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As of Aug. 23, public companies must report more events on a reconfigured Form 8-K with accelerated filing deadlines. This column summarizes the rule changes, highlights certain pitfalls, and suggests ways to address them. The SEC has included eight new triggering events for 8-K filings. Registrants must report both the entry into and the termination of a “material definitive agreement” (or any material amendment to such agreements, including amendments that make immaterial agreements material). But disclosure of discussions before the entry into or termination of such agreements is not necessary. Registrants must report when they incur a material direct financial obligation that arises other than in the ordinary course of business. They also must disclose if they incur a material obligation under an off-balance sheet arrangement as well as any event that accelerates or increases the payment of a material direct or off-balance sheet obligation. This includes an event that causes a contingent off-balance sheet obligation to become a material direct financial obligation. Registrants must disclose when they commit to an exit or disposal plan, dispose of a long-lived asset, or terminate employees under a plan that meets certain criteria to the extent that a material charge results. Registrants also must disclose the decision to recognize a material impairment of certain assets, unless reached in preparing a 10-Q or 10-K that discloses the impairment and is filed timely. Unless quoted solely on the OTC Bulletin Board or the Pink Sheets, registrants must disclose when they no longer meet exchange listing requirements, an exchange submits an application to delist it, or the registrant has taken definitive action to withdraw or transfer its listing to another exchange. Registrants must disclose if investors should not rely on any financial statement issued in the last three years because it contains an “error.” Also, they must disclose if their independent accountant advises that disclosure is needed to prevent future reliance on a previously issued audit report or completed interim review. The SEC has also expanded two 8-K disclosure items. Previously, a director’s departure was disclosed only if the director disagreed with company, provided a letter describing the disagreement and asked that it be disclosed. Now a registrant must disclose the election or appointment of new directors (other than at an annual meeting or special meeting of shareholders); the departure of any director for any reason; and the appointment, resignation or termination of a company’s principal executive officer, president, principal financial or accounting officer, principal operating officer or a person performing similar functions. Likewise, registrants previously had to disclose a change in their fiscal year. This is expanded to include any amendment to articles of incorporation or bylaws unless previously disclosed in a proxy or information statement. Finally, the SEC has moved certain disclosure items from a company’s quarterly reports to the new 8-K forms. A registrant must disclose sales of unregistered equity securities, except for de minimis sales that may continue to be reported quarterly or annually. It also must disclose any material modifications to the rights of security holders. With a few exceptions, an 8-K must now be filed within four business days of a reportable event. Previously, depending upon the event, filings were required to be made either within five business days or 15 calendar days. The SEC has provided a limited safe harbor from securities fraud claims for a failure to timely file an 8-K, which applies only to certain triggering events and extends only until the due date of the next quarterly or annual report. This does not alter the registrant’s liability for material misstatements or omissions in an 8-K filing or for a failure to disclose information for which there is a duty to disclose apart from an 8-K. Thus, the universe of reportable events is greatly expanded while the time period in which to report these events is significantly reduced. Companies should take note that the increased number of reportable events means that employees below senior management are now likely to become aware of an 8-K triggering event before senior management itself. And this triggers the new shortened filing deadline. Consider the entry into or termination of a “material definitive agreement.” Sales employees will often know of material sales contracts or amendments. Employees in operations will know of significant vendor contracts or amendments, such as property leases. Finance personnel will know of the company’s financing arrangements or amendments, including credit line, equity financing and asset management matters. Human resources personnel will know of material employment contracts or amendments, including employee benefit plans. Likewise, employees in finance and operations may become aware before senior executives of events that cause an increase or acceleration of a material direct financial obligation, whether “on-balance sheet” or “off-balance sheet.” One potential trap is that finance and legal employees must be alert to potential cross-default or cross-termination provisions (primarily credit arrangements and real property leases), which may be triggered by the termination of a separate agreement. The penalties for non-compliance are severe, including a company’s loss of the ability to issue stock under S-3. It also could be used as evidence of a company’s lack of disclosure controls as well as evidence of personal liability for a CEO or CFO under sections 302 and 906 certifications. It is essential that companies establish detailed, specific and ongoing training programs for employees well below senior management ranks. This training must explain the new 8-K disclosure requirements and their importance and also identify the types of events that trigger such filings. The training must explain, in plain English, what employees must do — and do immediately — when they learn of such events. Mid-level employees should not be making judgments on whether events must be reported. Companies must establish processes for preparing, reviewing and filing 8-Ks. Specifically they must establish internal reporting structures and procedures whereby these events will be communicated to senior management and legal counsel immediately so that the new, compressed 8-K timing requirements are satisfied. The new Form 8-K requires significant financial analyses and sensitive drafting decisions in a very compressed time period. Management and legal counsel will have to analyze the materiality of events on a “real time” basis. Consider this as one more burden in the new world of corporate governance. David B. Bayless, a partner in the San Francisco office of Morrison & Foerster, specializes in SEC enforcement work. He formerly headed the SEC’s San Francisco office.

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