Cleary, Gottlieb, Steen & Hamilton 2000 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20006-1801 41, AVENUE DE FRIEDLAND 75008 PARIS RUE DE LA L01 23 1040 BRUSSELS CITY PLACE HOUSE 55 BASINGHALL STREET LONDON EC2V 5EH one liberty plaza new york, ny 10006-1470 telephone (212) 225-2000 facsimile (212) 225-3999 MAIN TOWER NEUE MAINZER STRASSE 52 60311 FRANKFURT AM MAIN PIAZZA DI SPAGNA 15 00187 ROME BANK OF CHINA TOWER ONE GARDEN ROAD HONG KONG SHIN KASUMIGASEKI BUILDING 3-2, KASUMIGASEKI 3-CHOME CHIYODA-KU TOKYO 100-0013 August 26, 2002 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Proposed Rules Regarding Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date (File No. S7-22-02) Dear Mr. Katz: We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rules regarding additional disclosure requirements and acceleration of filing dates for Form 8-K set forth in Release Nos. 33-8106; 34-46084 (the "Release"). We appreciate the opportunity to comment on the matters discussed in the Release. We commend the Commission for its efforts to require more rapid disclosure of important corporate events, and believe that the Commission's general approach is consistent with the recently enacted Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act").1 However, we are concerned that the proposed two business day deadline will in many cases prove impossible to satisfy, particularly in light of the breadth of the proposed disclosure items and the fact-intensive nature of the materiality tests involved, and may inadvertently result in incomplete or misleading disclosure. We are also troubled by the consequences of noncompliance. Complying with the proposed rules will be difficult for many companies and the transition will not be seamless. Companies large and small will make mistakes, especially during the early phases of the new system. Under these circumstances, loss of eligibility for short-form registration, Form S-8 registration and Rule 144 resales would be an unduly harsh consequence for the issuer, its shareholders and employees. I. General Comments A. The proposed disclosure regime would satisfy the Sarbanes-Oxley Act's call for a "rapid and current" disclosure system. In the Release, the Commission requests comment on whether, in lieu of or in addition to the proposed rules, it should adopt a broad principle requiring companies to report "highly important" corporate events, leaving the company to determine the trigger for and scope of the necessary disclosure. Subsequent to the Commission's issuance of the Release, Section 409 of the Sarbanes-Oxley Act added new Section 13(l) to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Section 13(l) requires issuers to disclose publicly in plain English "on a rapid and current basis" such information as the Commission may require concerning material changes in their financial condition or operations. The current reporting requirements called for by the Sarbanes-Oxley Act appear to endorse the proposals contained in the Release, as evidenced by the Sarbanes-Oxley Act's use of the terms "rapid and current," rather than "continuous." Accordingly, we believe the approach reflected in the Release would fulfill the Commission's requirements under Section 409 of the Sarbanes-Oxley Act. As a practical matter, a principles-based continuous disclosure system would be very difficult to implement due to its inherent uncertainties. The general counsel and head of investor relations, as well as other members of senior management of a company, would be required to continuously monitor and evaluate all corporate events on a real-time basis to assess their disclosure impact. This activity could prove highly disruptive, as it would significantly distract management from focusing on running the company's business. In addition, a continuous disclosure regime would increase the litigation exposure of reporting companies both for incorrect judgments and even for delays of a day or two while management and counsel determine whether disclosure is necessary and draft the appropriate disclosure. The absence of bright-line standards for what information must be disclosed and when, together with the short timeframe for assessing the importance of events and preparing the necessary disclosure, could subject companies to an endless stream of after-the-fact second guessing over the timing and scope of disclosure. B. The two business day deadline is unworkable; a flat five business day standard (without an extension provision) should be adopted for all items. In the Release, the Commission requests comment on whether a longer filing deadline, such as three business days or five business days, should be adopted for some or all of the proposed disclosure items. We believe that a flat five business day deadline for all items would be a simpler and more workable solution than the Commission's proposal to combine a two business day deadline with an automatic two business day Rule 12b-25 extension. Our view is based on the following concerns. Two business days is an unreasonably short deadline in light of the fact-intensive nature of the materiality-based standards used in most of the disclosure items. The Commission's proposal would require the filing of a Form 8-K with respect to a number of events based on whether they are "material" to the issuer. As the Commission has noted in other contexts, the "onerous duty of making materiality decisions" is such that it cannot be properly discharged without considering "all of the relevant circumstances."2 Moreover, the proposed rules do not define "material," but instead rely on formulations developed by courts over the years, formulations that are by their very nature imprecise.3 Requiring companies to make fact-specific materiality determinations about the broad range of events and contracts covered by the proposed disclosure items on a two business day timeframe would be unduly burdensome. Legal and investor relations personnel may not always be familiar with the underlying agreements or events. Collecting and analyzing all of the relevant facts necessary to make a proper materiality determination takes time, frequently requires multiple layers of review within a corporate organization and often involves persons who may not be familiar with the legal concept of materiality. These difficulties will be even greater for large multinational companies with far-flung operations. Two business days often will not be