Managing the release of material information: what's new for directors in the SEC's new accelerated disclosure obligations.

• Author: Miller, Carolyn A.
• Position: COMMUNICATIONS

TODAY, BOARDS OF DIRECTORS find themselves in new territory. Expansive changes to federal securities laws and unprecedented decisions by the Delaware Supreme Court have materially increased boards' oversight responsibilities as well as their obligations to shareholders. In addition, attention on public companies has increased greatly following five years of high-stakes corporate scandals, rising executive compensation, and volatile financial performance. In tandem, these events have significantly raised the profile of corporate boards with investors, the public, shareholder activists, the judiciary, and regulators, to name a few. This means that as boards work to master their new, expanded responsibilities, they do so under a much brighter light.

One of the more critical proof points facing directors in the short term is the SEC's new accelerated disclosure obligations on Form 8-K, which take effect on Aug. 23, 2004. The SEC has identified eight new categories of information that are de facto material and must be publicly disclosed within four business days of their triggering events. Prior to the adoption of these new requirements, companies had, in certain instances, more than three months to disclose some of these items and no specific obligation to disclose others.

Importantly, six new disclosure items deal with issues that are likely to require either board involvement or approval and can bear directly on the company's share price upon release:

* Entry into a material definitive agreement not made in the ordinary course of the company's business.

* Termination of a material definitive agreement not made in the ordinary course of the company's business.

* Departures of directors or principal officers.

* Changes in the company's certifying accountant.

* Amendments to the company's code of ethics, or the waiver of a provision of the company's code of ethics.

* Material impairments.

These items carry with them specific issues and risks that need to be assessed before the date that the accelerated disclosure requirements take effect.

Identification and Anticipation

First, the board should identify the universe of people and entities that are likely to take the greatest interest in each type of disclosure and anticipate how their reactions could affect the company and the share price. Material contracts not made in the ordinary course of business, for example, may be of keen interest to competitors, as these contracts can signal that the company is diversifying its business model. Institutional or significant individual shareholders who do not share management's enthusiasm for these contracts may "vote with their feet," selling large positions in the company's stock, which can place downward pressure on the share price. Likewise, professional short sellers may increase their short positions in the company's stock.

In addition, shareholder watchdog groups are likely to pay particular attention to any waivers granted to provisions of the company's code of ethics. Given that significant ethical breaches by senior management were at the heart of the extreme violative behaviors that surfaced in the late 1990s, it is easy to understand why the SEC wants to see these waivers disclosed on a timely basis and why they will be closely watched by shareholder advocates following the date these new regulations take effect.

In the Proper Context

...