SEC Responds to Frequently Asked Questions on Form 8-K

On November 23, 2004, the staff of the Division of Corporation Finance of the Securities and Exchange Commission answered in writing 30 frequently asked questions (the "Frequently Asked Questions") they had been receiving on the Form 8-K changes that were effective August 23, 2004. While issuers should become familiar with each of the questions and answers in connection with ensuring that they meet their ongoing Form 8-K reporting obligations, there are several specific issues worth highlighting, including those involving decisions regarding cash compensation and perquisites.

• Issuers must examine, and revise as appropriate, their disclosure controls and procedures in order to ensure that information required to be disclosed by Form 8-K is brought to the attention of management and disclosed within the timeframes contemplated by Form 8-K.
• Item 1.01 and Item 1.02 of Form 8-K, which cover the entry into or termination of a "material definitive agreement," account for half of the Frequently Asked Questions. These questions are likely to be the items most frequently encountered by issuers, particularly because Instruction 1 to Item 1.01 incorporates the exhibit requirements of Item 601(b)(10)(iii)(A) of Regulation S-K dealing with compensatory arrangements. Thus a material definitive agreement specifically includes any management contract, or any compensatory plan, contract or arrangement, whether or not written, in which any director or "named executive officer" participates, or in which any other executive officer participates unless immaterial in amount or significance.