enough time to ascertain with any degree of certainty whether or not an event or agreement is material. A two business day deadline will undermine efforts to prepare meaningful, non-boilerplate disclosure. Many of the proposed disclosure items would require Form 8-K reports to include "a discussion of management's analysis of the effect" of the agreement or event being reported. In the Release, the Commission cautions against "general boilerplate statements" and expresses a preference for quantitative information wherever possible. Even if company officials are able to make the materiality determination discussed in the preceding paragraph within two business days, it will be difficult for them to analyze thoroughly the effects of a particular agreement or event on the company, prepare disclosure to summarize that analysis, and review the disclosure internally all within two business days. We believe that in a two business day regime, the quality of information provided in response to this requirement will be poor, given the limited time to ascertain the relevant facts and formulate disclosure. A two business day regime would also severely limit the time available for verification of information prior to filing and would thus heighten the risk of inadvertent errors. Obtaining, preparing and proofreading exhibits for filing via EDGAR is time-consuming, and could easily take longer than two business days. Many of the agreements and other documents the Commission would require as exhibits will take significant time to prepare for filing via the EDGAR system. This will be particularly problematic for agreements or other required exhibits that do not already exist in electronic form, or for which an electronic copy cannot be readily obtained. In such cases, the process of obtaining a copy of the agreement, keying in the text, converting it to EDGAR format and proofreading prior to filing could easily take longer than two business days.4 Similarly, the two business day deadline will be virtually impossible to meet in situations where the original document or agreement must first be translated into English prior to filing or where a confidential treatment request must be prepared and filed to protect sensitive information. The proposed Rule 12b-25 procedure is unnecessarily complicated and would divert issuer attention from the more important task of preparing and filing the Form 8-K report. In light of the difficulty in meeting the two business day deadline, issuers are likely to make such frequent use of the automatic Rule 12b-25 extension that it would be far better simply to adopt a more reasonable original deadline. Moreover, conditioning the automatic two business day extension on the filing of a Form 12b-25 within one business day of the original deadline would both needlessly divert an issuer's resources and attention away from the more important task of preparing and filing the required Form 8-K and create yet another source of inadvertent noncompliance. The five business day deadline alternative set forth in the Commission's request for comment would be a better solution. A five business day deadline for all items,5 while still ensuring rapid and current reporting, would provide a full calendar week to prepare and file the required Form 8-K, thereby allowing companies the time necessary to collect and analyze the relevant facts necessary to make required materiality determinations. It would provide the time needed to prepare and verify meaningful, non-boilerplate disclosure. It would also ensure that companies have enough time to obtain, prepare and proofread exhibits to be filed via EDGAR. Moreover, a flat five business day deadline would be a less complicated and more appropriate approach than combining a two business day deadline with an automatic two business day Rule 12b-25 extension.6 C. If the Commission retains the two business day timetable, it should take alternative steps to alleviate the difficulties identified above. If, despite the concerns discussed above, the Commission decides not to adopt a five business day deadline, the Commission should take the following steps to alleviate the difficulties associated with a two business day deadline (or any other period less than five business days). Adopt bright line standards. If the Commission retains the two business day deadline, it should tie the disclosure obligations to specific financial thresholds rather than to general materiality tests. Adopting bright line rules would simplify the task of identifying which contracts or obligations must be disclosed, saving time and making it easier for companies to meet the two business day deadline. Specifically, we suggest that the Commission adopt rules that require disclosure of entry into or termination of a material contract or creation or triggering of a direct or contingent financial obligation only if (i) the contract involves an annual amount that exceeds 10% of the registrant's annual consolidated revenues or the obligation involves an amount that exceeds 10% of the registrant's consolidated assets7 or (ii) the relevant contract would be required to be filed as a material contract under Item 601(b)(10)(iii) of Regulation S-K. Limiting the disclosure obligations in this manner would appropriately focus the disclosure requirements on "unquestionably material" transactions or contracts, while the bright-line nature of the rules would make them simpler for issuers to apply on the two business day timeline. Permit analytical information to be filed by amendment. As noted above, two business days will frequently be insufficient to permit companies to formulate meaningful analyses of reported events. If the Commission retains the two business day deadline, we suggest that it adopt a rule that requires companies to report the events called for by the various disclosure items within two business days, but permits analytical information to be filed by amendment within a given additional period (e.g., three business days) after the deadline for the original Form 8-K filing. This approach would ensure prompt reporting of the event itself, while allowing companies sufficient time to prepare more thoughtful and useful disclosure for investors.8 Permit exhibits to be filed by amendment. To alleviate the difficulties companies will have in obtaining, preparing and proofreading exhibits for filing within the two business day window,9 we suggest that the Commission adopt a