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Companies must tell more, and sooner
Kathleen Pender, SF Chronicle
Sunday, August 22, 2004
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Investors will start getting more and timelier information about public
companies, thanks to a new Securities and Exchange Commission rule that
takes effect Monday.
The rule requires companies to file 8-K reports with the SEC sooner and for many more reasons than they currently do. The 8-K is used to report material events that crop up between a company's quarterly or annual reports.
Although it's difficult to generalize, the average small company may be filing two more reports per year, while large ones may be filing 15 more, says Robert Townsend, an attorney with Morrison & Foerster.
The challenge for investors and the media will be sifting through the stream of new reports to separate the mountains from the molehills.
In the past, 10 events had to be disclosed in an 8-K, and two that could be at the company's discretion.
The mandatory events included things like a change in control of the company, a change in auditors, a change in fiscal year, the closing of an asset purchase or sale, or a bankruptcy filing.
The new rule adds eight events that companies must disclose and expands two existing ones.
The new ones range from simple, stark events, such as a company getting its stock delisted from an exchange or discovering that its books were cooked, to the more esoteric, such as entering into off-balance-sheet financing or determining that the value of an asset has become impaired.
The new event that will probably spark the most new filings is entering or exiting a definitive agreement outside the company's ordinary business, a broad category that encompasses a variety of contracts and similar arrangements.
Historically, companies had to disclose in an 8-K the departure of a director only if it was caused by a disagreement. In the future, companies must disclose the departure or election of all directors (outside of shareholder meetings) for any reason and must disclose the departure or appointment of any senior executive officers.
In the past, many companies waited to tell shareholders that a senior officer had left until a successor had been found.
The new rule also imposes a speedy, uniform filing deadline. Starting Monday, almost all 8-K reports must be filed within four business days of the event. In the past, the deadlines varied and generally gave companies much more time to file. Some events had to be reported only once a year.
Some companies had already been making public new events in 8-K filings in accordance with long-standing New York Stock Exchange and Nasdaq rules that require the prompt disclosure of any material event. These rules, however, give companies a lot of wiggle room, and because the term "material" has never been defined, many firms interpret them loosely.
The new SEC rules still don't define "material," but they do create clearer, timelier and more consistent standards for reporting certain events. The new rules incorporate some requirements of the Sarbanes-Oxley Act, although the SEC started working on them before the act became a law.
"This is another step in what the SEC is trying to push companies to do, which is real-time reporting of material developments," Townsend says.
The new rules "will help investors who are carefully tracking companies on an ongoing basis," Townsend adds. For example, "They will get more current information about contracts the companies believe are material to its future. Whether they will have the ability to correctly assess the impact of those contracts is difficult to say."
The new rules pose a big challenge for companies as well. They have to make sure that the people who know about the events now requiring 8-K disclosure realize they must be reported up the chain of command.
They also may want to issue press releases at the same time as the 8-K filing so they can put their spin on it.
Chris Hodges, co-founder of Ashton Partners, which consults with companies on investor and public relations, gives this example:
Suppose a company loses a very large customer, but gains a few smaller ones to help make up for it. In the past, the company probably could disclose the loss in its quarterly report and could discuss the gain of smaller customers in its conference call with analysts.
In the future, the big loss probably would have to be reported in an 8-K, "but you can't put out the news about the new customers unless you put out a press release," says Hodges.
"We can put our own quotes, our own voice in (a press release). Don't let the media or the sell side (brokerage firm analysts) interpret this for you," he warns companies.
Hodges says investors "need to become more adept at interpreting information. If you are a daily stock watcher, there will be more for you to decipher. There may be an opportunity for traders. But if you are in this for the long haul, paying attention to the variables that really matter (the new disclosures) may not be a big deal."
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New 8-K triggers
Under existing rules, companies must file an 8-K with the SEC following
10 events. A new rule adds eight events that must be disclosed in the
8-K and expands two of the existing ones. It also requires companies to
file almost all 8-K reports within four business days of the event. The
new events (some of which have been consolidated below) include:
Election or appointment of new directors (outside of shareholder meetings).
Departure of a director for any reason.
Resignation, termination or appointment of a senior executive officer, including CEO, president and chief accounting, financial or operating officer.
Entry into or termination of a material definitive agreement not made in the ordinary course of business.
Creation or acceleration of off-balance-sheet obligations.
Material costs caused by exiting or disposing of a business, like write- offs or restructuring charges.
Any material impairment in the value of an asset, including securities and goodwill.
Action taken by an exchange or market to delist the company's securities.
Conclusion by management or auditors that previously issued financial statements cannot be relied upon.
Source: Morrison & Foerster, Chronicle research
last updated: August 23, 2004
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