The SEC uses as its definition of materialthe Supreme Court decision in the 1976 case ofTSC Industries, Inc. v Northway Industries, Inc.That decision said, “An omitted fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making his or her invest- ment decisions. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reason- able investor as having significantly altered the ‘total mix’ of information made available. Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.”
This definition may best be seen in a consent decree issued some time ago against Investors Diversified Service, Inc., containing the following language, “Material inside information is any information about a com- pany, or the market for the company’s securities, which has come directly or indirectly from the company, and which has not been disclosed generally to the marketplace, the dissemination of which is likely to affect the market price of any of the company’s securities or is likely to be considered impor- tant by reasonable investors, including reasonable speculative investors, in determining whether to trade in such securities.”
Any material information by that definition must be disclosed immedi- ately. There is some leeway given by both the SEC and the exchanges if dis- closure puts the issuer at a competitive disadvantage, as long as you don’t trade or leak it. While the kind of information that comes under that head- ing is impossible to list to the fullest extent, there are certainly some obvi- ous activities that should always be reported . . .
• Financial results for a period
• Changes in corporate structure of any magnitude
• Mergers or acquisitions. Here, as in other areas of negotiation, timing becomes sensitive, since premature disclosure can sometimes adversely affect such negotiations. It is now generally accepted, however, that such negotiations should be announced at any point at which there is any feeling by both parties that the negotiations will reach a successful con-
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clusion. This can be a verbal agreement or a letter of intent. But more often it’s when both parties agree in principle on the price and structure of the merger or acquisition. Certainly, failure to disclose the negotia- tions at the time a letter of intent is signed is potentially dangerous. But the time to disclose prior to the letter of intent is still an educated guess.
• Earnings forecasts or estimates, with Safe Harbor(The Private Securi- ties Litigation Reform Act of 1995) provisions
• Exchange offer or tender offer
• Stock split or stock dividend, or any other significant change in capitalization
• Decision to make a public offering
• A substantial loan or changes in terms of loans
• Listing on an exchange
• Changes in accounting
• Management change
• Major new product introduction
• Opening or closing a plant of considerable size
• Amendment of corporate charter or bylaws
• Any information that legally requires special filing with the SEC. In this context, include any consequential information filed in the 8-K report filed with the SEC.
• Significant environmental or civil rights matters
• Decisions of regulatory bodies other than the SEC, such as the Inter- state Commerce Commission or the Federal Trade Commission.
• Material litigation
• Significant executive or board changes
• Rumors that may be damaging or too helpful
The list goes on and on, guided only by one’s definition of material information for a particular company or industry.
FORM 8-K
The SEC also updated the disclosure items to be included in the Form 8-K, expanding two existing Form 8-K disclosure items, and transferring to Form 8-K two disclosure items that previously were required to be in com- panies’ annual and quarterly reports.
Under the rules, companies must include disclosure about the following new items . . .
• Entry into a material agreement not made in the ordinary course of business
• Termination of a material agreement not made in the ordinary course of business
• Creation of a material, direct financial obligation or a material obliga- tion under an off-balance sheet arrangement
• Triggering events that accelerate or increase a material, direct finan- cial obligation or a material obligation under an off-balance sheet arrangement
• Material costs associated with exit or disposal activities
• Material impairments
• Non-reliance on previously issued financial statements or a related audit report or completed interim review (restatements)
• Notice of delisting or failure to satisfy a continued listing rule or stan- dard, or transfer of listing
According to SEC staff, the final rules provide more precise triggers for the new disclosure requirements than the proposed rules provided. How- ever, based on the SEC’s discussion of the rules at its open meeting, and par- ticularly in light of the Safe Harbor that the SEC adopted, it doesn’t appear that the SEC is establishing objective standards of materiality. Thus, it will be important to assess carefully the actual text of the disclosure items once the final rules release is published.
In addition, companies must include disclosure about two items that previously were required to be disclosed in companies’ annual and quar- terly reports:
• Unregistered sales of equity securities by the company
• Material modifications to rights of holders of the company’s securities.
The rules expand the existing Form 8-K item that requires disclosure about the resignation of a director to also require disclosure regarding the departure of a director for reasons other than a disagreement or removal for cause, the appointment or departure of a principal officer, and the election of directors. The rules also combine the existing Form 8-K item regarding a change in a company’s fiscal year with a new requirement to disclose any material amendment to a company’s articles of incorporation or bylaws.
Other Form 8-K disclosure items, such as consummation of a merger or dis-
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closure of financial information for a completed fiscal quarter or year, remain in place.
According to SEC staff, the rules don’t include the proposed require- ment that companies provide in Form 8-K a “discussion of management’s analysis” of the effect of certain events on the company. The staff empha- sized, however, that companies continue to have obligations under Securi- ties Exchange Act of 1934 (“Exchange Act”) Rules 12b-20 and 10b-5 to disclose any additional information necessary to make required disclosures not misleading.
The rules also shorten the filing deadline for Form 8-K to four business days after an event triggering the disclosure requirements. Under previous rules, the filing deadline for most items was five business days or 15 calen- dar days, depending on the nature of the event. The final rules do not pro- vide for extension of the filing deadline for the new items.