rule that permits such exhibits to be filed by amendment within a given additional period (e.g., three business days) after the deadline for the original Form 8-K filing.10 This extended deadline for exhibits would also alleviate the difficulties companies may have in translating exhibits or preparing confidential treatment requests within the two business day deadline. D. The consequences of late filing are unnecessarily severe; a late filing under the new regime should not suspend eligibility for short-form and Form S-8 registration and Rule 144 resales. Under the proposed rules, a company that fails to file a current report on Form 8-K would not be eligible for short-form registration for at least one year from the date of the late filing. In light of the difficulties issuers will have in complying with the new rules, we believe these consequences are unnecessarily severe and would be extremely disruptive to the U.S. capital markets, particularly for issuers that make extensive use of the shelf registration system. Filing late would also make Rule 144 temporarily unavailable for security holders' resales of restricted and control securities, and would make Form S-8 temporarily unavailable for registration of employee benefit plan securities.11 This result would severely penalize shareholders and employees who have no control over the timing of corporate disclosure.12 Our views are based on the following observations: Given the short time frames involved, even slight delays may result in inadvertent late filings. Given the short time frame, even slight delays in forwarding information to the persons responsible for Exchange Act reporting may cause a company to miss the filing deadline. The filing deadline will be particularly difficult to meet given the proposal to require reports filed under Sections 1, 2 and 3 of Form 8-K to discuss management's analysis of the effect of the relevant event. Moreover, many of the disclosure items are new, and it will take time for companies to understand their practical application. The harm to investors from late filings generally will be insignificant. There is no particular significance attributable to the deadline imposed under the proposed rules. For most of the proposed disclosure items, a modest delay in reporting generally would not cause harm to investors. Investors would not be well-served by widespread ineligibility for short-form registration. A hair-trigger rule that could lead to widespread ineligibility for short-form registration would prove highly disruptive and would needlessly deprive investors and the financial markets of the benefits of the integrated disclosure system. Requiring a company that is otherwise current in its Exchange Act reporting to offer all of its securities via the long-form registration process would add significant extra expense and burden without meaningfully improving the information available to investors. In light of the above, we urge the Commission to provide that delinquent filings under the proposed rule would not affect eligibility for short-form and Form S-8 registration and for Rule 144 resales.13 Doing so would be consistent with the approach taken by the Commission in similar contexts such as Regulation FD and the Commission's recent proposal regarding current reporting of certain management transactions.14 As in those contexts, suspending eligibility upon delinquent filings would lead to unduly severe and ill-adapted consequences. Instead, we believe the Commission should promote compliance with the rules by relying on its general enforcement powers to proceed against delinquent companies on a case by case basis. Doing so would allow the Commission to better focus attention on those cases most deserving of sanction and to impose tailored penalties that are appropriate in light of the particular circumstances of such cases. We note that there has been generally excellent compliance with Regulation FD relying solely on the Commission's general enforcement powers. E. Eligibility for the safe harbor should turn on the knowledge of those primarily responsible for corporate disclosure; the safe harbor should also cover good faith filing failures. The proposed safe harbor from Commission enforcement action under Sections 13 and 15(d) should be narrowed to focus on cases involving intentional misconduct. As originally proposed, paragraph (c)(ii) provides a two-part test that would deny eligibility for the safe harbor if either any officer, employee or agent of the registrant knew, or was reckless in not knowing, that a report on Form 8-K was required to be filed; or once an executive officer of the registrant became aware of the company's failure to file a required Form 8-K, the company failed to file promptly (and not later than two business days after becoming aware of its failure to file) a Form 8-K with the Commission containing the required information. The first part of this two-part test should be abandoned, because it would deny the safe harbor in situations that do not amount to intentional misconduct. First, rather than focusing on the knowledge of every officer, employee and agent of an issuer (most of whom would ordinarily play no role in the reporting process), the rule should focus on the knowledge of the persons at the company that have primary responsibility for corporate disclosure - executive officers.15 As the Commission implicitly acknowledges in the second part of the two-part test, until an executive officer is aware of the filing obligation, the company's failure to file would be inadvertent rather than intentional. Second, in light of the difficult interpretive issues raised by the proposal, the recklessness standard should be discarded in favor of a knowledge standard to more appropriately limit the denial of the safe harbor to situations involving intentional misconduct. Turning to the second part of the test, if the Commission adopts the five business day deadline suggested above, it should make a conforming change to paragraph (c)(ii) of the safe harbor to extend the period for making the filing described in that paragraph from two business days to five business days. The resulting rule - which would permit use of the safe harbor as long as the company files the required Form 8-K within five business days of an executive officer becoming aware of the need to file a report - would more appropriately focus penalties for noncompliance on situations involving