United States: SEC Staff Issues Frequently Asked Questions Relating to New Form 8-K Rules

The Securities and Exchange Commission implemented new rules effective August 23, 2004 that expanded Form 8-K disclosure requirements and shortened the deadlines for filing Form 8-Ks as discussed in detail in our July 2004 Bulletin, "Effective Date Approaching for SEC Rules Expanding Disclosure Requirements and Accelerating Filing Deadlines for Form 8-Ks." The new Form 8-K rules spawned many interpretative questions. On November 23, 2004, the Staff of the Division of Corporation Finance of the SEC issued responses to 30 frequently asked questions regarding the implementation and interpretation of the new Form 8-K rules. Companies should carefully review these FAQs because the Staff's interpretations may be different than the approach that companies have been following with respect to filing of Form 8-Ks and exhibits to Form 10-Qs and Form 10-Ks, particularly in the area of director and executive officer compensation matters.

In addition to the Staff's discussion of specific interpretive matters in the FAQs, the Staff also reminded companies to ensure that they have implemented appropriate disclosure controls and procedures to ensure that information required to be disclosed under Form 8-K is brought to the attention of management and disclosed within the required timeframe. In this regard, companies need to examine each action taken with respect to director and executive officer compensation matters to determine whether a Form 8-K and related exhibits to a Form 10-Q or Form 10-K are required and make sure that their human resources personnel and directors are aware of these disclosure issues.

While the Staff addressed a variety of topics in the FAQs, this bulletin focuses on the FAQs relating to director and officer compensation arrangements, plans and agreements, as well as appointment, resignation or other termination. The full text of the FAQs can be found on the SEC's web site at:
http://www.sec.gov/divisions/corpfin/form8kfaq.htm

The Staff noted that Item 1.01 of Form 8-K applies to unwritten, as well as written, material definitive agreements. Furthermore, if a company is a party to an oral contract that would be required to be filed as an exhibit pursuant to Item 601 of Regulation S-K if it was written, then the company must file a written description of the contract as an exhibit to a Form 10-Q or Form 10-K. In this context, the Staff indicated that a "summary sheet" that a company provides to directors setting forth meeting fees and basic compensation information would be subject to Form 8-K disclosure under Item 1.01 and filing as an exhibit under Item 601 of Regulation S-K if the summary sheet memorializes or sets forth terms of an agreement between the company and the directors as to compensation. The Form 8-K obligation is triggered when the "agreement" is entered into, not when the company provides the summary sheet to the directors.

Adoption by the company's board of directors of a compensation plan in which the company's directors or executive officers are eligible to participate requires disclosure pursuant to Item 1.01 of Form 8-K. However, the Staff clarified that if a company adopts a plan (e.g., an equity compensation plan or cash bonus plan) subject to shareholder approval, then the obligation to file a Form 8-K pursuant to Item 1.01 will be triggered upon receipt of shareholder approval of the plan. The filing obligation with respect to any reportable plan amendment or grant that is approved by the board of directors subject to shareholder approval will also be triggered by the receipt of shareholder approval.

Item 1.01 of Form 8-K requires a company to disclose adoption of an equity compensation plan, but does not require the company to file the plan as an exhibit to the Form 8-K. However, a company must file the plan as an exhibit to the company's next Form 10-Q or Form 10-K after adoption of the plan. If the plan provides broad discretion as to the terms of its awards, then the company must also file as exhibits each form of award agreement or notice that the company uses under the plan for awards to directors or executive officers.

The Staff confirmed that a company does not need to file a Form 8-K under Item 1.01 to report grants of equity awards pursuant to the plan that are consistent with the material terms and conditions of such awards disclosed in the Form 8-K the company previously filed. The Staff made clear that the company does not need to disclose in the Form 8-K the identity of the recipient of the award, the grant date, the number of securities covered by an award, the prices at which the recipient of the award may acquire the securities and the vesting schedule of the award. However, if the company grants an equity award using a form of award agreement or notice that is materially different from the material terms and conditions of the form of award agreement or notice previously filed, then the Staff indicated that the company must file a Form 8-K to disclose such equity award under Item 1.01.

