New Developments In Securities, Corporate, and Business Law
DERIVATIVE ACTIONS IN DELAWARE
The Delaware Supreme Court recently established a new set of criteria to be used in determining whether a stockholder's claim against a corporation is direct or derivative. Stockholders use derivative actions to sue the corporation for harm done to the corporation by management or other insiders, whereas stockholders who are individually harmed retain the right to sue the corporation for individual injuries. Previously, Delaware courts have held that a stockholder must bring a derivative, rather than individual, action against the corporation unless the stockholder could show a "special injury" that is separate and distinct from the injury suffered by other stockholders.
In Tooley v. Donaldson, Lufkin & Jenrette, Inc. et al. (April 2, 2004), the court held that the issue of whether a claim is derivative or direct "must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?" The court found that the "proper analysis" for determining if a claim is derivative is to look to the nature of the wrong and to whom the relief should go. "The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing injury to the corporation."SEC ADOPTS ADDITIONAL FORM 8-K DISCLOSURE REQUIREMENTS
The Securities and Exchange Commission (SEC) has adopted new regulations which expand the number and type of events that public companies (except for foreign private issuers) must report on Form 8-K under the Securities Exchange Act of 1934. The new rules take effect on August 23, 2004.
Generally, under the amended Form 8-K, a public company must, within four business days (unless otherwise specified) after the event triggering the need for disclosure, report the date of the event, the identity of relevant parties, and a brief description of the event. In some instances, the company must also provide copies of relevant documentation.
The SEC revised Form 8-K and added eight new items to the list of reportable events, transferred, in part, two items from other periodic reports, and expanded two pre-existing items. The following is a brief overview, by item number, of the types of items that public companies must report when the regulations take effect in August.
Item 101 - Entry into a Material Definitive Agreement. A company must disclose any new material definitive agreements that are not made in the ordinary course of business and any material amendments to any material agreements. The company does not have to file a copy of the agreement or amendment with its Form 8-K.
Item 102 - Termination of a Material Definitive Agreement. A company must disclose if a material definitive agreement not made in the ordinary course of business is terminated, other than by expiration of the agreement on a stated termination date or as a result of all parties completing their obligations under the agreement. Disclosure is required only if the termination of the agreement is material to the company.
Item 103 - Bankruptcy or Receivership. The company must report the company's entry into bankruptcy or receivership. This item retains the substantive requirements formerly included in Item 3 of Form 8-K.
Item 201 - Completion of Acquisition or Disposition of Assets. This item requires disclosure if the company, or any or its majority-owned subsidiaries has acquired or disposed of a significant amount of assets, otherwise than in the normal course of business.
Item 2.02 - Results of Operations and Financial Condition. This is the former Item 12 of Form 8-K regarding public announcements or releases of material non-public information regarding a company's results of operations or financial condition.
Item 2.03 - Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant. This item requires disclosure if the company becomes obligated under a direct financial obligation that is material to the company or if the company becomes directly or contingently liable for an obligation that is material to the company which arises out of an off-balance sheet arrangement.
Item 2.04 - Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant. The item requires a company to make an 8-K filing if a triggering event causes the increase or acceleration of a direct financial obligation of the company and the consequences of the event are material to the company. An 8-K filing will also be required if an event occurs which causes the company's obligation under an off-balance sheet arrangement to increase or be accelerated or causes a contingent obligation under an off-balance sheet arrangement to become a direct financial obligation of the company, and the consequences of the event are material to the company.
Item 2.05 - Costs Associated with Exit or Disposal Activities. This item requires disclosure if the company's board of directors or authorized officers commit the company to an exit or disposal plan or otherwise disposes of a long-lived asset or terminates employees under a plan of termination described in paragraph 8 of FASB Statement of Financial Accounting Standards No. 146, under which material charges will be incurred under generally accepted accounting principles applicable to the company.
Item 2.06 - Material Impairments. This item requires disclosure if the company's board of directors or authorized officers conclude that a material charge for impairment to one or more of its assets, including, without limitation, an impairment of securities or goodwill, is required under generally accepted accounting principles applicable to the company.
Item 3.01 - Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing. This item requires disclosure from a company that receives a notice from a national securities exchange or national securities association that maintains the principal listing for any class of the company's securities that the company or its class of securities does not satisfy a rule or standard for continued listing on the exchange or association, the exchange or association has submitted an application to the SEC to delist such class of securities, or the association has taken all necessary steps under its rules to delist the security from its automated inter-dealer quotation system. The company must also disclose if it has notified the national securities exchange or national securities association that the company is aware of any material noncompliance with a rule or standard for continued listing on the exchange or association.
Item 3.02 - Unregistered Sales of Securities. This item requires disclosure of the information specified in paragraphs (a) and (c) through (e) of Item 701 of regulation S-K regarding the company's sale of securities in an unregistered transaction.
Item 3.03 - Material Modifications to Rights of Security Holders. This item requires a company to disclose material modifications to the rights of the holders of any class of the company's registered securities and to briefly describe the general effect of the modifications on those rights.
Item 4.01 - Changes in Registrant's Certifying Accountant. This item is substantively the same as former Item 4 of Form 8-K.
Item 4.02 - Non-Reliance on Previously Issued Financial Statements or a Related Audit Report of Completed Interim Review. This item requires a company to file a Form 8-K if its board or authorized officers conclude that any of the company's previously issued financial statements no longer should be relied upon because of an error in the financial statements as addressed in Accounting Principles Board Opinion No. 20. Similarly, the company must disclosed if it is advised by or receives notice from its independent accountant that disclosure should be made or action should be taken to prevent future reliance on a previously issued audit report or completed interim review to previously issued financial statements.
Item 5.01 - Changes in Control of Registrant - This item was previously required to be reported on Form 8-K.
Item 5.02 - Departure of Directors or Principle Officers. This item requires disclosure if a director has resigned or refuses to stand for re-election to the board of directors because of a disagreement with the company on any matter relating to the company's operations, policies or practices, or if a director has been removed for cause. In addition, if the Company furnishes the Company with any written correspondence concerning the circumstances surrounding his or her resignation, refusal or removal, the company must file a copy with the Form 8-K.
Item 5.03 - Amendments to Articles of Incorporation and Bylaws; Change in Fiscal Year. This item requires disclosure of any amendments to the Articles of Incorporation or Bylaws if the company did not propose the amendment in a previously filed proxy statement or information statement. A company must also disclose if it changes its fiscal year by means other than a submission to a vote of the security holders through the solicitation of proxies or by an amendment to its Articles of Incorporation.
Item 5.04 - Temporary Suspension of Trading Under Registrant's Employee Benefit Plans. This item requires disclosure of the information specified in Rule 104(b) of Regulation BTR.
Item 5.05 - Amendments to the Registrant's Code of Ethics or Waiver of a Provision of the Code of Ethics. This item requires disclosure of any amendments to or waivers of the company's code of ethics that applies to its principal officers unless it discloses the information on its website within four business days following the date of the amendment or waiver and the company has disclosed in its most recently filed annual report its internet address and intention to provide disclosure on its web site.
The foregoing is only a very brief overview of the new Form 8-K disclosure requirements. All reporting companies which are required to file Form 8-K should review the new regulations carefully. Please contact Larry Koltun if you would like more information.
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