intentional misconduct. In addition, we believe the safe harbor should be expanded to provide relief in cases where issuers fail to meet the deadlines despite good faith efforts to do so. Given the short timeframe, inadvertent mishaps may delay filing beyond the deadline despite an issuer's good faith efforts. F. There should be a reasonable transition period. As discussed above, we believe that the transition to the new rules will be difficult for most issuers. The proposed rules will fundamentally transform the Exchange Act reporting system. They will significantly increase the number and frequency of reports filed with the Commission, and will strain the internal reporting systems of many companies. Long-established internal procedures that were appropriate under the old periodic reporting regime will often prove inadequate to meet the time demands of the proposal. Adapting to the new system will require most companies to make significant changes to their existing reporting processes. Educating multiple layers of personnel about, and adapting reporting systems to, the new disclosure items and the accelerated deadlines will take time, all in an environment of additional disclosure requirements under the Sarbanes-Oxley Act and the Commission's other recent initiatives. Accordingly, if the Commission adopts the proposed rules, we suggest that it provide for a transition period before filing under the new rules becomes mandatory. We believe that a transition period of at least six months would be appropriate. During this period, issuers would be permitted, but not required, to file reports in accordance with the new rules. The experience gained and issues encountered during the transition period would have the additional benefit of allowing the Commission to fine-tune the rules before they become mandatory. G. If the amendments to Rule 12b-25 are adopted, the availability of the extension should not turn upon filing of a Form 12b-25. If, despite our arguments in Part I.B above, the Commission decides to retain the two business day deadline and the automatic two business day Rule 12b-25 extension rather than adopting a flat five business day deadline, it should not make filing a Form 12b-25 a condition to receiving the extension. Given the short time periods involved, a requirement to file a Form 12b-25 report would be unduly burdensome and would both needlessly divert an issuer's resources and attention away from the more important task of preparing and filing the required Form 8-K and create yet another source of inadvertent noncompliance. Instead, the Commission should permit companies to provide the disclosure called for by Form 12b-25 regarding the reasons for the late filing in the Form 8-K report itself. H. Changes in critical accounting policies should not require reporting on Form 8-K. In the Release, the Commission requests comment on whether it should adopt a requirement that an issuer file a report on Form 8-K whenever it changes a critical accounting policy. We do not believe that such a requirement is necessary. In most cases, we believe that changes in critical accounting policies are likely to be made in conjunction with a company's outside auditors at or near the time that the company prepares its annual or quarterly report, and those reports already provide a suitable forum for such disclosures where such a change can be placed in context, given the financial statements and related notes and the MD&A disclosure contained in such filings. I. The proposals in the Release should not be extended to foreign private issuers. In the Release, the Commission requests comment on whether it should require disclosure by foreign private issuers of specific information.16 We would not support the extension of the Commission's proposed reporting regime to foreign private issuers. In addition, although the mandate in Section 409 of the Sarbanes-Oxley Act that the Commission adopt rules to implement current reporting could be read to apply equally to foreign private issuers and U.S. issuers, the legislative history of the Sarbanes-Oxley Act 17 and the historical deference the Commission has afforded to foreign regulators suggest that any new rules for foreign private issuers should be adopted only after significant consultation with foreign regulators to ensure appropriate deference to local law and practice.18 Currently, foreign private issuers that are required to file periodic reports under the Exchange Act have an annual obligation to file a Form 20-F. Their only additional reporting obligation is to file a Form 6-K with respect to any material information provided to shareholders, regulators or stock exchanges pursuant to their home jurisdiction requirements. As a result, U.S. filing requirements beyond the annual Form 20-F are effectively determined by reference to home jurisdiction requirements. Requiring compliance by non-U.S. issuers with the Commission's proposed new current reporting regime, without taking into account local law and practice, would result in a significant increase in the level of intrusion of the U.S. securities laws in the disclosure practices and corporate activities of non-U.S. issuers, and would represent a dramatic shift in the analytical framework for periodic disclosure requirements applicable to non-U.S. issuers.19 Moreover, to the extent that public disclosure pursuant to Commission rules would trigger home jurisdiction disclosure, application of the proposal could result in home jurisdiction requirements being determined by reference to U.S. requirements rather than vice versa. These increased burdens would undermine efforts to encourage foreign private issuers to list their securities in the United States. Before proposing any new current disclosure rules for foreign private issuers, the Commission should consult with non-U.S. regulators and issuers as to ways in which any proposed rules might be harmonized with local law and practice. If the Commission feels the need to address this issue with respect to foreign private issuers, we believe it should be done under the aegis of the International Organization of Securities Commissions and only after significant discussions with securities regulators in other jurisdictions. II. Comments on proposed disclosure items In addition to the general comments above, we have the following comments on specific proposed disclosure items. A. Item 1.01 - Entry into a Material Contract Companies should