The Staff also confirmed that the same analysis applies to awards under equity compensation plans that a company adopted prior to August 23, 2004 and for which it did not file a Form 8-K so long as the company previously filed the plan and, if the plan provides broad discretion as to the terms of award, each form of award agreement or notice that the company uses under the plan for awards to directors or executive officers as an exhibit under Item 601 of Regulation S-K and the filed plan, together with the forms of agreement or notice, described all material terms and conditions of the award. The Staff further stated that a company that had not previously disclosed in a Form 8-K, or filed as an exhibit prior to August 23, 2004, a form of award agreement or notice could file a Form 8-K disclosing the material terms of such form and thereafter would not be required to file a Form 8-K to report individual director or executive officer grants that are consistent with such terms.

The Staff cautioned that disclosure of an individual equity award to a director or executive officer may be required in any case if disclosure of particular provisions in the personal agreement is necessary for an investor's understanding of that individual's compensation under the plan.

The Staff clarified that a company must file a Form 8-K under Item 1.01 to disclose that the company's board of directors has adopted a cash bonus plan in which "named executive officers" (i.e., the company's principal executive officer and the other executive officers required to be included in the Summary Compensation Table in the company's annual proxy statement) are eligible to participate even if the company has not communicated to plan participants any specific performance criteria, performance goals or bonus opportunities. The same analysis would apply to plans in which other executive officers are eligible to participate, unless the plan is immaterial in amount or significance.

The Staff stated that if the Form 8-K reporting such a plan's adoption did not disclose specific goals and business criteria for a performance period and the board of directors subsequently adopts specific performance goals and business criteria for plan participants, then the company must file an additional Form 8-K under Item 1.01 to disclose those measures. However, the Staff clarified that a company is not required to disclose target levels with respect to specific qualitative or quantitative performance-related factors, or factors or criteria involving confidential commercial or business information if the disclosure of that information would have an adverse effect on the company.

The Staff indicated that a company's payment of an award pursuant to a cash bonus plan may require disclosure under Item 1.01 of Form 8-K depending on the circumstances. If the award is paid based on a determination that the applicable performance criteria have been satisfied, then a company does not need to file a Form 8-K with respect to the payment. However, if the company exercised discretion to pay the award when the applicable performance criteria were not satisfied, then the company would need to disclose such payment under Item 1.01.

The Staff confirmed that if a company enters into an employment agreement, or an amendment to an employment agreement that is material to the company, with a named executive officer or a director, then the company must file a Form 8-K under Item 1.01 of Form 8-K.

The Staff also confirmed that if a company enters into an employment agreement, or an amendment to an employment agreement that is material to the company, with an executive officer who is not a "named executive officer," then the company must file a Form 8-K under Item 1.01 unless the employment agreement is "immaterial in amount or significance." The Staff noted that "whether an employment agreement is immaterial in amount or significance must be considered from the perspective of a reasonable investor and in light of established standards of materiality."

The Staff clarified that if the appointment of an executive officer would require disclosure pursuant to Item 5.02(c) of Form 8-K, then a company may delay disclosure on Form 8-K of the officer's employment agreement under Item 1.01, as well as the officer's appointment to the company's board of directors (if applicable) under Item 5.02(d), until the appointment is publicly announced as is permitted under Item 5.02(c).

The Staff clarified that the obligation to disclose a director's or officer's resignation, retirement or refusal to stand for re-election that is reportable on Form 8-K pursuant to Item 5.02(b) is triggered by a written or unwritten notice to the company of a decision to resign, retire or refuse to stand for re-election. In addition to disclosing the fact that the resignation, retirement or refusal to stand for re-election occurred, the company must also disclose the effective date of the resignation or retirement or, in the case of a refusal to stand for reelection, when the election in question will be held. The Staff also indicated that no disclosure is required under Item 5.02(b) because of discussions or consideration of resignation, retirement or refusal to stand for re-election. The determination of whether communications represent notice of decision or mere discussions or consideration is based on the facts and circumstances.

The Staff confirmed that there is no obligation to report under Item 5.02(b) of Form 8-K if a company decides not to nominate a director for re-election unless the director, upon learning of the company's decision, then resigns or communicates a decision not to stand for re-election.

The Staff also made clear that a "termination" of an officer that must be disclosed pursuant to Item 5.02(b) includes situations where the officer has been demoted or has had his or her duties and responsibilities modified such that the officer no longer functions in the position of that office, even if the officer remains employed by the company and retains the same title.

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