767 Fifth Avenue
New York, NY 10153
(212) 418-6901 Fax
August 26, 2002
Mr. Jonathan G. Katz
U. S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington DC 20549
File No. S7-22-02
Dear Mr. Katz:
Maverick Capital is a manager of private investment funds with over $20 billion of gross assets under management. Our goal is to preserve as well as to grow our investors' capital. Maverick's investment style requires in-depth, fundamental research into every current and potential investment in our portfolio. Therefore, timely, accurate, relevant, and complete financial reporting is of the utmost importance to us, and we appreciate the opportunity to respond to the proposed changes in reporting requirements.
We support, in general, the Commission's proposal to expand the items that require a company to file a Form 8-K with the Commission. We also support the Commission's proposal to shorten the filing deadline for Form 8-K to two business days after a triggering event. We commend the Commission for its initiatives to provide investors with better and more timely disclosures of important corporate events.
We continue to be troubled by proposals that would apply only to domestic registrants and that fail to strengthen the financial reporting requirements for foreign registrants. As we have indicated in prior letters, requiring only domestic registrants to provide this highly relevant information would create one more significant financial reporting advantage to foreign registrants over domestic registrants at the expense of investors. The financial reporting model requires strengthening for all registrants; the current financial reporting requirements for foreign registrants are clearly deficient and the status quo for foreign registrants should not be perpetuated. Consequently, we believe that the Form 6-K requirements should also be amended to require disclosure of specific information.
In addition, the Commission requests information throughout the proposal as to whether a standard threshold should be specified that identifies a percentage (and its relative basis) above which a referenced transaction would be considered material. We do not support an approach that exclusively relies on a quantitative benchmark. The use of a percentage as a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that only a transaction that exceeds the specified percentage is likely to be material. However, we believe that materiality should be assessed based on the "total mix" of information, and should not be reduced exclusively to a numerical formula. Consequently, we recommend that the Commission highlight Staff Accounting Bulletin No. 99 to assist companies in making the assessment of materiality.
The following are specific comments on the proposal.
Entry into a material agreement not made in the ordinary course of business
We agree that any new or material modification to a material agreement should be disclosed in Form 8-K. We believe that the disclosure requirement should extend to letters of intent and other non-binding agreements as well. It would be useful to have expanded implementation guidance on the assessment of what is "in the ordinary course of business" to assure a degree of comparability.
Companies should be required to file copies of the material contracts with the Form 8-K. To the extent that companies seek to have portions of material contracts that are required to be filed with Commission redacted, we recommend that companies be required to disclose the reason and the length of time for which the request for confidential treatment is being made.
Termination of a material agreement not made in the ordinary course of business
We believe that the termination of a material agreement can provide important information to investors and should be subject to timely disclosure as proposed. We are concerned that the timing of the disclosure may be too delayed if required only upon receipt of written termination notice by the terminating party. We recommend modifying the requirement to extend it to contracts for which the counterparty is in default if, for example, 30 days have passed and the default has not been cured, even though no notice of termination has been received.
Termination or reduction of a business relationship with a customer that constitutes a specified amount of the company's revenues
We agree that a company should disclose the fact that a customer has terminated or reduced its scope of business with the company and that the loss of revenues is material to the company. We are troubled with specifying that this disclosure only needs to be made when the customer's (including groups of customers under common control) transactions constitute 10 percent or more of consolidated annual revenues, and we believe that a lower level, such as segment revenues, may be a more relevant basis for evaluating the significance of a customer. For example, transactions with a customer may be significant to a segment, perhaps representing as much as 30 percent or more of segment revenues, but still may not exceed 10 percent of consolidated revenues. As we mention earlier, we believe that SAB 99 provides a superior framework for assessing material transactions or events.
Completion of acquisition or disposition of assets
While companies will be required to file 8-K disclosures at the inception of agreements to acquire or dispose of assets, we believe that these disclosures should not replace the required disclosures for the culmination of an agreement and actual transfer of the assets. Because we believe that there should be consistent (harmonized) disclosure requirements for what constitutes a material contract to acquire or dispose of assets at the inception of that contract and at the completion of that contract, we recommend that the 10% threshold for the latter be deleted in favor of a "materiality" standard. If a 10% threshold is retained, it should be retained only as a de facto presumption that transactions that trip that threshold are material.
Creation of a direct or contingent financial obligation that is material to the company
We agree that a company should disclose information whenever it or a third party enters into a transaction or agreement that creates any material direct or contingent financial obligation to which the company is subject, and that those disclosures should extend to the origination of financial obligations. We do not believe that this disclosure should be limited to only those obligations to which a specified level of probability exists. Accounting rules currently require companies to comply with ongoing disclosure obligations for loss contingencies for which there is at least a reasonable possibility of a loss. That disclosure supplementing the 8-K filing requirement as to the origination of the obligation will provide useful information to investors who are focusing on a company's assets and current and potential future claims on those assets.