not be required to disclose entry into letters of intent and other non-binding agreements. We do not support the Commission's proposal to require disclosure of letters of intent and other non-binding agreements (which would, unless clarified, arguably include non-binding oral agreements). We believe limiting the proposed rule to definitive agreements that are binding would strike a more appropriate balance between the general desire of investors for prompt disclosure and the legitimate need for confidentiality to complete many negotiations. Our view is based on the following observations: Early disclosure will disrupt negotiations. Given the delicate nature of contract negotiations, requiring disclosure of interim non-binding agreements could cause many negotiations to fall apart, destroying deals that otherwise could prove beneficial to a company and its shareholders. The proposed terms could cover many matters that are not ripe for disclosure. The terms "letter of intent," "non-binding agreement" and "any similar document" are vague and undefined, and could potentially apply to a wide range of matters that have not traditionally been viewed as ripe for disclosure. For example, many companies engaged in complex negotiations begin by reaching tentative agreement on an interim term sheet that forms the basis for further negotiations. Requiring disclosure of such documents would force companies to disclose the existence of contract negotiations well before they have ripened into a true agreement20 and at a much earlier stage than might otherwise be required under current law.21 Indeed, the language is vague enough to potentially apply to tentative agreements that are subject to diligence, negotiation of definitive agreements and board approval, even to such tentative agreements that are not in writing or are represented only by unsigned term sheets.22 Given that many such interim understandings never ripen into a final agreement, requiring their disclosure would be burdensome and potentially misleading. Based on the Commission's language in the Release to the effect that "this proposed item would not require disclosure about agreements still under negotiation," we do not believe this is the Commission's intent. Accordingly, we suggest that the proposed disclosure item be clarified to eliminate the requirement to disclose letters of intent and other non-binding agreements. Eliminating the requirement to disclose interim agreements would ensure consistency with Item 2.03. Proposed Item 2.03 of Form 8-K would require disclosure of material direct or contingent financial obligations, but only if a definitive agreement that is unconditional or subject only to customary closing conditions has been reached. It is unclear why a company should be required to file a term sheet for a credit facility under Item 1.01 if it would not be required to do so under Item 2.03. Adopting a consistent rule limited to definitive agreements would alleviate confusion and ensure greater consistency within the regulatory scheme. B. Item 1.02 - Termination of a Material Agreement A terminating party should not be required to file a Form 8-K report until it has informed the other parties to the agreement of the planned termination. When the company is the terminating party, it should not be required to report the termination of the agreement until it has given formal notice of the planned termination to the other party or parties to the agreement. Requiring a company to file a Form 8-K report within a fixed period after it first "decides" to terminate an agreement (as provided in Instruction 1 to the proposed disclosure item) could deprive that company of needed flexibility in determining when to apprise the other parties to the contract of its intent to terminate, and would further expose the company to unnecessary litigation risk. It may also be difficult to pinpoint the moment at which a corporation "decides" to take an action. Tying the disclosure obligation to the giving of notice would result in a rule with easy-to-apply, objective standards and would provide companies with the needed flexibility. No filing should be required upon expiration of an agreement by its terms. In the Release, the Commission asks whether it should require disclosure upon expiration of a material agreement by its terms. We do not support such an expansion of this item. Parties often continue their business relationship after expiration of a contract according to its terms, and requiring disclosure of such expirations could prove unnecessarily disruptive. To the extent a termination date is material, existing disclosure of that fact in the registrant's annual or quarterly report - to the extent required - should be sufficient. Disclosure of termination of letters of intent and other non-binding agreements should not be required. As noted above, we do not support a requirement to file a Form 8-K report upon entry into letters of intent and other non-binding agreements. Although we believe that if a party decides to file such a report of its own accord, it will likely file a report upon termination of such arrangements, we do not think a mandatory disclosure item is necessary or desirable. C. Item 1.03 - Termination or Reduction of a Business Relationship with a Customer We do not support the adoption of proposed Item 1.03, because we believe it will be extremely difficult to apply in practice and could have unintended consequences. Customer relationships are typically fluid, often informal and frequently subject to rapid change. Given the informal nature of such relationships, it may not always be immediately clear when a business relationship has ended, or when negotiations have been completed. In the absence of a formal contract, a major customer may leave today in search of better pricing, only to return at a later date. This will be a particularly difficult issue in light of the short time frames for disclosure - two business days (or as suggested above, five business days) may not be long enough to distinguish whether the customer has really terminated the relationship or is just "negotiating." Requiring public disclosure could also disrupt the negotiating dynamic, giving major customers even greater leverage in their negotiations with a company. If, despite these concerns, the Commission chooses to adopt Item 1.03, we suggest that the following modifications be made to make the item easier to apply: Disclosure