• A compensatory plan, contract or arrangement with an executive officer who is not a named executive officer must be reported and filed "unless immaterial in amount or significance." The SEC has confirmed that materiality is to "be considered from the standpoint of a reasonable investor and in light of established standards of materiality." (See Question 7). This interpretation is quite helpful, as there had been some informal indications in the past that the SEC staff viewed materiality in this context as subject to different standards, and established issuers should be able to conclude that most arrangements with executive officers who are not named executive officers are not material under this test.
• Named executive officers are defined in Item 402(a)(3) of Regulation S-K with reference to positions held and compensation earned during the registrant’s most recently completed fiscal year, and thus will generally be limited to the persons listed in the summary compensation table in the most recent annual meeting proxy statement, at least through the end of the current fiscal year. Note, though, that the identity of the named executive officers may change once a new fiscal year begins, even though no new annual meeting proxy statement has yet been made available. Also, some arrangements with executive officers who are not, or are not yet, tech- nically named executive officers are particularly likely to be material, such as any contract with a new chief executive officer, and perhaps with any other new or existing executive officer, who is expected to be listed as a named executive officer in the next proxy statement. Also keep in mind that if the executive officer is promoted to one of the designated positions in Item 5.02(c) of Form 8-K, then the material terms of any employment agreement will have to be described pursuant to Item 5.02(c)(3) in any event.
• The staff’s interpretations regarding the treatment of compensation plans under Item 1.01 of Form 8-K have been particularly challenging. For example, the adoption of a plan in which directors or named executive officers may participate is regarded as a material definitive agreement giving rise to a reporting requirement even if no awards have been made, unless the plan is exempt from the exhibit filing requirements under Item 601(c)(10)(iii)(C) of Regulation S-K (primarily nondiscriminatory plans and plans of foreign private issuers or wholly owned subsidiaries of reporting issuers). (See Questions 8 and 12). However, if shareholder approval is required, the filing can be delayed until it is obtained.
• If the material terms and conditions of awards under an equity compensation plan, other than the identity of the recipient, the grant date, the number of securities covered by the award, the prices at which the participant may acquire the securities and the vesting schedule, are disclosed in a plan and, if necessary, a form of award previously filed as an exhibit to either a periodic report or a Form 8-K, grants under the plan are not required to be reported under Item 1.01 of Form 8-K because of Instruction 1 to Item 601(b)(10) of Regulation S-K. (See Question 9). For this reason, issuers must examine the management contracts and compensatory plans, contracts or arrangements that they have on file with the SEC to determine whether all material information has previously been disclosed. If all material information is not on file with the SEC prior to a grant or an award, the issuer will have to file a Form 8-K each time a grant or award is made to a director and named executive officer, and to other executive officers unless immaterial in amount or significance. Also, an award that differs materially from the terms and conditions previously disclosed or on file will trigger a filing requirement under Item 1.01 of Regulation S-K. (See Question 10).
• Board action setting specific performance goals and business criteria (such as EBITDA, return on equity or other applicable measures) for a director and named executive officer or other executive officers unless immaterial in amount or significance under a cash bonus plan must be disclosed in an Item 1.01 Form 8-K unless the specific criteria to be used have previously been reported. Thus, under many conventional cash bonus plans that provide a variety of performance measures that may be chosen, annual board or compensation committee action choosing a specific year’s performance criteria will have to be reported on an Item 1.01 Form 8- K. Actual target levels set with respect to specific quantitative or qualitative performance-related factors, or factors or criteria involving confidential commercial or business information, the disclosure of which would have an adverse effect in the issuer, need not be disclosed, just as they need not be disclosed in the compensation committee report pursuant to Instruction 2 to Item 402(h) of Regulation S-K. Payments need not be disclosed unless the issuer exercised discretion to pay a bonus in an amount greater than that for which the person qualified for pursuant to the previous disclosed terms. (See Question 14).
• We understand that the staff is also taking the position that decisions with regard to salary, cash compensation and perquisites may require the filing of an Item 1.01 Form 8-K. With regard to salary and cash compensation decisions involving a director or named executive officer, since the decision is a compensatory plan or arrangement, it is deemed a material contract pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K, and, as such, would be a material definitive agreement that would trigger the filing of an Item 1.01 Form 8-K. In addition, salary and cash compensation decisions with regard to other executive officers would require an Item 1.01 Form 8-K filing unless the decision is immaterial in amount or significance. We understand that the staff of the SEC has orally told some third parties that an initial determination regarding salary or cash compensation for a specified person would trigger an Item 1.01 Form 8-K filing and annual adjustments to that amount would trigger a new Item 1.01 Form 8-K filing only if the change in the amount is material. We understand that their position is based on Item 1.01(a) of Form 8-K, which states that with respect to amendments of material agreements, a filing is only required in the event that an amendment to a material agreement is material to the issuer. However, this approach appears inconsistent with Item 601(b)(10)(iii)(A) which deems certain contracts material including any management contract or compensatory plan, contract or arrangement in which a director or named executive officer participates. As a result, amendments to those contracts would also be deemed material. Accordingly, until the SEC makes a more formal public announcement of their views on this issue, an issuer is taking some risk in following this approach. However, decisions regarding perquisites would not require an Item 1.01 Form 8-K filing so long as the benefits in question do not constitute a material portion of the total compensation of the director or executive officer in question. (See Interpretation I.84 of the SEC’s Division of Corporation Finance Telephone Interpretations Manual, July 1997).
• Oral compensatory plans, contracts or arrangements in which any director or named executive officer participates, or in which any other executive officer participates unless immaterial in amount or significance, would require an Item 1.01 Form 8-K be filed when the plan, contract or arrangement is entered into. (See Question 5). The plan, contract or arrangement must be summarized and filed as an exhibit to the next periodic report. (See Interpretation I.85 of the SEC’s Division of Corporation Finance Telephone Interpretations Manual, July 1997). If the plan, contract or arrangement has been established by board resolution, a copy of the board resolution may be filed as an exhibit rather than a summary. If the plan, contract or arrangement is subject to shareholder approval, as will often be the case if equity awards are involved, the filing obligations are delayed until shareholder approval is obtained. (See Question 12).
• If a director informs another director or executive officer of a decision that he or she does not wish to be nominated for an additional term, a Form 8-K pursuant to Item 5.02 of the form is required to be filed within four business days of the issuer becoming aware of such notice. (See Questions 24 and 25). While certain late Form 8-K filings may not affect eligibility to use Form S-3, a late filing of an Item 5.02 Form 8-K will cause an issuer to lose its Form S-3 status for one year. Therefore, it is critical that disclosure controls and procedures be adequate to obtain this information and timely file a Form 8-K. However, a decision by the nominating committee of the board of directors not to renominate a director does not trigger a Form 8-K filing.
• With the exception of Item 4.01 (change in independent accountant) and 4.02 (non-reliance on previously issued financial statements or related audit reports), if a triggering event occurs within 4 business days of the filing of a periodic report, the event may be disclosed in the periodic report rather than in a separate Form 8-K.
• If an agreement becomes material at a time other than when it is entered into or amended, no Form 8-K is required to be filed, rather the newly-material contract is required to be filed as an exhibit to the next periodic report.

A complete copy of the Frequently Asked Questions is available at http://www.sec.gov/divisions/corpfin/form8kfaq.htm

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