PERKINS COIE
LLP
1201 Third Avenue, Suite 4800, Seattle, Washington
98101-3099
Telephone: 206-583-8888 Facsimile:
206-583-8500
August 26, 2002
Mr. Jonathan G. Katz,
Secretary
Securities and Exchange
Commission
450 Fifth Street,
N.W.
Washington, D.C. 20549
Re: Proposed Rule
Regarding Additional Form 8-K Disclosure Requirements and Acceleration of Filing
Date
(File No.
S7-22-02)
Dear Mr. Katz:
We
appreciate this opportunity to respond to the Securities and Exchange
Commission’s ("Commission’s") request for comments regarding the
Commission's proposal to revise current Form 8-K disclosure and timing
requirements (the "Proposed Rule"). The Proposed Rule would add
eleven new disclosure categories and also incorporate two other categories
currently required under the 10-Q and 10-K rules. The Proposed Rule also
contemplates that companies would disclose most events that trigger a disclosure
requirement within two business days after such event occurs.
Below, we present our and our clients’ chief concerns regarding (i) several of
the proposed disclosure items, and (ii) the two business-day deadline. We
understand that the Commission may be re-considering certain aspects of the
Proposed Rule in light of the recent passage of the Sarbanes-Oxley Act. To the
extent that any of the items discussed below are among the sections of the
Proposed Rule that is re-formulated, we would of course welcome the chance to
provide the Commission with further comment.
l. Proposed Item 1.01
The Commission proposes to require a public company to report on Form 8-K its
entry into an agreement that is material to the company and that is not made in
the ordinary course of the company's business ("Proposed Item
1.01"). Instruction 1 to Proposed Item 1.01 broadly defines "agreement"
to include not only definitive agreements, but also letters of intent and other
non-binding agreements. Pursuant to Proposed Item 1.01, companies would also be
required to disclose the material agreement itself, together with information
detailing such agreement’s material terms.
Although we support the Commission’s effort to provide investors with timely
information about material company agreements not made in the ordinary course of
business, we are concerned that Proposed Item 1.01's expansive definition of
"agreement" may lead to instances of premature disclosure of certain events and
negotiations. This would in turn jeopardize the underlying transactions, chill
future negotiations and cause unwarranted price movements of the reporting
companies' securities. The Commission is well aware of the dangers of premature
disclosure and has sought to avoid such result. See Securities Act Release No.
6835 (May 18, 1989) (the "Release") at 62,851-2 (discussed below).
We request that the Commission confirm the appropriateness of, and utilize
established parameters for determining when contingent agreements are ripe for
disclosure, rather than relying on a definition of "agreement" that focuses on
the form of document used (whether a definitive agreement, a letter of intent,
another non-binding agreement or similar document).
The
United States Supreme Court and the Commission have established adequate
parameters for determining when speculative and contingent agreements are ripe
for disclosure. Disclosure is generally warranted when the contingent event is
‘material’ and there otherwise exists an affirmative duty to disclose the event.
To avoid a chilling effect, in the merger context the Commission has explicitly
refrained from requiring a company to disclose merger negotiations if the
company believes disclosure would jeopardize the underlying transaction. We urge
the Commission to clarify that required disclosure pursuant to Proposed Rule
1.01 would follow these same guidelines for disclosure of contingent agreements.
We fear that without clarification, the broad definition of "agreement"
contained in Proposed Item 1.01 may cause companies to prematurely disclose
contingent events. This, in turn, will jeopardize the underlying transactions
and chill reporting companies' appetites to negotiate material agreements.
The
Court has held that whether a contingent or speculative event is material
requires "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." Basic Inc. v. Levinson, 485 U.S. 224 (1988) at 238
(quoting SEC v. Texas Gulf Sulfur Co., 401 F.2d 833,849 (2d Cir. 1968),
cert. denied, 394 U.S. 976 (1969)). Determinations of materiality are
made on a case-by-case basis.
