Click here for a .pdf of this Securities Alert
In November 2004 the staff of the Division of Corporation Finance at the Securities and Exchange Commission ("SEC") issued answers to some Frequently Asked Questions (“FAQs”) about the new Form 8-K requirements. The SEC staff's answers in the FAQs have resulted in some surprising developments.
Under Item 1.01 of the new 8-K rules that took effect in August 2004, a company must file a Form 8-K within four business days of entering into a material definitive agreement not in the ordinary course of business, or a material amendment to such an agreement. Under long-standing SEC regulations, the following are deemed to be material contracts unless they apply generally and on a similar basis to all employees: (1) compensatory plans and contracts covering directors and those executive officers whose compensation information must be disclosed in the proxy statement tables ("Named Executive Officers"), (2) plans and contracts covering other executive officers (unless immaterial in amount or significance), and (3) equity plans, contracts and arrangements covering any employee that have not been approved by shareholders (unless immaterial in amount or significance).
Based on the FAQs and subsequent discussions, the staff is taking the following positions:Director Compensation
- Entering into any arrangements, whether in writing or oral, to pay directors annual retainer fees and meeting fees triggers the filing of an 8-K under Item 1.01 and also requires that a copy of a term sheet or other document evidencing the arrangement, or a description of the arrangement if it is oral, be filed as an exhibit to the company's next 10-Q or 10-K.
- If there is a material increase or change in the compensation to be paid to directors, the increase or change will need to be reported in an 8-K and a copy or description of the change or increase also will need to be filed as an exhibit to the next 10-Q or 10-K.
- If a material change is made to the salary, bonus or entitlement to perquisites of a Named Executive Officer or other executive officers whose existing contracts or arrangements were required to be reported on a Form 10-Q or 10-K, the change will trigger an 8-K filing and the filing of an exhibit with the next 10-Q or 10-K. Note: this applies even if the company only has an oral, and not a written, agreement with the officer.
- With respect to the materiality of changes in executive compensation, the SEC has indicated that the test should be whether a reasonable investor would consider the change to be material, not whether the additional compensation is material in relation to an executive's total compensation package.
- If a company pays out bonuses and the bonus plan has not been filed previously or information on the bonus criteria, if any, has not been reported previously, the payout of the bonus triggers the filing of an 8-K and the actual payout amount will need to be disclosed. If the bonus plan and criteria have been filed previously as an exhibit to a 10-K or 10-Q, the payment of bonuses consistent with those plans and criteria will not need to be reported on an 8-K.
- Grants of options or other awards do not trigger an 8-K filing if the company previously has filed the plan and the form of option or award agreement for each form of award agreement used under the plan, and no material modifications to the form of option or award agreement are made in connection with the grants or awards.
This Barnes & Thornburg LLP publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
- File written documents evidencing bonus plans (or if they are oral, descriptions) with your next 10-K or 10-Q, including any criteria used to determine such bonuses, so that you will not have to file an 8-K when those bonuses (assuming they are made in accordance with the specified criteria) are paid out. If a company prefers not to describe the bonus plan criteria, an 8-K will need to be filed whenever material bonuses are paid to executive officers.
- Make sure you have filed all option and other stock incentive plans and the forms of grant agreements for such plans so that you will not need to file an 8-K when options, restricted stock, or other awards are made under those plans that are consistent with the previously filed agreements.
- File an 8-K when you make annual increases in executive officer and director compensation, unless the increases are clearly immaterial.
- File an 8-K whenever you enter into new employment agreements with your executive officers.
- File an 8-K when you make material amendments to bonus plans, option and other incentive plans and employment agreements.