We note that the instructions define "contingent financial obligations" to include "guarantees, co-obligor arrangements, obligations under keepwell agreements, obligations to purchase assets and any similar arrangements and all other obligations that exist or may arise under an agreement. For purposes of this instruction, a `keepwell agreement' means any agreement or undertaking under which the registrant is, or would be, obligated to provide or arrange for the provision of funds or property to an affiliate or other third party." (Emphasis added.) We believe that an obligation that will be settled by transferring the issuer's equity securities also should be included in the definition.
Events triggering a direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation
We agree that a company should disclose events that trigger a direct or contingent material financial obligation. We believe that there are other items that should be disclosed as well that are highly important to investors as they assess the claims on a company's resources and its ability to generate resources by accessing the capital markets. Among these items are the withdrawal of a backstop facility or actions or events that preclude access to capital markets, particularly if a company has a demonstrated reliance on those markets.
Exit activities including material write-offs and restructuring charges or any material impairment
We strongly support the timely disclosure of material write-offs, restructuring charges, and exit activities. We agree that the items to be disclosed should include the date, description of the course of action and reasons for the write-off or charge, description of the asset subject to the write-off, an estimate of the amount and the portion that will be incurred in cash, an analysis of the effect on the company and segment affected.
Companies also should be required to disclose the number of employees affected.
The accounting for restructuring charges is unusual in that it has permitted companies to record a liability based on management's intent. While new accounting requirements will move liability recognition in some cases from the commitment date to a later period, we believe that tying the 8-K disclosure to when management with the authority to approve the action commits to take that action remains appropriate. We are concerned, however, that the disclosures that we will receive will become boilerplate as companies decline to provide informative detail stating that the company has not obtained all the necessary data. Given this expectation, we recommend that companies be required to provide supplemental 8-K disclosures when that information becomes available.
Companies should be required to update the disclosure if there is any material change in the previously disclosed information. These changes could include a determination that the charge previously disclosed in an 8-K or 10-Q would be materially different and, for example, a reversal of the charge would be recorded in the quarter.
A change in a rating agency decision, issuance of a credit watch or change in a company outlook
We support the required disclosure by a company when it receives a notice or other communication from any rating agency to whom the company provides information as to a change, withdrawal, or refusal to assign a credit rating to the company or any class of securities of the company. We agree that companies should discuss the effect of the change in credit rating on the company when the rating changes. The credit rating agencies should not be limited to those entities with which the company has a contractual relationship.
Movement of the company's securities from one exchange or quotation system to another, delisting of the company's securities from an exchange or quotation system, or a notice that a company does not comply with a listing standard
We support the required disclosure of any notice received from the exchange or association that is the principal trading market for a class of the company's securities that indicates that the company no longer satisfies the listing requirements or that a class of the company's securities have been delisted. We agree that the required disclosures should include the date, reasons, and company's planned response to the notice.
Conclusion or notice that security holders no longer should rely on the company's previously issued financial statements or a related audit report
We believe that this required disclosure is very important and strongly support disclosure when a company concludes that previously issued financial restatements should not be relied on or when the company is notified by its current or former accountants that previously issued reports on financials statements should not be relied on.
We support the disclosures proposed by the Commission, and would add that companies should disclose the effect on the Company that the failure to have financial statements that can be relied on will or is expected to have.
We also agree that the Company should follow similar procedures to those required when it has a change in auditor. That is, companies should be required to obtain and file a letter from the auditor as to whether the auditor agrees with the company's representations and disclosure about the reliance issue.
Unregistered sales of equity securities by the company
We support moving the reporting of this item from other Exchange Act reports to Form 8-K. As we indicated earlier, investors are interested in events that could or actions that have or will affect their ownership interests in the entity. We believe that there is also incremental information provided if companies are required to provide an aggregate listing in their quarterly or annual filings of the issuance of unregistered equity securities.
Material modifications to rights of holders of the company's securities
We support moving the reporting of this item from other Exchange Act reports to Form 8-K. The disclosure of material modifications to the rights of holders of any class of the company's registered securities along with a discussion of the general effect of such modifications should be required for all modifications, and not limited to those that exceed some specified threshold.
Departure of Directors or Principal Officers, Election of Directors, Appointment of Principal Officers
We support the disclosure of additional information about the resignation or unwillingness of a Director to stand for reelection due to a disagreement. If a Director provides any written correspondence to the Company regarding the Director's resignation, declination, or removal, that correspondence should be required to be filed. The company should be required to describe the circumstances of the director's withdrawal and the director should be offered the opportunity to file in writing a letter indicating whether the director concurs with the description. If the director declines to provide that letter, the company should state that that is the case.
We believe that similar requirements should be applied to officers that resign, are terminated, or reassigned.
Shortened filing deadline
We agree that the Form 8-K should be filed within two business days of triggering event.
We appreciate the opportunity to comment on this proposal. Please contact Lee Ainslie at (212) 418-6910, or Jane Adams at (212) 418-6915, if you have any questions or issues that you would like to discuss.
Lee S. Ainslie III Jane B. Adams
Managing Partner Senior Analyst