report something of which it is not aware, you might ask (and apparently, someone did). the SEC argues that a registrant must ensure that its disclosure and internal controls and procedures ensure that information required to be disclosed is timely recorded. Instruction 2 to Item 2.03 provides for an additional four business days as a "grace" period given the nature of the requirement. Apparently, "not being aware" is no excuse for failure to file.
• Whether a financial obligation is material depends upon all the facts and circumstances, including the amount of the obligation, current impact on covenants, liquidity and debt capacity and other debt requirements. For example, depending upon other facts and circumstances, a registrant may be able to conclude that a refinancing on similar terms, even though of a material amount, is not material.

Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement

• If all facts have occurred that are necessary under an agreement to trigger acceleration or increase in a direct financial obligation, but the counterparty has not declared, or provided notice of, a default, and such declaration or notice is necessary prior to increase or acceleration, then Item 2.04 is not triggered. If notice is not required and the increase or acceleration is triggered automatically upon the occurrence of an event, disclosure is required under Item 2.04.

Item 2.05 Costs Associated with Exit or Disposal Activities

• Costs associated with an exit activity are not limited to those addressed in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses certain costs associated with an exit activity. Other costs that may need to be disclosed pursuant to Item 2.05 are addressed by SFAS Nos. 87, 88, 106 and 112.
• If a registrant, in connection with an exit activity, has committed to a plan to terminate employees, it may wait to file the required Form 8-K until it has informed affected employees. This approach is intended to be consistent with SFAS 146.

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

• If a registrant has taken appropriate action to prevent reliance on its financial statements and has also filed a Form 8-K under Item 4.02(a) to report the error in its financial statements, a registrant that is then separately advised by its auditor that the auditor has reached the same conclusion need not file a second Form 8-K under Item 4.02(b), unless the auditor's conclusion relates to an error or matter different from that which triggered the registrant's filing under Item 4.02(a).

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

• With respect to any resignation, retirement or refusal to stand for re-election reportable under Item 5.02(b), the Form 8-K reporting obligation is triggered by a notice of a decision to resign, retire or refuse to stand for re-election provided by the director or executive officer, whether or not the notice is written. The disclosure must specify the effective date of the resignation or retirement. In the case of a refusal to stand for re-election, the registrant must disclose when the election in question will occur. Mere discussions or consideration of resignation, retirement or refusal to stand for re-election would not trigger a filing. Whether communications represent actual notice of a decision or merely a discussion is a facts-and-circumstances determination. The SEC insists that a registrant should ensure that it has appropriate disclosure controls and procedures to determine when a notice of resignation, retirement or refusal has been communicated to the registrant. (Remember that this is not one of the items that, if filed late, does not affect S-3 eligibility. Timely filing of this item is required for S-3 eligibility, even though determination of the trigger involves a judgment call.)
• A Form 8-K is not required if a registrant decides not to nominate a director for re-election at its next annual meeting. However, if the director, upon receiving notice, then resigns, a Form 8-K would be required. If the director tells the registrant that he or she refuses to stand for re-election, whether or not in response to an offer by the registrant to be nominated, a Form 8-K is required.
• If a registrant appoints a new specified officer, it may delay Form 8-K disclosure until it makes public announcement of the event under the Instruction to Item 5.02(c). Similarly, until the announcement is made, the registrant may delay disclosure of the entry into an employment agreement with the officer pursuant to Item 1.01 or of the officer's appointment to the board pursuant to Item 5.02(d) until public announcement of the officer's appointment.
• If, in connection with an officer's departure, a material definitive agreement in the form of an employment contract is terminated, to satisfy the Item 1.02 requirement to disclose "the material circumstances surrounding the termination," it is sufficient for the registrant to state that the contract was terminated in conjunction with the officer's departure. The registrant must, however, disclose disclose other material circumstances, such as resulting termination, severance or other payments or other consequences.
• The registrant must make all of the disclosures required by Item 5.02(c)(2) of Form 8-K with respect to the specified officers, including a principal accounting officer, even if the registrant does not consider that officer to be an executive officer for purposes of Items 401 or 404 of Reg S-K.
• The term "termination" includes situations where an officer identified in Item 5.02 has been demoted or has had his or her duties and responsibilities removed such that he or she no longer functions in the position of that officer, even if that person retains his or her officer title.

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

• The restatement of a registrant's articles of incorporation, without any substantive amendments to those articles, would not trigger a Form 8-K filing. However, the SEC recommends that registrants refile their complete articles of incorporation, if restated, in their next periodic report for ease of reference by investors.

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