NOVEMBER 2, 2006
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The SEC’s Compensation Disclosure Reforms: 8-K Disclosure Requirements
On July 26, 2006, in response to calls for extensive reform of the disclosure rules governing compensation of executive officers of public companies, the Securities and Exchange Commission (SEC) voted to adopt comprehensive changes to the rules requiring disclosure in proxy statements and registration statements of executive and director compensation and other corporate governance matters.1 In this release, the SEC also modified the requirements for disclosing executive and director compensation arrangements in Current Reports on Form 8-K. Companies must comply with the revised disclosure requirements in their Forms 8-K for triggering events that occur on or after November 7, 2006.
This Client Advisory provides a brief summary of the amendments to Form 8-K and practical guidance for complying with the new disclosure requirements.
The last major set of amendments to the Form 8-K, adopted in 2004, require disclosure under Item 1.01 regarding a company’s entry into a material definitive agreement outside of the ordinary course of the company’s business, as well as any material amendment to such an agreement. In order to help companies determine in real-time what agreements and amendments are required to be reported under Item 1.01 within the four business day deadline for filing the Form 8-K, the SEC incorporated into Item 1.01, as a bright line test for materiality, the standards that are set forth in Item 601(b)(10) of Regulation S-K, which is the provision governing the filing of material agreements as exhibits to registration statements, Form 10-Ks and Form 10-Qs. Item 601(b)(10)(iii) requires disclosure of any compensatory arrangement with a named executive officer or director, as well as disclosure of compensatory arrangements with other executive officers unless the arrangement is “immaterial in amount or significance.” As you are probably aware, these 2004 amendments have resulted in a significant increase in Form 8-K filings under Item 1.01 regarding executive and director compensation, making it difficult for investors to focus on the truly material events that need to be disclosed in real time.
In an effort to restore a more balanced approach, which is designed to elicit on a real-time basis only that information regarding compensation which is unquestionably and presumptively material, and which seeks to limit the number of executive and director compensation disclosures that companies have been filing under Item 1.01 of Form 8-K, the SEC adopted the new disclosure requirements described in this Client Advisory, effective November 7, 2006.
The New Requirements
Items 1.01 and 1.02
Item 1.01 and Item 1.02 of Form 8-K will no longer apply to compensation arrangements, and the Form 8-K will no longer reference Item 601(b)(10)(iii) of Regulation S-K in connection with the determination of the filing requirements for executive and director compensation arrangements on Form 8-K. Such arrangements will now be reported under Item 5.02 of Form 8-K, as amended. However, no change is being made to Item 601(b)(10)(iii) of Regulation S-K, which will still govern exhibit filings for registration statements, Forms 10-K and Forms 10-Q.
Item 5.02 of Form 8-K, which currently requires disclosure of departures, elections and appointments of directors and certain officers, will be expanded as follows:
For each of these disclosure items under amended Item 5.02, the SEC emphasized that companies need only provide a brief description of the event triggering the Form 8-K filing, not the full information necessary to comply with Item 402 of Regulation S-K. In addition, disclosure need not be provided about plans, contracts, or arrangements which are not discriminatory in scope, terms or operation in favor of executive officers or directors and that are available generally to all salaried employees.
Extension of Limited Safe Harbor under Section 10(b),
In adopting the amendments to Form 8-K in 2004, the SEC provided a limited safe harbor from general antifraud liability under Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder for a company’s failure to timely file reports required by Form 8-K Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) and 6.03. The safe harbor applies until the filing date of the company’s quarterly or annual report for the period in question. The SEC has now amended Exchange Act Rules 13a-11(c) and 15d-11(c) to extend this safe harbor to a company’s failure to make timely disclosure required under Item 5.02(e) of material new compensatory plans, awards or amendments. In addition, the extension of this safe harbor continues the current protection against loss of Form S-3 eligibility for companies whose untimely filings fall within the safe harbor.
Ability to Omit Item 1.01 Caption—General Instruction
In order to avoid potential non-compliance due to the inadvertent exclusion of an Item 1.01 caption, the SEC has amended General Instruction D to Form 8-K to permit companies to omit the Item 1.01 heading in a Form 8-K that also discloses any other item, so long as all of the substantive disclosure required by Item 1.01 is included in the Form 8-K and the number and caption of the other applicable items are provided. This does not permit companies to omit other Form 8-K captions if the Item 1.01 caption is included.
Foreign Private Issuers
The SEC has amended the exhibit instructions to Form 20-F to provide that foreign private issuers will be required to file employment agreements or compensatory plans with management or directors only if the foreign private issuer is required to file the plan publicly in its home country or has otherwise publicly disclosed the plan.
In connection with the revisions to the Form 8-K rules, companies should take note of the following:
1 The text of the new rules
is available here.
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