Your good client Michael Bluth calls you from the Delaware bankruptcy court. Now that his family’s business, The Bluth Company, has filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code and his late nights with DIP lenders and our bankruptcy colleagues have come to a temporary pause, Michael’s ready to turn back to his typical day-to-day job running his business. However, he notes that their Form 10-Q filing is due in a few weeks, and he’s very concerned about whether they will have the ability to get it done on a timely basis with all of the distractions caused by this bankruptcy and his family’s efforts to “be helpful” (which only seem to make things worse).
SEC Reporting Obligations Continue In Bankruptcy
Unfortunately for Michael, the obligation of a public company to continue filing periodic reports with the SEC continues after bankruptcy if the company has:
- a class of securities listed on a national securities exchange;
- a class of equity securities registered under Section 12(g) of the Exchange Act; or
- a reporting obligation under Section 15(d) of the Exchange Act.
Potential Relief: Staff Legal Bulletin No. 2
Companies can file a no-action request with the SEC Staff to modify the usual reporting requirements by allowing the company to furnish the monthly operating reports required in the bankruptcy proceeding on a Form 8-K in lieu of the company’s 10-Qs and 10-Ks. SLB No. 2 outlines the factors that the SEC Staff considers when determining whether to grant these requests for modified reporting, including:
- Whether the company complied with its Exchange Act reporting obligations before its bankruptcy filing.
- The timeliness of the company’s Form 8-K announcing its bankruptcy filing and other efforts the company made to advise the market of its financial condition.
- Whether the company is able to continue its Exchange Act reporting.
- Whether the information in modified reports is adequate to protect investors.
- The nature and extent of trading in the company’s securities.
- Whether the company has submitted its request for modified reporting promptly after entering bankruptcy.
Trading volume in the company’s securities is often the key stumbling block to securing reporting relief. The SEC Staff will generally only grant relief if the company can demonstrate that trading volume has diminished to an almost negligible amount post-bankruptcy. Unfortunately, many companies in the midst of a Chapter 11 proceeding see substantial trading volume in their stock even when those shares are trading for a negligible value and the company has informed investors of the likelihood that the stock will not have any value or receive any continuing interest after the bankruptcy process is concluded. Furthermore, even if the volume has diminished, if the company’s securities are still traded on a national securities exchange, then modified reporting relief will not be granted.
Our general experience with these types of no-action requests is that the SEC Staff may not grant them outright. Instead, in those cases where the SEC Staff believes relief is appropriate, the Staff typically requests additional information while informally suggesting that enforcement action against the company is unlikely if it pursues modified reporting while it is in bankruptcy. At the same time, we have seen several instances where the SEC Staff either rejected modified reporting relief or recommended the withdrawal of the request for relief, often as a result of high trading volume in the company’s stock (even if the trading seems somewhat hard to understand). Additionally, in one instance, the SEC Staff stated that the company’s finance department needed to be completely eliminated in order for the Staff to grant modified reporting relief. It is unclear whether this is an emerging SEC Staff position, or whether it was limited to that specific situation.
Mind Your Ks and Qs
Even if a company’s SLB 2 request is granted, it is still required to file Forms 8-K and comply with the proxy rules during the bankruptcy—modified reporting only applies to relief from the requirement to file 10-Qs and 10-Ks.
During the bankruptcy, companies that are reorganizing must file a Form 8-K to disclose any material events relating to the reorganization, as well as any other events that would ordinarily require the filing of a Form 8-K. This may require numerous 8-K filings to comply with Regulation F-D with respect to filings made with or statements made to the bankruptcy court or to reflect decisions being made by the company and/or the bankruptcy court. For example, the company must furnish under Item 7.01 of Form 8-K the monthly operating reports filed with the bankruptcy court. Furthermore, the company must disclose various events related to the delisting of its common stock from a national securities exchange under Item 3.01 of Form 8-K. Additionally, once the final plan of reorganization becomes effective, the company must file an appropriate Form 8-K. If the reorganized company remains subject to SEC reporting obligations after emerging from bankruptcy, then it must file all Exchange Act periodic reports for all periods that begin after the plan becomes effective. If the company did not formally obtain modified reporting no-action relief from the SEC Staff, it is possible that the Staff will insist that the company file all periodic reports due after emergence from bankruptcy or even all periodic reports that the company did not file while in bankruptcy.
What About Liquidation?
Companies that are liquidating must file a Form 8-K to disclose whether any liquidation payments will be made to security holders, the amount of any liquidation payments, the amount of any expenses incurred, and any other material events related to the liquidation. Once the final plan of liquidation becomes effective, the company must continue to file a Form 8-K to disclose material events relating to the liquidation. When the liquidation is complete, the company must file a final Form 8-K to disclose that event.