should be required only when a company has received written notice or written confirmation from a customer that the business relationship has been terminated. Given the fluid, informal nature of customer relationships, a company should not be required to file a Form 8-K report announcing the loss of a customer unless and until that customer has formally notified the company that it is terminating its business, and negotiations to avoid that result have ended. Tying the disclosure requirement to the receipt of notice or confirmation from the customer would eliminate major uncertainties. A mere reduction in orders should not give rise to a disclosure obligation. So long as a customer continues to do business with a company, a mere reduction in orders should not trigger a Form 8-K disclosure requirement. Requiring a company to continuously monitor the level of sales to its principal customers and to file a Form 8-K report whenever a reduction equal to more than 10% of the prior year's total sales has occurred would be burdensome to implement. Making the calculation would be difficult and could require significant estimations, as a customer whose purchases decrease in one month might have purchases that increase significantly in the following month. It might also be difficult to measure based on dealings with multiple affiliated entities that depending on the circumstances may or may not constitute a single customer. D. Item 2.03 Creation of a Direct or Contingent Financial Obligation that is Material to the Registrant The definition of "contingent financial obligation" should be further refined. As proposed, the definition of "contingent financial obligation" could extend to a wide variety of provisions that would not ordinarily be thought of as contingent financial obligations. The catchall phrase "and all other obligations that exist or may arise under an agreement" is exceptionally broad and should be deleted. We recommend that the definition be redrafted as follows (additions are underlined in bold): "Contingent financial obligation" means any financial obligation that is conditioned upon the occurrence of a future event and includes guarantees, co-obligor arrangements, obligations under keepwell agreements, obligations to purchase assets and any similar arrangements. The definition of "keepwell agreement" should be further refined. As drafted, the term "keepwell agreement" could cover a wide range of agreements not designed for credit support. We recommend that the Commission amend the definition to read as follows (additions are underlined in bold): 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 that is either (i) entered into in connection with or as a condition to a financing or (ii) made in order to maintain the minimum net worth of that affiliate or third party or to meet a minimum financial ratio or similar numerical requirement. Specific disclosure of underwriter and agent compensation and fees should not be required. We do not believe that this information, which is frequently not publicly disclosed, is of sufficient per se importance to merit specific disclosure once disclosure regarding the nature and amount of the obligation has been provided. Direct or contingent financial obligations that are created in the ordinary course of business should not require disclosure. In Items 1.01 and 1.02, the Commission does not propose to require disclosure of contracts entered into in the ordinary course of business. We believe the same logic should apply to direct and contingent financial obligations, particularly if the Commission does not adopt a 10% threshold similar to that discussed above in Part I.C. E. Item 2.04 -- Events Triggering a Direct or Contingent Financial Obligation that is Material to the Registrant. The item should refer only to the triggering of a contingent financial obligation. A direct financial obligation, by definition, will already be "triggered" from the moment it is incurred. F. Item 2.05 -- Exit Activities Including Material Write-Offs and Restructuring Charges The triggering event for disclosure should be when the company determines the amount of the write-off or restructuring charge. Although companies generally announce the need for write-offs and restructuring charges when they announce a restructuring, in many instances the accounting treatment and estimate of the restructuring charge or write-off may be determined more than two business days after the decision.23 This is the case because significant analytical work is often required to support the amount of the write-off or charge. Tying the disclosure obligation to when the write-off or charge is finally determined would allow companies adequate time to make an accurate determination before filing. G. Item 2.06 -- Material Impairments The triggering event for disclosure should be when the appropriate party actually records the impairment charge. Tying the disclosure obligation to when the impairment charge is actually recorded would allow companies to file once the amount of the impairment charge has been determined. This timeframe would better accommodate the difficulties that may arise in determining the amount of an impairment. Disclosure of the asset's carrying value and other additional information should not be required. We believe that the Commission should give companies flexibility in deciding what level of detail to provide regarding material write-offs. In light of the short timeframe, we recommend that the required disclosure items be kept brief so the proposed deadlines are achievable. H. Item 3.03 -- Unregistered Sales of Equity Securities Disclosure should be required only for transactions involving substantial dilution. Although unregistered sales of equity securities sometimes involve substantial dilution for existing shareholders, the quantities of equity securities issued in unregistered sales are frequently small.24 We suggest that the Commission limit the Form 8-K disclosure obligation to unregistered sales of common stock, or securities convertible into or exchangeable for common stock, representing more than 10% of the outstanding common stock of the company held by nonaffiliates.25 I. Item 5.01 -- Changes in Control of Registrant We support the clarification that responses may be made by incorporation by reference. The Commission requests comment on whether permitting incorporation by reference is appropriate. We believe this clarification is appropriate. It