SEC Amends Form 8-k Requirements - Effective November 7, 2006

As part of the SEC's overhaul of the disclosure requirements for executive and director compensation, the SEC has also amended certain Form 8-K disclosure requirements.  These Form 8-K changes relate principally to employment and compensation arrangements of executive officers.  These changes are effective for Form 8-K triggering events that occur on or after November 7, 2006.  At this time, companies should be reviewing their disclosure controls and procedures, or separate Form 8-K disclosure procedures, in preparation for the new Form 8-K rules when they take effect.

New or Amended Compensatory Arrangements with Named Executive Officers

Currently, Items 1.01 and 1.02 of Form 8-K require disclosure of employment and compensation arrangements with directors and executive officers.  Item 1.01 requires the filing of a Form 8-K if a company enters into or amends a "material definitive agreement," and Item 1.02 requires a Form 8-K if such an agreement is terminated.  Prior to the amendments, employment and compensation arrangements were disclosable under Items 1.01 and 1.02 because the term "material definitive agreement" included any arrangement that a company would be required to file as an exhibit to a periodic report by Item 601(b)(10)(iii)(A) or (B) of Regulation S-K.  Under that Item, employment or compensation arrangements with directors or Named Executive Officers (NEOs) are presumptively material and are required to be filed as exhibits, and such arrangements with other executive officers must be filed unless immaterial in amount or significance.  The new amendments uncouple Item 601(b)(10)(iii) of Regulation S-K from the current disclosure requirements of Form 8-K.  Accordingly, compensation arrangements required by that Item are no longer automatically triggering events requiring disclosure under Items 1.01 and 1.02; however, disclosure of such matters may be required by Item 5.02, as discussed below.

A new paragraph (e) has been added to Item 5.02 of Form 8-K, and requires a Form 8-K filing in the event that the company enters into, adopts or otherwise commences (or materially amends or modifies) a material compensatory plan, contract or arrangement (whether or not written), as to which the company's principal executive officer, principal financial officer, or an NEO participates or is a party.  In addition, an Item 5.02(e) Form 8-K is required in the event of a material grant or award (or modification thereto), whether involving cash or equity, under any such plan, contract or arrangement to any NEO.  However, disclosure will not be required if the grant or award is both (1) materially consistent with the previously disclosed terms of such plan, contract or arrangement, and (2) actually disclosed the next time the company is required to provide such disclosure under Item 402 of Regulation S-K (which would typically be the next proxy statement).  Note that this paragraph (e) does not cover arrangements with directors of the company or with any executive officers other than the NEOs.  Further, new paragraph (e) requires a materiality determination with respect to the compensation arrangements with the NEOs.  Although a materiality determination must be made under Item 5.02(e), the SEC indicated in its release that it believes that "much of the disclosure regarding employment compensation matters required in real-time under the [current] Form 8-K requirements is viewed by investors as material."

Departures of Directors and Listed Officers, Including NEOs

Item 5.02(b) of Form 8-K was also amended to expand the list of covered persons to include NEOs.  Therefore, a Form 8-K will be required when a company's principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions, or any NEO , retires, resigns or is terminated from that position, or if a director retires, resigns, is removed, or refuses to stand for reelection.  Because departures also often involve the creation of severance arrangements or modifications of compensatory arrangements, companies will also need to consider whether there are disclosures required by the new Item 5.02(e) in connection with such events.

Arrangements with and Grants to Newly-Appointed Listed Officers and Directors

Under Items 5.02(c) and (d), a Form 8-K is triggered in connection with the appointment of a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer or person performing similar functions, or the election of a new director other than by vote of shareholders.  The amendments to these paragraphs require a brief description of any material plan, contract or arrangement, whether or not written, to which one of the listed officers or a director is a party or to which he or she participates that is entered into or materially amended in connection with such appointment or election, or any grant or award to any such person, or modification thereto, under any such plan, contract or arrangement in connection with such appointment or election.  It is important to note that these new requirements are not limited to compensatory arrangements.  In addition, there is no exception for immaterial grants or awards, and the grant or award must be disclosed even if consistent with previously disclosed terms of the plan or arrangement.

Recalculated Salary and Bonus Under Summary Compensation Table

A new paragraph (f) of Item 5.02 has been added relating to amounts required to be disclosed in the Summary Compensation Table.  Specifically, in the event that the amount of salary or bonus earned in a fiscal year for an NEO cannot be calculated by the time the Summary Compensation Table is filed with the SEC, then a footnote must be added to that table disclosing that fact and the date that the amount of salary or bonus is expected to be determined.  A Form 8-K triggering event under new paragraph (f) of Item 5.02 then would occur when there is a payment, decision or other occurrence as a result of which the amount becomes calculable in whole or in part.  In addition to disclosing the salary or bonus amount, a recalculated total compensation figure must also be disclosed in the Form 8-K.

Determination of NEOs and Broad-Based Plans

As described above, certain disclosures under Item 5.02 must be made relating to NEOs.  A new instruction to Item 5.02 provides that for purposes of that item, NEOs are those executive officers for whom disclosure was required in the company's most recent filing with the SEC under the Securities Act of 1933 or the Securities Exchange Act of 1934 that required disclosure pursuant to Item 402(c) of Regulation S-K.  Another instruction to Form 8-K states that no information is required by Item 5.02 with respect to plans, contracts and arrangements to the extent that they do not discriminate in favor of the executive officers or directors of the company and are generally available to all salaried employees.

Safe Harbor for 5.02(e) Only

The new amendments provide that the failure to file timely a report required solely by new Item 5.02(e) of Form 8-K is not deemed a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  Similarly, such failure would also not result in loss of Form S-3 registration statement eligibility.  However, the safe harbor applies only until the filing due date of the company's next quarterly or annual report for the period in question.  It is also important to note that there continues to be no safe harbor for any other paragraphs of Item 5.02.

Exhibits to Periodic Reports Still Required

Finally, the amendments to Form 8-K do not affect the continuing obligation of a company to file with its periodic reports as exhibits, the employment and compensation arrangements covered by Item 601(b)(10)(iii)(A) or (B) of Regulation S-K.  As a result, nearly all employment or compensatory arrangements with an NEO or director continue to be presumptively material contracts and are required to be filed as exhibits to those filings.  Compensation arrangements with executive officers who are not NEOs will continue to need to be filed as an exhibit unless they are "immaterial in amount or significance."

Conclusion