Although
negotiations or other preliminary steps toward a definitive agreement may become
‘material’ under the Basic test before the definitive agreement is ever
executed, the Court stated in Basic that, absent a duty to disclose, a company
need not disclose even material information. See Id. at 239 n. 17. The
Commission has acknowledged that the law does not affirmatively require
companies to disclose even material negotiations, stating "...we are not
suggesting that material merger negotiations...have to be disclosed to the
public as a matter of course. We agree with the court below that corporations
ordinarily have no duty to disclose even material merger negotiations." See
Brief for the SEC as Amicus Curiae in Levinson v. Basic Inc., 786 F.2d
741 (6th Cir. 1986), vacated and remanded, 485 U.S. 224 (1988).
While
promulgating rules that create a duty to disclose, the Commission found
compelling reasons to stop short of expanding that duty to preliminary
negotiations where disclosure would jeopardize the underlying transaction. The
Commission has clearly acknowledged that premature disclosure of negotiations
could have a chilling effect on the underlying transaction, stating:
"While Item 303 [disclosure
requirements] could be read to impose a duty to disclose otherwise
nondisclosed preliminary merger negotiations..., the Commission did not intend
to apply, and has not applied, Item 303 in this manner...[T]he Commission has
historically balanced the informational need of investors against the risk
that premature negotiations may jeopardize completion of the
transaction...Accordingly, where disclosure is not otherwise required, and has
not otherwise been made, the MD&A need not contain a discussion of the
impact of such negotiations where, in the registrant’s view, inclusion of such
information would jeopardize completion of the transaction."
Release
at 62,851-2, footnotes omitted.
We
request that the Commission confirm that Proposed Rule 1.01’s disclosure
requirements are to be read together with established guidelines for the
disclosure of contingent agreements. As currently written, Proposed Item 1.01
appears to focus solely on the form of the document used without considering
when per Basic and the Release the substance of the progress of events is ripe
for disclosure (probability that the event will occur, magnitude of the event to
the company, and a determination as to whether a duty to disclose is outweighed
by the danger that disclosure would jeopardize the underlying agreement).
Without
clarification, Proposed Item 1.01 may result in the premature disclosure that
the Court and the Commission expressly sought to avoid. The chilling effect on
negotiations or contingent agreements brought about by premature disclosure
would, in turn, discourage the creation of definitive contracting relationships
between would-be negotiating parties. In addition, premature disclosure of
negotiations at an early stage would likely cause highly speculative and
unwarranted movements in the affected share prices, even when tempered with
cautionary statements about lack of assurance whether or when a transaction will
be consummated.
Adoption
of Proposed Item 1.01 may also have the effect of chilling the desire of
non-reporting companies to enter into negotiations with reporting companies if
it is known that such negotiations would become publicly disclosed at a time
when disclosure may jeopardize the underlying transaction.
For
the foregoing reasons, we request that the Commission reconfirm its position
regarding merger negotiations expressed in the Release, and extend such analysis
to all material agreements for purposes of Proposed Item 1.01. Specifically, we
request that the Commission clarify that a duty to disclose contingent material
agreements (or negotiations regarding said material agreements) will not
materialize if the reporting company is of the view that disclosure would
jeopardize completion of the material transaction.
2. Proposed Item 2.04
- Events Triggering a Direct or Contingent Financial Obligation that is Material
to the Registrant
The Commission has proposed the promulgation of a new item ("Proposed Item
2.04") that would require disclosure on Form 8-K of events that
"trigger" a direct or contingent obligation that is material to a reporting
company. We agree with the Commission's desire to require companies to promptly
disclose on Form 8-K events that give rise to the creation or acceleration of
material obligations in a manner consistent with the disclosure requirements set
forth in Item 303 of Regulation S-K ("Item 303"). However, we are
concerned that the definition of "triggering event" contained in Proposed Item
2.04 is over-inclusive, and further that Proposed Item 2.04 does not set forth
an objective standard for determining when the triggering event has occurred.
(a) The Commission should revise Proposed
Item 2.04 to limit its over-inclusiveness.
