August 26, 2002
VIA EMAIL (firstname.lastname@example.org)
Jonathan G. Katz
Re: Release Nos. 33-8106 and 34-46084; File No. S7-22-02
Dear Mr. Katz:
We at Wyrick Robbins Yates & Ponton LLP appreciate the opportunity to comment on Release Nos. 33-8089 and 34-46084. For your information, we are an approximately 50-attorney law firm based in Raleigh, North Carolina. We represent approximately a dozen public companies, primarily in the life sciences and high technology industries. Our comments are based both on our experience and on comments from some of our public company clients who have reviewed the proposed rule changes.
We have drafted our comments to respond to the question categories formulated by the SEC that are listed in the Release, although we do not address all questions posed and address only those issues that we feel would have significant negative impact on issuers and investors.
Questions regarding proposed Item 1.01:
We believe that disclosure should only be required for unconditionally binding definitive agreements or those that are binding subject only to conditions stated in the agreement. Public disclosure of anything less could be premature, potentially confusing investors and/or impairing the ability of issuers to negotiate transactions because competitors will be able to make better offers once the terms of a potential transaction are disclosed.
No. Disclosure of letters of intent and other non-binding agreements should not be required for the reason stated above.
We do not believe that two business days is sufficient time, given the need to summarize transactions, have counsel and accountants review the proposed disclosure and include the agreements and financial statements as exhibits. In many cases simply EDGARizing and proof-reading the EDGARized agreements can take more than a day. In addition, the agreements often contain information that must be treated confidentially, under existing SEC rules designed to protect issuers and therefore their investors. The preparation of a confidential treatment request involves careful analysis by the parties to an agreement and counsel, discussion amongst those parties as to which portions should be the subject of the confidential treatment request and why, drafting an appropriately specific, detailed confidential treatment request and preparation of the redacted EDGAR version of the agreement as well as the unredacted version submitted in paper to the SEC for review. Under these proposals, there will not be sufficient time to complete this process.
We respectfully submit that while we support the concept of prompt disclosure of material events, any proposals in this regard must be tempered with consideration of the practicalities of the filing process. Forcing issuers to make filings with undue haste could lead to undesirable results that could harm investors, including having concern over filing logistics distract issuers from the business transaction itself, making mistakes in filings, filing an inordinate number of Forms 12b-25 and suffering the penalties for late filings.
In this context, we point out that current law and, in our experience, practice dictate that issuers make disclosure of material events promptly, but not under unreasonable deadlines. Current law provides significant penalties for trading on material information prior to its disclosure. A great majority of public companies, in our experience, are very aware of this fact and have procedures in place to avoid such violations.
Questions regarding proposed Item 2.01:
Yes. We strongly support harmonization of thresholds, standards and filing requirements under the securities laws, absent compelling reasons for differences. We respectfully submit that for clarity, any transaction above 10% of assets should be deemed material. We also think that the qualitative materiality test should be used for transactions below 10% of assets.
Questions regarding proposed Item 2.03:
As noted in our prior comment, we support uniform thresholds. We think the thresholds indicated in our prior comment make sense under this item and proposed items 2.04 and 2.05 as well.
In addition, however, there is another aspect of this item that is too broad. As the Release notes, "[d]isclosure would be required under this proposed item whether or not the company is a party to the agreement." For this reason, we believe that this item should make clear that disclosure is not triggered until the company receives written notice of the creation of the obligation.
Questions regarding proposed Item 2.04:
See our prior two comments above.
We believe that disclosure should not be required until the triggering event is reached because negotiations over such events often are protracted and terms change frequently prior to the ultimate resolution. Premature disclosure of terms that ultimately are not agreed upon could have a negative impact on an issuer's stock price, thereby harming investors. Further, issuers would be required to disclose such negotiations in their quarterly and annual reports on Forms 10-Q and 10-K if such events would be material and are unresolved when the report is due. Consequently, disclosure is already mandated.
Questions regarding proposed Item 2.05:
See our comment with respect to proposed item 2.03.
We believe that the proposal should be amended to take into consideration financial services companies that regularly make loans and are, in the ordinary course of business, evaluating, reserving for and restructuring or writing off loans. If there is not a specific disclosure threshold for disclosure that is sufficiently high, these entities might be making continuous disclosure of their most basic and ongoing operations, which would not be beneficial to investors.
Questions regarding proposed Item 2.06:
We are concerned that this trigger might not be workable because it could occur before the company has sufficient information to make good disclosure. It could be misleading to be forced to announce an impairment before you have fully analyzed its amount and impact, which could take considerable time after the board or officer(s) "concludes that the company is required to record a material charge for impairment." For this reason and for the sake of uniformity, we think the triggering event proposed for item 2.05, when the board or officer(s) "definitively commits" to the charge, would be much preferable.
See our comment with respect to proposed item 2.03.
We believe that the proposal should be amended to take into consideration financial services companies for the same reasons stated under proposed Item 2.05 above.
Questions regarding proposed Item 3.03:
Yes, Form 8-K disclosure of unregistered sales of securities should be limited. Otherwise, companies will be forced to make filings for transactions, such as small option or warrant grants or exercises, that are immaterial to investors. As with other items, we suggest a 10% bright-line test, with qualitative materiality triggering disclosure of smaller sales.
Questions regarding proposed Item 3.04:
No. Avoid repetitive disclosure. Forms 10-K and 10-Q already require disclosure about Forms 8-K filed during the relevant period.
Questions regarding proposed shortening of filing deadline:
No. We believe the shortened deadline does not give sufficient time to prepare the Form 8-K, have it reviewed by the parties and their legal and accounting advisors, or to prepare the exhibits that might be required. See our third comment with respect to proposed Item 1.01, above.
Longer for all. We believe that a better alternative would be to add the proposed disclosure items, but require that companies file their reports within the current 15-day maximum deadline. This proposal allows companies sufficient time to prepare their reports without unreasonable deadlines and lets them and the markets, as opposed to regulation, drive earlier, quality disclosure when feasible and appropriate.
Yes. The added costs would include increased rush/overtime professional and printing/EDGARization fees, as well as actual and intangible business costs for additional internal procedures and personnel to attempt to comply on a timely basis.
Yes. Of course, the costs discussed in our preceding comment will be most significant for smaller companies, primarily because they have less capital and human resources to devote to filings. (However, note that we do not support different filing deadlines for different companies because of the confusion such a system could engender. Instead, as noted above we support longer, more reasonable deadlines applicable to all, which do not in and of themselves delay disclosure.)
Questions regarding proposed safe harbor:
Because of the significant affect the failure to timely file a Form 8-K would have on a company's and "innocent" investors' ongoing activities in the company's securities, if the 2-day deadline is adopted, short form eligibility, Form S-8 eligibility, shelf eligibility and Rule 144 resale availability should be protected or exempted for failure to timely file a Form 8-K.
Thank you for considering our comments. If you have any questions or need additional information, please contact the undersigned or Alexander M. Donaldson of this office at (919) 781-4000.
Donald R. Reynolds