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 Commissionís ("Commissionís") 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 clientsí 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 agreementís material terms.

          Although we support the Commissionís 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 Ďmaterialí 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 Ďmaterialí 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 registrantís 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 1.01ís 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 Ďtriggering eventí 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 Commissionís goal of requiring more current disclosure, we strongly believe that a two business-day reporting deadline would seriously impede the Commissionís 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 Ďmaterialí 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 companyís 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 managementís attention from the companyís 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 Commissionís 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 Commissionís 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,