United States: Disclosure Form Now Available for New Information Filing Requirements for Companies Incorporated or Qualified to Do Business in California

As we reported to you in our letter dated October 7, 2002, corporations incorporated or qualified to do business in California are subject to additional filing requirements under new California legislation (the "Corporate Disclosure Act") that became effective January 1, 2003, including significant new disclosure requirements for such corporations whose shares are publicly traded. At the time the Corporate Disclosure Act was passed, the California Secretary of State was charged with developing a new form for the filings, and that form (the "Corporate Disclosure Statement") is now available.

Our previous letter on this matter identified several areas of the Corporate Disclosure Act in need of interpretive guidance, and we had hoped that the Corporate Disclosure Statement would provide that guidance. However, the Corporate Disclosure Statement for the most part just repeats provisions of the Corporate Disclosure Act, leaving most of the open questions unanswered. The Corporate Disclosure Statement does define the "annual compensation" that is required to be disclosed for directors and executive officers as including "wages, salaries, bonuses, commissions and any other form of monetary remuneration . . . for services rendered to the corporation in the previous 12 months or fiscal year." Interestingly, annual compensation (other than options and stock) has been limited to monetary remuneration by the Corporate Disclosure Statement, although there is no such express limitation in the Corporate Disclosure Act.

The designation of "the previous 12 months or fiscal year" as the period for which compensation is to be reported is particularly helpful, since there was speculation that the Corporate Disclosure Act required disclosure of the current rate of annual compensation at the time the form is filed. That would have meant that, in the typical situation, information reported or to be reported in the proxy statement required under the Securities Exchange Act of 1934 could not have been used.

No comparable guidance was provided in the Corporate Disclosure Statement as to how to relate grants of options and issuances of shares to annual periods. The Corporate Disclosure Act requires the disclosure of annual compensation "including" options and shares. The Corporate Disclosure Statement simply provides a column for numbers of "Shares/Options" and an instruction which says nothing about relating the options and shares to the reporting period. We believe that, at a minimum, corporations should disclose options which are granted during the reporting period (regardless of when they become exercisable) as well as options which are granted or become exercisable as a result of services rendered during the period. Likewise, stock which is issued (including stock issued upon the exercise of options) and stock which becomes unrestricted during the reporting period or is issued or becomes unrestricted as a result of services rendered during the period should be reported. More conservative reporting would also include all outstanding options and restricted stock (broken down by whether the options are exercisable and the shares have become unrestricted). In any event, reporting on this item will require supplementary explanatory information and should not be limited to just the numbers in the column on the form.

With the introduction of the Corporate Disclosure Act, each corporation incorporated or qualified to do business in California must file the "Statement of Information" annually; previously, this was required only every two years. This form (designated SI-200 or SI-200 N/C for California corporations and SI-350 for corporations incorporated elsewhere) is available on the Secretary of State's website at http://www.ss.ca.gov/business/corp/corp_soinfo.htm. Corporations with publicly traded securities are also required to file the Corporate Disclosure Statement (designated SI-PTSUPP on the website) disclosing the additional information, which can include an attachment page (SI-PTSUPPA). The forms can be downloaded and filled out electronically and are accompanied by instructions.

The Secretary of State is required by the Corporate Disclosure Act to mail the forms to each filing corporation at least three months before the filing deadline, but for those corporations with filing deadlines early in 2003 that time period obviously will be shorter. Any failure to receive the forms from the Secretary of State is not an excuse for failure to file. California corporations may file the forms any time within the six-month period that ends on the last day of the month in which they filed their original articles of incorporation with the Secretary of State. Corporations incorporated outside of California may file the forms any time within the six-month period that ends on the last day of the month in which they filed the documents required to qualify to do business in California with the Secretary of State. Because it is now clear that the requirement to file compensation data can be met using the data from the last fiscal year, some companies may find it beneficial to file earlier than required. For example, a company with a fiscal year ending December 31 and a required filing period that expires on January 31 should consider adopting a practice in future years of filing prior to December 31 in order to avoid having to scramble to assemble the information in January, prior to the preparation of the company's annual proxy statement. The required filing date of any company incorporated or qualified in California can be determined by looking at the deadline for the last filing or on the Secretary of State's website at http://kepler.ss.ca.gov/list.html. In addition to the filing, the corporate filer must remit a total filing fee of $25 (up from the previous $20).

If the name and/or address of the agent for service of process change before the next filing deadline, the corporation is required to file the forms containing all of the information called for, not just the new name and/or address of the agent for service of process. If there is a change in any of the other disclosed information before the next filing deadline, a new filing is permitted but not required. Note that if a statement is filed outside the applicable filing period to amend any information on a previously filed statement, no fee is required.

The Corporate Disclosure Act requires the Secretary of State to make the disclosed information "available and open" to the public and, by December 31, 2004, to provide access to the information by means of an online database.

All corporations incorporated or qualified to do business in California must file the Statement of Information annually, but only those that are publicly traded must file the additional Corporate Disclosure Statement. As described in our previous correspondence, a "publicly traded company" is defined by the Corporate Disclosure Act as a company whose securities are listed or admitted to trading on a national or foreign securities exchange or are the subject of two-way quotations, such as bid and ask prices, that are regularly published by one or more broker-dealers in the National Daily Quotation Service or a similar service. We believe that the Nasdaq National Market, the Nasdaq SmallCap Market, the OTC Bulletin Board and the Pink Sheets published by Pink Sheets LLC were intended by the Legislature to be services "similar" to the National Daily Quotation Service. Parent corporations that are not incorporated or qualified to do business in California but do business in California through subsidiaries apparently are not required to make the filings under the Corporate Disclosure Act. Their subsidiaries also are not required to make the new public company filings if their securities are not publicly traded.

The Corporate Disclosure Statement asks the corporate filer to supply the following:

• Name of independent auditor;
  Date of last report prepared for the corporation by the independent auditor (a copy of the report must be attached);
• Description of "any other services" performed by the independent auditor or certain related entities in the previous 24 months;
• As to each director and executive officer: the annual compensation for the previous 12 months or fiscal year, the number of shares or options for shares provided that were not available to other employees, and whether such individual has filed bankruptcy or has been convicted of fraud during the previous 10 years;
• Description of any loan made by the corporation to a director "at a preferential loan rate" during the previous 24 months including the amount and terms of the loan;
• Whether the corporation has filed bankruptcy in the previous 10 years;
• Whether the corporation violated any federal security laws or any security or banking provision of California law during the previous 10 years for which the corporation was found liable in an action before a federal or state court or regulatory agency or a self-regulatory organization in which a judgment over $10,000 was entered.

"Executive officer" is defined in the form as "the five most highly compensated officers of the company, excluding any officer who is also a member of the board of directors." This is the same definition as in the Corporate Disclosure Act. The Corporate Disclosure Statement must be certified as true and correct by checking a box stating so at the end of the form.

Our more detailed October 7, 2002 letter entitled "New Information Filing Requirements for Public Companies Incorporated or Qualified To Do Business in California" and a related article entitled "Compliance with the New California Disclosures Act: Issues and Tips" can be found on our website Corporate Transactions and Securities page.