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8-K Readiness Begins With Disclosure Controls And Procedures

Wilmer Cutler Pickering Hale and Dorr | August 3, 2004

On August 23, 2004, the number and type of events required to be reported on Form 8-K will expand significantly—as will the amount of attention and effort that public companies must devote to their Form 8-K reporting obligations. To get ready for these new reporting obligations, most public companies will need to make changes to their disclosure controls and procedures.

Public companies are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

This requirement encompasses an obligation to maintain controls and procedures that are designed to ensure that information required to be disclosed in Form 8-K is timely and accurately recorded, processed, summarized and reported.

In light of the ongoing nature of a company’s Form 8-K reporting obligations, in contrast to the periodic nature of Form 10-K and 10-Q reporting, the processes used to ensure that Forms 10-K and 10-Q are accurate and complete are not likely to be sufficient for timely identifying Form 8-K reportable events. Accordingly, companies need to reevaluate their existing disclosure controls and procedures in light of the new 8-K reportable events. We recommend that the following suggestions be considered as part of this reevaluation process:

  1. Dislosure Committee Review

    The company’s Disclosure Committee should review each type of 8-K reportable event and identify the persons in the company who are most likely to first become aware of each event. For example:

    • A life sciences company engaged solely in clinical and preclinical trials may identify its CEO, CFO, chief scientist and head of business development as the people in its organization most likely to be aware of new agreements that might need to be reported under new Item 1.01 (Entry into a Material Definitive Agreement).
    • A manufacturing company with international operations may identify its CFO, controller, treasurer, divisional financial heads, divisional presidents, head of procurement and head of sales as the people in its organization most likely to be aware of new agreements that might need to be reported under Item 1.01.

    Once the Disclosure Committee identifies the relevant people for each item, it should educate them about the new 8-K reporting requirements and the process for communicating information about events that might trigger a Form 8-K requirement to the persons within the company responsible for preparing and filing Form 8-Ks. It would also be appropriate to periodically educate an even larger group of employees in order to raise the organization’s overall awareness of the company’s Form 8-K reporting obligations.

  2. Don’t Forget The Board

    When considering who in the organization is most likely to first become aware of various reportable events, do not forget about the board of directors. The company’s directors should be aware, in advance, whether actions they authorize will trigger a Form 8-K filing requirement.

    For some reportable events, such as the election of new directors, decisions about impairment charges and entry into new compensation arrangements with named executive officers, one of the first persons likely to become aware of the occurrence of a reportable event is the chairman of the board or the chairman of the audit, compensation or nominating committee.

    Since boards are increasingly meeting in executive session without members of management present and key board committees no longer include members of management, it is important for the directors with primary responsibility for setting board and committee agendas to consider how they will timely communicate matters to management and to the persons within the company responsible for preparing and filing Form 8-Ks.

  3. Review Committee Membership

    Because decisions as to whether an 8-K reportable event has occurred will need to be made more often and in a shorter timeframe than in the past, the company should revisit the membership and operating practices of its Disclosure Committee with a goal of ensuring that the committee consists of members who:

    • Will be able to respond in a timely manner to disclosure questions that come up between regularly scheduled meetings of the Disclosure Committee; and
    • Have the knowledge and understanding of the company and applicable securities law to be able to quickly analyze materiality questions.

    Companies that currently have a large number of members on their Disclosure Committee may want to consider identifying certain of those members to play the primary role in analyzing Form 8-K disclosure questions.

  4. Information Flow

    In light of the short timeframes for identifying and analyzing 8-K reportable events and preparing Form 8-K, the company should put in place processes that will result in multiple members of the Disclosure Committee being made aware of events that may need to be reported on a Form 8-K.

    A process that results in news only flowing to a single member of the Disclosure Committee might result in loss of critical time if that person is temporarily unavailable for any reason.

  5. Defining Materiality

    Since several of the reportable events contain a materiality standard, the Disclosure Committee should develop objective rules of thumb to be used in helping identify potentially material events.

    For example, Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant) requires a Form 8-K filing when a company incurs direct financial obligations that are material to the company. The company should establish some up-front quantitative guideposts as to what would be a material amount of debt.

    While quantitative rules of thumb are helpful in separating out routine borrowings from material borrowings, the company should keep in mind that materiality must ultimately be assessed in a qualitative manner, taking into account all relevant factors. The Disclosure Committee should regularly reassess any objective rules of thumb that the company establishes in order to confirm their continued validity in light of changing business circumstances.

  6. Tracking Unregistered Sales

    The company should establish a process for tracking all unregistered sales of equity securities on a continuous basis. Prior to the effectiveness of the new Form 8-K rules, companies were required to report information about unregistered sales on a quarterly basis, so existing processes may not be sufficient to timely flag when aggregate sales have exceeded the new Form 8-K reporting threshold.

  7. Contract Signatures

    The company should reevaluate its policy regarding authorized signatories for material contracts. The company may also want to adopt more formal policies requiring legal department review of potentially material contracts prior to signing.

  8. Meeting Minutes

    The minutes of board and committee meetings should be carefully prepared so they clearly distinguish between discussions about possible actions (such as restructurings) and the taking of definitive action committing the company to a course of action (such as the adoption of a restructuring plan).

  9. Reportable Events

    The company’s process for collecting data needed to complete Forms 10-K and 10-Q should be expanded to encompass the new 8-K reportable events. The limited safe harbor provided by the new Form 8-K rules with respect to a failure to file a Form 8-K for certain of the new reportable events is only available until the next periodic report is due. Therefore, it is important in the course of preparing Forms 10-Q and 10-K for the company to:

    • Determine whether the company failed to identify any 8-K reportable events during the past quarter; and
    • Retest any close materiality determinations during the quarter that served as a basis for not reporting an event on Form 8-K.

    If the company discovers that reportable events did occur during the quarter but were not properly reported, in addition to reporting the event as part of the next Form 10-K or 10-Q, the company must consider whether this discovery suggests an ineffectiveness of the company’s disclosure controls and procedures that must be redressed or reported in connection with the next Form 10-K or 10 Q.

  10. Update Documentation

    After implementing whatever process changes are deemed appropriate, the company should update its documentation regarding disclosure controls and procedures in order to conform its documentation to the company’s current practice.

This column solely reflects the views of its authors. It is for general information only and is not intended as legal advice with respect to any particular situation. Readers should not act upon information contained in this article without professional legal counseling. The views expressed in this article are those of the authors and do not necessarily reflect the views of their firm or any of the firm's clients.

This article is excerpted from the recent Wilmer Cutler Pickering Hale and Dorr LLP publication “Keeping Current with Form 8-K: A Practical Guide,” which summarizes the events that will trigger a Form 8-K requirement and the disclosures that must be provided when a triggering event occurs, and also includes numerous practice tips.