August 26, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549-0609
Re: Proposed Rule: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date-File No. S7-22-02
Dear Mr. Katz:
Hogan & Hartson L.L.P. is pleased to submit these comments to the Securities and Exchange Commission (the "Commission") regarding the proposed rules regarding additional Form 8-K requirements and acceleration of the Form 8-K filing deadline set forth in Release Nos. 33-8106 and 34-46084. We represent many issuers subject to the reporting requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, including real estate investment trusts ("REITs") and other publicly-traded real estate companies. We submit these comments on their behalf.
This letter addresses only Item 1.01 of the proposal regarding entry into a material agreement. We support the Commission's efforts to ensure that issuers "provide investors with better and faster disclosure of important corporate events." 1 However, we believe that there is no public interest to be served by requiring companies to disclose entering into and the terms of letters of intent and other non-binding agreements, and, in fact such a requirement could in fact harm the very investors it is meant to protect.
Issuers Should Not Be Required to Disclose Letters of Intent and Other Non-Binding Agreements
We generally support the Commission's proposal to require disclosure by issuers when they enter into material agreements not made in the ordinary course of business. However, we respectfully submit that the Commission should not require disclosure of letters of intent and other non-binding agreements under proposed Item 1.01, for several reasons.
The materiality of letters of intent and other non-binding agreements must be evaluated based on their probability and magnitude. Letters of intent and other non-binding agreements are, by their nature, contingent or speculative. The U.S. Supreme Court ruled that the materiality of contingent or speculative facts depends upon "'a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.'" 2 We respectfully submit that by requiring disclosure regarding letters of intent and other non-binding agreements, the Commission would be removing, in essence, the probability portion of such analysis, and, in most cases, would be requiring disclosure of agreements not yet ripe for disclosure. The proposal makes it clear that this is not the intent of the Commission: ". . . the proposed item would not require disclosure about agreements still under negotiation . . . . We do not intend to change current law as to when disclosure about this negotiation is required." 3 Many letters of intent and other non-binding agreements, particularly in the real estate industry, are a step toward negotiating a binding agreement, a means to advance or facilitate further such negotiations. In fact, in most cases letters of intent and other non-binding agreements leave many significant substantive issues to be negotiated as part of reaching the "definitive" agreement. 4 We respectfully suggest that the timing of disclosure of letters of intent and other non-binding agreements continue to be governed by the Basic v. Levinson/Texas Gulf Sulphur probability/magnitude test in determining whether any disclosure is appropriate and at what time such disclosure is appropriate.
Required disclosure of letters of intent and other non-binding agreements would cause competitive harm or otherwise disrupt the ability of companies to negotiate agreements for the benefit of the company and its investors. In the proposal, the Commission asked for comments regarding whether disclosure of letters of intent and other non-binding agreements would "cause competitive harm or otherwise disrupt the ability of companies to negotiate agreements for the benefit of the company and its investors." 5 We believe that it would cause significant harm and disruption. Frequently, a letter of intent or other form of non-binding agreement is executed before many significant terms of the transaction have been agreed and before due diligence has commenced. Requiring companies to disclose negotiating terms that could be reviewed by their competitors could adversely affect continuing negotiations or increase the price the disclosing company will have to pay once a definitive agreement is reached or affect other material terms or conditions of the transaction, thereby possibly harming the very investors the proposal is meant to protect. This would also put public companies at a significant competitive disadvantage relative to privately-held companies. 6
* * * * *
We appreciate this opportunity to comment on the Commission's proposal to require disclosure of letters of intent and other non-binding agreements on Form 8-K, and would be happy to discuss further the Commission's proposal and the contents of this letter with the Commission. If you have any questions or comments, please do not hesitate to contact David Bonser (202-637-5868, e-mail: firstname.lastname@example.org) or David Slotkin (202-637-3675, e-mail: email@example.com).
Very truly yours,
HOGAN & HARTSON L.L.P.
|1||17 CFR 228, 229, 240, 249 (Release Nos. 33-8106; 34-46804)(June 17, 2002).|
|2||Basic, Inc. v. Levinson, 485 U.S. 224, 232 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849).|
|3||17 CFR 228, 229, 240, 249 (Release Nos. 33-8106; 34-46804)(June 17, 2002).|
|4||Separately, we also believe the Commission should more particularly define when an agreement is outside of the ordinary course of business. For instance, is an agreement (binding or not) to purchase real estate by a REIT or other real estate company outside its ordinary course of business? Also, does the size of such transaction merely affect the materiality analysis, or does it also play a part in determining whether a transaction is outside of the ordinary course of business?|
|5||17 CFR 228, 229, 240, 249 (Release Nos. 33-8106; 34-46804)(June 17, 2002).|
|6||We add that an unwanted side effect could be that companies will simply avoid memorializing non-binding understandings through letters of intent or other forms of non-binding agreements. In the absence of a writing, the materiality analysis under Basic v. Levinson would still apply, resulting in disparate treatment of a non-binding oral agreement and one memorialized into a letter of intent.|