The
Release sets forth the Commission's position on the disclosure requirements
under Item 303 with respect to non-compliance with the material terms of
material agreements. "If management determines that [the obligation] is not
reasonably likely to occur, no disclosure is required. . . . If management
cannot make that determination, it must evaluate objectively the consequences of
the [obligation], on the assumption that it will come to fruition. Disclosure is
then required unless management determines that a material effect on the
registrant's financial condition or results of operations is not reasonably
likely to occur." Release at 62,843 (footnote omitted).
In
the case of a material breach of a financial covenant contained in a material
credit facility, there is little uncertainty under the Release standard
concerning the creation or acceleration of an obligation. Assuming the breach is
material, Item 303 (and Proposed Item 2.04) mandates its disclosure. Conversely,
an immaterial default, technical default or a default that is capable of being
cured might fail the first aspect of the Release standard and thus not result in
disclosure under Item 303.
However,
unlike Item 303, Proposed Item 2.04 would require disclosure of the occurrence
of any and all events that could give rise to a financial obligation,
irrespective of the event's materiality, pending any negotiations and absent a
formal notice by the creditor of the triggering event. Although immaterial and
technical breaches might be likely candidates for negotiations or waivers, we
are concerned that the definition of 'triggering event' as it is now drafted
requires disclosure in advance of any such negotiation or waiver.
Under
the theory that immaterial defaults are unlikely to give rise to the creation or
acceleration of an obligation, the Commission should permit companies to use the
guidance set forth in the Release to analyze, in the absence of notice from a
creditor of a triggering event, whether an event requiring Form 8-K disclosure
has occurred. We propose that the Commission accomplish this by inserting the
word 'material' immediately before the word 'event' appearing at the end of the
first line of Proposed Item 1.01(b). In addition, in subparagraph (b) below we
suggest a mechanism whereby the giving of notice by the obligee would
nonetheless require disclosure under Proposed Item 2.04.
(b) The
Commission should revise Proposed Item 2.04 in order provide an objective
standard for determining the timing of a 'triggering event'.
The
parties to a credit arrangement may, after a default and regardless of its
magnitude, conduct negotiations concerning its impact on the credit relationship
and whether to formally accelerate the indebtedness as a result thereof. These
negotiations may not commence until some time after the triggering event and may
progress slowly. As a result, the determination of when to disclose based solely
on whether negotiations have ceased is highly subjective.
By
contrast, upon receipt of creditor notification of the acceleration of material
indebtedness, there seems to be little doubt as to whether under Proposed Item
2.04 a triggering event (whether or not subject to ongoing negotiation) is ripe
for disclosure. Furthermore, and as discussed in subparagraph (a) above, in the
absence of notice of acceleration and prior to the commencement of negotiations,
Proposed Item 2.04 seems to call for disclosure of any and all defaults.
We
request that the Commission promulgate an objective standard for the disclosure
of a triggering event. We suggest that this could be accomplished by amending
Proposed Item 2.04 to provide that a ‘triggering event’ not occur until the
creditor provides notice that an obligation has arisen or been accelerated. This
would alleviate some of the ambiguity surrounding, and the need to monitor,
whether a triggering event has occurred.
This might be accomplished as
follows:
"...provided,
however, that no triggering event shall be deemed to have occurred
unless a party to which the obligation would be owed has notified the
registrant or otherwise declared that (1) the triggering event has occurred;
and (2) as a result the obligation has arisen or been accelerated. Such notice
or declaration must be in writing unless the agreement provides for
notification in another manner."
Combining
an objective standard with the addition of materiality the definition of
'triggering event' lends itself to a more accurate standard while remaining
consistent with the Release standard for determining materiality. We believe
that this would provide companies with needed clarity and accommodate the
negotiation and resolution of financial events, which if disclosed prematurely
would have an unnecessary and adverse effect on the disclosing company.
3. Two Business-Day Filing
Deadline
The
Proposed Rule would require that companies file most required 8-K disclosure
within two business days after a triggering event.