would be inconsistent with the Commission's general approach to incorporation by reference under the integrated disclosure system to require companies to repeat disclosure made in previous Exchange Act filings. J. Item 5.02(a) -- Departure of a Director due to a Disagreement Disagreements should only be disclosed where provided by the director in writing. Although we generally support the adoption of proposed Item 5.02(a), we suggest the Commission reconsider the requirement that a company disclose disagreements over the Company's operations, policies or practices in situations where the director does not state those disagreements in writing. In our experience, few directors agree with every decision made by management. In the absence of a letter from the director linking his or her resignation to a specific disagreement, it would be difficult for a company to determine what specific disagreements exist, if any. K. Item 5.02(b) -- Departure of a Director for reasons other than a Disagreement; Departure of Certain Officers A description of the reasons for the resignation, termination or reassignment should not be required. Proposed Item 5.02(b)(2) requires a "description of the reasons for the event" when a named officer or covered director resigns, is terminated or is reassigned. This conflicts with the Commission's statement in the narrative portion of the Release that "if an officer resigns, is terminated or is reassigned . . . the company would not be obligated to disclose the reasons for . . . the departure." We suggest that the Commission revise Item 5.02(b)(2) to delete the requirement that the reasons for the departure be provided. We do not believe that a company should be required to provide information about disagreements with departing officers or to seek a departing officer's explanation for the reasons for his or her departure. Requiring a company to publicly debate disagreements over business strategy or policy with departing officers would make it more difficult for companies to terminate officers in a manner that limits adverse public relations impact and avoids increased litigation risk. L. Item 5.04 -- Material Events Regarding the Registrant's Employee Benefit, Retirement and Stock Ownership Plans Item 5.04 is no longer necessary in light of Section 306(b) of the Sarbanes-Oxley Act. In light of the adoption of Section 306(b) of the Sarbanes-Oxley Act, we believe Item 5.04 is no longer necessary and should not be adopted. The proposed disclosure would be duplicative of information that will already be provided to plan participants under the Sarbanes-Oxley Act, and investors that are not plan participants generally will have little need for information regarding blackout periods under employee benefit plans in which they do not participate. * * * We thank you for the opportunity to submit this comment letter. We would be happy to discuss with you any of the comments described above or any other matters you feel would be helpful in your review of the proposal. Please do not hesitate to contact Victor I. Lewkow, Leslie N. Silverman, Craig B. Brod or Janet L. Fisher in New York (212-225-2000) or Edward F. Greene in London (44-207-614-2200) if you would like to discuss these matters further. Very truly yours, CLEARY, GOTTLIEB, STEEN & HAMILTON cc: The Honorable Harvey Pitt, Chairman The Honorable Cynthia A. Glassman, Commissioner The Honorable Harvey J. Goldschmid, Commissioner The Honorable Paul S. Atkins, Commissioner The Honorable Roel C. Campos, Commissioner ___________________________ 1 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002). 2 Staff Accounting Bulletin No. 99 (Aug. 12, 1999) (emphasis in the original). See also Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information (1980) ("The predominant view is that materiality judgments can properly be made only by those who have all the facts"). 3 See Basic v. Levinson, 485 U.S. 224, 231 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1977). 4 Even converting heavily formatted electronic documents to EDGAR format frequently takes significant time. 5 We believe that adopting a uniform five business day deadline for all items will make the rules easier to apply and less confusing than a system with multiple filing deadlines. If the Commission is unwilling to adopt this approach, a reasonable alternative would be to impose a five business day deadline for all events except those that by their nature are so significant that senior officials will always know of the event in advance and therefore will have time to begin preparation of the Form 8-K filing in advance. We would limit these events to entry into definitive agreements involving a change in control of an issuer, the sale of substantially all of the assets of an issuer or the acquisition of a business in which any of the conditions specified in the definition of "significant subsidiary" in Rule 1-02(w) of Regulation S-X exceeds 50 percent, or transactions with directors or executive officers of an issuer. 6 If the Commission adopts the five business day deadline, the proposed automatic two business day Rule 12b-25 extension should no longer be necessary. 7 The proposed 10% tests would be consistent with the approach taken to customer relationships under proposed Item 1.03 and the 10% test in proposed Item 2.01. They would also be consistent with the approach taken in Item 601(b)(4) of Regulation S-K (long-term debt instruments representing less than 10% of total assets need not be filed as exhibits), Item 101(c) of Regulation S-K (subject to certain exceptions, disclosure of revenues from specific products is required only if they exceed 10% of consolidated revenues during the past three fiscal years), and Item 103 of Regulation S-K (subject to certain exceptions, litigation involving less than 10% of current assets need not be disclosed). The Commission should provide appropriate exceptions for situations where Item 601(b)(10) would not require the filing of a contract as an exhibit, e.g., for contracts that would be covered by Item 601(b)(10)(ii)(C) of Regulation S-K, we would recommend that the Commission retain the 15% test set forth in that Item. 8 Assuming the Commission accepts our recommendation (in Section II.A. below) that Item 1.01 be limited to definitive agreements (and not letters of intent or other non-binding agreements), the Commission could require analyses to be filed by the original deadline for certain highly significant events in circumstances where senior officials of a company will always know of the event in advance and therefore will have time to begin preparation of the Form 8-K filing in advance of the reportable event. See footnote 5 of this letter. 