SEC Issues Helpful New Form 4 and Form 8-K Interpretations

June 27, 2008

This week the Securities and Exchange Commission’s Division of Corporate Finance issued separate interpretations simplifying and clarifying certain issues affecting Form 4 reporting under Section 16(a) and Form 8-K reporting. Specifically, the Division’s interpretations: 

• allow same-day, same-way open market purchases or sales to be aggregated and reported on a single line on Form 4, subject to certain conditions addressed below; and 

• clarify that when a director tenders his or her resignation pursuant to a corporate governance policy, Form 8-K reporting obligations arise only if and when the Board accepts that resignation. 

These interpretations will result in clearer and more useful disclosure for investors and assist Section 16 insiders and issuers in complying with their reporting obligations. 

The Division’s Section 16(a) Interpretation

On June 25, 2008, in response to a request by the Society of Corporate Secretaries & Corporate Governance Professionals, the Division issued a no-action letter that will simplify the preparation, and enhance the readability to investors, of Form 4 reports. The no-action letter reverses an interpretation issued by the Division last year stating that each trade effected at a different price had to be reported on a separate line. Because many brokers execute a single order through a number of discrete transactions at prices that may differ by only pennies or fractions of a cent, the prior interpretation resulted in Section 16 reporting persons often filing multiple Forms 4 to report a single purchase or sale order. These Forms 4 were difficult to prepare and unwieldy for investors to decipher. 

The no-action letter allows Section 16 reporting persons to aggregate and report on a single line all same-day, same-way open market purchases or sales that occur within a one dollar price range, if the Form 4 includes specified information. In order to rely on the no-action letter, a reporting person should:

• report in the price column on the Form 4 the weighted average purchase or sale price for all transactions that are being aggregated and reported on a single line, which transactions must have been effected within a one dollar ($1) range (that is, the highest and lowest transaction price for all purchases or sales that are being aggregated must be within a dollar of one another),

• specify in a footnote on the Form 4 the range of prices for the transactions that are aggregated and reported on the line, and

• state in a footnote that the reporting person will provide to the Commission, the issuer and any stockholder, upon request, full information regarding the number of shares purchased or sold at each separate price.

If the reporting person’s transactions were effected at prices that vary by a dollar or more, the reporting person can nonetheless aggregate groups of transactions occurring within a one dollar price range and report each of those on a separate line. For example, if 5,000 shares were sold in multiple transactions at prices ranging from $20.25 to $21.24 and an additional 2,500 shares were sold on the same day at prices ranging from $21.25 to $22.00, the reporting person may file a single Form 4 with two line entries. 

While the no-action letter does not set forth specific text for the footnote that is required on any Form 4 filed in reliance on the Division’s position, we believe the following text would satisfy the no-action letter:

"This transaction was executed in multiple trades at prices ranging from $__.__ to $__.__. The price reported above reflects the weighted average sale [or purchase] price. The reporting person hereby undertakes to provide upon request to the SEC staff, the issuer or a security holder of the issuer full information regarding the number of shares and prices at which the transaction was effected." 

The Division’s no-action position only applies to purchase or sale transactions reportable using transaction codes "P" and "S," respectively, that are effected: 

• through a broker-dealer,

• in "same-way" open market transactions (that is, all transactions aggregated are either purchases or sales),

• on the same day, and

• at different prices that are within one dollar ($1) of one another. 

The no-action position does not allow single line, aggregate reporting for separate transactions involving shares that are both directly and indirectly beneficially owned, or that reflect different forms of indirect beneficial ownership. Thus, for example, sales of shares owned directly by the reporting person cannot be aggregated and reported on a single line with sales of shares indirectly owned through a trust. The no-action position is also available for Form 5 reporting. 

The Division’s no-action letter is available at: http://www.sec.gov/divisions/corpfin/cf-noaction/2008/scsgp062508-sec16.htm.

The Division’s Form 8-K Interpretation

On June 26, 2008, the Division updated its Compliance and Disclosure Interpretations relating to Form 8-K to specifically address whether a resignation tendered by a director pursuant to a corporate governance policy triggers a Form 8-K under Item 5.02(b), which generally covers resignations by directors. Because of the prevalence of governance policies embodied in bylaws and other publicly disclosed documents that require directors to tender resignations at the time they are nominated in order to implement majority voting provisions, or that require directors to tender their resignations if their principal occupation changes, there was a risk that a flood of Forms 8-K would be filed for "pro forma" offers to resign even when the resignation only reflects compliance with a corporate governance policy and the resignation is not accepted. The Division’s new interpretation clarifies that in these situations, a Form 8-K is triggered only by the Board’s acceptance of the resignation. 

Importantly, the Division did not alter its interpretation that in other contexts, a Form 8-K is triggered by notice from a director of his or her intention to resign or not stand for re-election. Given the number of companies that have lost Form S-3 eligibility by failing to timely file a Form 8-K in those circumstances, companies should specifically notify each of their directors of the Form 8-K reporting requirements that arise if and when the director notifies the company of an intention to resign or not stand for re-election. Companies also should ensure that they have designated an individual who is responsible for being informed of a director’s notice and preparing the required Form 8-K. 

The Division’s interpretations on this issue are set forth at http://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm and copied below: 

Question 117.01

Question: When is the obligation to report an event specified in Item 5.02(b) of Form 8-K triggered? Must the Form 8-K filed to report an Item 5.02(b) event disclose the effective date of the resignation or other event?

Answer: With respect to any resignation, retirement or refusal to stand for re-election reportable under Item 5.02(b), other than in the corporate governance policy situations addressed in Question 117.15, the Form 8-K reporting obligation is triggered by a notice of a decision to resign, retire or refuse to stand for re-election provided by the director, whether or not such notice is written, and regardless of whether the resignation, retirement or refusal to stand for re-election is conditional or subject to acceptance. The disclosure shall specify the effective date of the resignation or retirement. In the case of a refusal to stand for re-election, the registrant must disclose when the election in question will occur, for example, at the registrant’s next annual meeting. No disclosure is required solely by reason of Item 5.02(b) of discussions or consideration of resignation, retirement or refusal to stand for re-election. Whether communications represent discussion or consideration, on the one hand, or notice of a decision, on the other hand, is a facts and circumstances determination. A registrant should ensure that it has appropriate disclosure controls and procedures in place — for example, a board policy that all directors must provide any such notice directly to the corporate secretary — to determine when a notice of resignation, retirement or refusal has been communicated to the registrant. (emphasis added) 

Question 117.15

Question: If a company has a corporate governance policy that requires a director to tender her resignation from the board of directors upon the occurrence of an event — such as reaching mandatory retirement age, changing jobs or failing to receive a majority of votes cast for election of directors at the annual meeting of shareholders — when must a company file a Form 8-K under Item 5.02(b)?

Answer: Under these circumstances, in which a director tenders her resignation only because she is required to do so in order to comply with a corporate governance policy, the company must file a Form 8-K under Item 5.02(b) within four business days of the board’s decision to accept the director’s tender of resignation. If the board does not accept the director’s tender of resignation — and thus, the director remains on the board — the company should consider informing shareholders as to whether and to what extent corporate governance policies are being followed and enforced.