Although
it would help accomplish the Commission’s goal of requiring more current
disclosure, we strongly believe that a two business-day reporting deadline would
seriously impede the Commission’s goal of better disclosure. Such a
timeframe would sacrifice the accuracy and quality of disclosure, making the
disclosure less useful to investors who hope to rely on the information in
making informed investment decisions.
Our
clients believe that a two business day filing period is impractical in that it
provides insufficient time for a company to accomplish each of the following:
(i) make the sometimes difficult determination as to whether an event is
‘material’ and therefore requires disclosure, (ii) develop and draft a reasoned
and thorough analysis of the effects of the reportable event, (iii) consult with
all key officers and board members, as well as the company’s independent
advisors, (iv) coordinate with financial printers to file the 8-K and any
exhibits, and (v) prepare a confidential treatment request with respect to any
confidential business matters in the exhibits.
Without
sufficient time companies will inevitably release inaccurate or incomplete
information into the public market, with the ultimate effect of misleading
investors. At the same time, because of the inevitable rush to turn out
disclosure, a two business-day filing deadline would divert management’s
attention from the company’s everyday business affairs, as well as other
material developments that may occur at approximately the same time as the
reportable event.
In
keeping with the Commission’s twin goals of better and faster disclosure, we
recommend that the Commission (i) adopt a more practical deadline for filing 8-K
reports, and (ii) bifurcate the deadline such that the Form 8-K filing become
due first, and any exhibits and/or confidential treatment requests become due
after the 8-K is filed.
We
recommend that the Commission set the filing deadline for disclosing the
reportable event on Form 8-K at five business days after the triggering event
occurs. Such a time period would provide reporting companies with sufficient
time to properly address reportable events, while at the same time providing
current disclosure. A two business-day requirement would not allow for this,
especially when the company does not control the occurrence of the reportable
event and/or cannot anticipate the timing of such event. Five business days
would also allow the company to make contact and consult with all appropriate
members of management and advisors and make use of resulting advice in a
reasoned manner.
We
propose that the Commission extend the deadline for filing exhibits to the 8-K,
and confidential treatment requests pertaining to such exhibits, to 15 business
days after the reportable event. The Commission has recognized the need for a
bifurcated deadline in light of practical limitations; existing Item 2 of Form
8-K provides for a bifurcated deadline for the 8-K itself and the related
financial statements. Under the Proposed Rule, relevant disclosure on Form 8-K
would enter the market upon the original filing of the 8-K (and the disclosing
company would have the onus of assuring that the filing is free of material
misstatements or omissions). A reasonable delay in filing exhibits and/or
confidential treatment requests associated with such 8-K disclosure would not
run contrary to the Commission’s desire for current disclosure. This bifurcation
would rather allow the company to first concentrate its efforts on establishing
the case for and drafting a reasoned disclosure on Form 8-K, followed by the
preparation of a reasoned confidential treatment request and orderly
coordination with financial printers to EDGARize, proof and file necessary
exhibits.
4. Conclusion
Although
we understand and agree with the Commission's overall desire to increase the
quality and speed the flow of information to the investing public, we believe
that certain aspects of the Proposed Rule would harm both investors and the
disclosing companies and would over-saturate the public with information that is
unfiltered and in many instances premature.
On
behalf of our reporting company clients, we make the following recommendations
to the Commission with regard to the Proposed Rule:
- Confirm that, where disclosure is not otherwise required, Proposed Item
1.01 does not create a duty to disclose contingent material agreements (or
negotiations regarding material agreements) if the reporting company
believes that disclosure would jeopardize completion of the underlying
material transaction;
- Revise Proposed Item 2.04 in a manner consistent with Item 303 and with
objective standards for the timing of the disclosure event; and
- Extend the deadline for filing an 8-K to five business days, and
bifurcate the filing deadline such that companies are allowed to file
exhibits and confidential treatment requests after the 8-K filing
deadline.
* * *
We hope that
the Commission will find these comments helpful, and we would be pleased to
discuss our views with members of the Staff at their convenience. We ask that
questions be directed to Andrew Bor in our Seattle office at (206) 583-8888.
Very truly yours,
/s/ PERKINS COIE LLP
|