Updates

August 23, 2004 - Review of Expanded 8-K Disclosure Regarding Management Contracts and Compensation Plans

As of August 23, 2004 , the Securities and Exchange Commission ( SEC ) requires public companies to disclose additional corporate events by filing a Form 8K.  These events include management contracts and compensation plans for senior executives.  In addition the SEC  shortened the 8-K filing deadline for these items to just four days.  These changes have been made in response to Section 409 of the Sarbanes-Oxley Act of 2002, with the intent to help investors stay on top of important corporate events.  Meeting these reporting requirements and deadlines will require additional efforts and perhaps resources from companies' disclosure committees.  The following reviews what effect these new regulations have on the disclosure of compensation and benefits agreements and what companies can do to ensure the requirements are met.

Historically Form 8-K has been used to report significant corporate events such as the resignation of a director or a company change in control.  Requirements effective August 23rd state that public companies must now disclose the implementation of any "material definitive agreement" or amendment of any material agreement not made in the ordinary course of business.  These include bonus, profit-sharing, equity award, pension and deferred compensation plans.  The Form 8-K must include a brief description of the agreement entered into.  While companies are encouraged to file a copy of the agreement, the actual document is not required until the company files its next annual or quarterly report. It is clear that disclosure is required for agreements made with "named executive officers" (the CEO and four most highly compensated employees).  It is unclear, however, under what conditions compensation agreements with other executives and directors must be filed.  This uncertainty is due to the lack of clarity in what the SEC considers to be a "material definitive agreement".  Until this is further defined, we can expect companies to file compensation agreements with employees other than "named executive officers".  The SEC does provide a limited safe harbor for late filers to pass until the end of their current reporting period in some cases.

In response to this ruling, many public companies are now taking precautions to ensure these SEC requirements are met.  Precautions include the development of a team, within a company's disclosure committee, responsible for recognizing and reporting triggering events that require an 8-K filing.  Further, public companies are documenting what actions within the company would now require disclosure.  Finally companies are establishing quarter-end review procedures to ensure that all necessary 8-K disclosures were made.  When necessary the committee completing these reviews will file corrections in the company's Quarterly (10-Q) or Annual Report (10-K).

In the near future, we can expect to see more detail from the  SEC regarding what specific events now require 8-K disclosure as companies work to meet these new requirements and improve investor awareness.  

For more information, please see the SEC website: Final Rule: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date