9 A specific provision on this point is desirable in light of the wide range of mishaps that could delay filing beyond the two business day deadline. Many foreseeable mishaps (e.g., late or misplaced packages, etc.) that could delay filing beyond the two business day deadline would not be covered by existing safeguards such as Rule 201 of Regulation S-T. 10 Exhibits could be required earlier for the events described in footnote 9 of this letter. 11 The registration of resales of plan securities on form S-8 also requires the registrant to satisfy the requirements for use of Form S-3, and accordingly, failure to file a Form 8-K on a timely basis would result in loss of availability of Form S-8 for resales for at least one year. 12 We also think it is unreasonable to deprive a potential acquirer (whether in a friendly or a hostile transaction) of the ability to incorporate information by reference in a Form S-4 filing due to the issuer's noncompliance with the proposed current disclosure requirements. 13 In the alternative, the Commission could expand the safe harbor to preserve such eligibility in cases where the conditions of the safe harbor are met. If the Commission takes this approach, it should adopt the changes to the safe harbor discussed in Part I.E of this letter. 14 See Rule 103 of Regulation FD (failure to comply with Regulation FD does not affect eligibility for Forms S-2, S-3 or S-8 or resales under Rule 144). See also SEC Release Nos. 33-8090; 34-45742 (Apr. 12, 2002) (proposing amendments to the applicable registration statement form instructions and Securities Act Rule 144 so that delinquency in filing Form 8-K reports concerning proposed disclosure item would not affect form eligibility or eligibility for Rule 144 resales). 15 Indeed, as a practical matter, even the term "executive officer" may capture officers who are not directly involved in the preparation of Exchange Act reports. The Commission should consider limiting this provision even more narrowly to focus on the subset of executive officers who are primarily responsible for the preparation of corporate disclosure. 16 The Commission also requests comment on whether it should amend Form 6-K to change the list of illustrative items that may be considered material. We believe it could be beneficial to amend the list of illustrative items in the instructions to Form 6-K to track the general categories for domestic issuers. 17 During the Senate conference debate to approve the bill, Senator Enzi stated: While foreign issuers can be listed and traded in the U.S. if they agree to conform to [U.S. generally accepted accounting principles] and New York Stock Exchange rules, the [Commission] historically has permitted the home country of the issuer to implement corporate governance standards. Foreign issuers are not part of the current problems being seen in the U.S. capital markets, and I do not believe it was the intent of the conferees to export U.S. standards disregarding the sovereignty of other countries as well as their regulators. 18 This deference is particularly appropriate in light of the fact that the principle of rapid and current disclosure of material events is already a feature of the disclosure system in many countries. Many foreign private issuers are already required to report material events on a continuous or otherwise rapid and current basis under home country requirements, and submit this information on Form 6-K as a matter of course. 19 Guided by principles of comity, the Commission and U.S. self-regulatory organizations have deferred to home-country regulation where doing so would not jeopardize the interests of U.S. investors. Consistent with this deference, foreign private issuers have been exempted from the requirements to file proxy statements and quarterly and current reports under the Exchange Act and their securities are not subject to Section 16(a) reporting or Section 16(b) short-swing profit liability. In 1999, the Commission revised Form 20-F to conform to the disclosure format adopted by the International Organization of Securities Commissions, rather than the disclosure format that applies to U.S. issuers filing annual reports on Form 10-K. See SEC Release Nos. 33-7745; 34-41936; International Series Release No. 1205 (Sep. 28, 1999). In the area of corporate governance, foreign private issuers are not subject to the board composition and independence requirements of The New York Stock Exchange (the "NYSE") or Nasdaq. The corporate governance initiative of the NYSE reaffirms this approach even in the wake of the Sarbanes-Oxley Act. See Press Release of the NYSE, "NYSE Approves Measures to Strengthen Corporate Accountability" (Aug. 1, 2002). 20 This could be particularly troublesome in cross-border transactions, as many non-U.S. companies are accustomed to "heads of agreement" of various types. 21 See generally Basic v. Levinson, 485 U.S. 224 (1988) (noting situations in which companies may properly remain silent or maintain a "no comment" policy concerning material pending merger negotiations). 22 Our concern that this provision could be extended to oral agreements is heightened by the Commission's telephone interpretation on the treatment of oral agreements under Item 601(b)(10) of Regulation S-K. See Manual of Publicly Available Telephone Interpretations, Interpretation No. 85 (July 1997) (requiring written descriptions of oral agreements to be filed as exhibits under Item 601(b)(10)). 23 See generally FAS 146 (write-offs and restructuring charges in relation to exit activities should be recognized as incurred, rather than when the decision is made to exit the activities). 24 Where small sales of equity securities are most likely to be of interest - insider purchases - disclosure is already adequately covered by the reporting requirements under Section 16 of the Exchange Act (as recently amended by the Sarbanes-Oxley Act). 25 This 10% threshold would be consistent with the approach taken in Rule 415 (shelf registration of an at-the-market offering of equity securities is permitted if the amount of securities does not exceed 10% of the aggregate market value of voting stock of the company held by nonaffiliates).