February 7, 2000
Via e-mail: email@example.com
Mr. Jonathan G. Katz, Secretary
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Form S-8 Release No. 33-7647
File No. S7-2-98
We submit this letter in response to the request of the United States Securities and Exchange Commission (the "Commission") for comments on its release, Registration of Securities on Form S-8, Release No. 33-7647, 63 Fed. Reg. 9648 (February 25, 1999) (the "Form S-8 Release").
Section II of the Form S-8 Release, "Registrant Eligibility Proposal," proposes to tighten the eligibility standards for the use of Form S-8. Currently, an issuer is not permitted to use Form S-8 if it has failed to make a timely filing of an Exchange Act report, until such time as the late report has been filed. As proposed, the new eligibility requirements would prevent an issuer that had made a late filing from using Form S-8 for 12 months after the original due date of the late filing. We are strongly opposed to this proposal, for the reasons discussed below.
We agree with the Commission that there is sometimes a correlation between issuers that fail to timely file Exchange Act reports and issuers that engage in other problematic practices, including abuse of Form S-8. However, by proposing as a remedy denying the use of Form S-8 to all late filers, the Commission casts its net too broadly. Late filings are not always the mark of an issuer with a nonchalant attitude towards the securities laws or an issuer facing serious business problems. They can sometimes be the result of administrative error, or a frustrating inability to track down an itinerant corporate officer or director at the last minute. Failure to timely file is a serious matter. But an issuer's single failure to timely file, quickly corrected, should not be punished as severely as a habitual violation.
The Form S-8 Release compares Form S-8 to Form S-2 and Form S-3, which also permit incorporation by reference, and which are currently barred to late filers for 12 months. While the
Commission is correct that the Form S-8 is structurally similar to Form S-2 and Form S-3, the principal uses of Form S-8 are very different. Forms S-2 and S-3 are used either for primary offerings, in which the issuer receives the funds, or for secondary offerings by large shareholders of the issuer. Denying the use of these forms to late filers therefore penalizes either the issuer, which was itself responsible for the late filing, or large shareholders, who presumably have some influence over corporate affairs. Form S-8, on the other hand, is used principally by holders of options granted under employee benefit plans. At least with respect to technology companies (and we think increasingly by companies in other sectors as well), options are frequently granted to the majority of company employees, including rank-and-file employees who have no control over the timing of the company's SEC filings.
We support as appropriate and necessary the current rule that prohibits the use of Form S-8 when current public information about an issuer is unavailable. However, the proposed 12-month penalty, if adopted, would preclude option exercise by employees for a substantial period of time. Given the increasing importance of equity compensation, the unavailability of Form S-8 could have a serious negative impact on such a company's ability to hire and retain employees. In addition, if the proposed rule is adopted, one particularly troublesome result will be that a number of options may expire during the period of time in which the issuer is unable to use Form S-8. This will cause issuers to face the following difficult decision: allow employees to lose their options entirely (which would, in our view, seriously penalize employees) or extend the terms of the expiring options (which could result in the issuer's incurring adverse accounting charges and in some cases could result tax issues at both the issuer and the employee level). Penalizing rank-and-file employees, who have little control over the timing of a company's SEC filings, for the company's failure to timely file seems fundamentally unfair. For these reasons, we respectfully request that the Commission reconsider its proposal to tighten the Form S-8 eligibility requirements in this manner.
We respectfully request that the Commission not interpret our commenting on only one proposal contained in the Form S-8 Release as an indication that we support or are indifferent to the other proposals contained in that Release. We have commented on the timeliness requirement issue because we believe our experience in this regard might assist the Commission in its consideration of this particular proposal. With respect to the other proposals, we generally support with the positions taken in the letter submitted on November 1, 1999 by the ABA Subcommittee on Employee Benefits regarding the Release. In particular, we would emphasize our support for the position taken in that letter regarding the proposed disclosure requirements with respect to consultant and advisor grants.
The views as reflected in this letter constitute a consensus of our individual perspectives. They do not reflect the official positions of the law firms or other organizations with which we are affiliated, or the clients of any of our law firms. Because this is a consensus document, we individually reserve the right to express views that may not be fully reflected in this letter.
Thank you for your consideration of the foregoing.
/s/ Sharon J. Hendricks
/s/ Marilyn N. Taketa
/s/ Linda M. DeMelis
/s/ Ann Yvonne Walker
/s/ J. Sue Morgan