In light of the continuing economic downturn, many issuers with periodic reporting obligations under the Securities Exchange Act of 1934 are or may be faced with the prospect of reorganizing or liquidating under the United States Bankruptcy Code. These issuers must file their Exchange Act reports under the strain of the bankruptcy process, which imposes practical difficulties in completing and timely filing the reports during a time when resources are limited. Can these reporting requirements be modified so that issuers can more readily satisfy them? This alert briefly describes the possible modifications of Exchange Act reporting requirements for an issuer in bankruptcy.
Deciding to Pursue Modified Reporting
Staff Legal Bulletin No. 2, issued April 15, 1997, reflects the SEC`s guidance for issuers in bankruptcy. The Staff Legal Bulletin emphasizes that companies in bankruptcy are not relieved of their periodic reporting obligations and that neither the Bankruptcy Code nor the federal securities laws provide an exemption from Exchange Act periodic reporting for issuers in bankruptcy. The Staff Legal Bulletin does, however, provide an alternative for modified periodic reporting, which may be available to certain companies that are subject to the jurisdiction of the bankruptcy court.
The decision to pursue modified reporting should not be taken lightly. The many considerations in making such a decision include:
- whether investors will continue to need audited financial statements during the bankruptcy (the financial statements included in annual reports filed under the modified reporting may be unaudited);
- the need to instill confidence in investors and employees (which is important in proposed reorganizations) by continuing normal periodic reporting;
- the expense of Exchange Act reporting during a period when creditors are demanding payment and there are other significant expenses related to the reorganization process;
- the time involved in completing audited financial statements when more pressing matters exist; and
- whether the company anticipates emerging as a public company upon completion of the bankruptcy (given that post-bankruptcy filings must include audited financial statements for any period that was not audited during bankruptcy, as discussed below).
Requesting SEC No-Action
Although an issuer may choose to rely generally on the guidance provided by the SEC (which includes the Staff Legal Bulletin and SEC Release No. 9660) in modifying its reporting while in bankruptcy (i.e., delaying filing of its quarterly and annual reports), it would need to seek a no-action position from the SEC staff to provide certainty for its reporting stance and benefit fully from the procedures outlined by the SEC. The Staff Legal Bulletin provides several factors that the staff typically considers in granting or denying a no-action request. The staff will consider three main factors:
- Information regarding disclosure of financial condition. The staff will consider favorably an issuer`s efforts to advise the market of its financial condition by complying with its reporting obligations during the 12 months before the bankruptcy filing and timely filing a Form 8-K announcing the bankruptcy filing. The issuer must also clearly demonstrate its inability to continue regular reporting and show that the information in modified reports will be adequate to protect investors.
- Information regarding the trading market for the issuer`s securities. The staff requires the issuer to provide detailed information regarding the trading of its securities. Based upon a review of no-action positions taken by the staff concerning modified reporting, the SEC is likely to grant an issuer`s no-action request when there is no active trading market for the security and tends to deny the request when there is an active trading market. When the trading volume is low, there are fewer investors to protect and it is more likely that the issuer`s reporting of less information will be adequate.
- The timing of the issuer`s request for modified reporting. An issuer should request modified reporting promptly after filing for bankruptcy. To a large extent, these factors focus on whether modified reporting will continue to protect investors in the issuer.
Modified Reporting Scheme
If the SEC staff determines that a no-action position is warranted, the staff will generally permit the issuer to file, in lieu of its annual report on Form 10-K and quarterly reports on Form 10-Q, a copy of each monthly operating report (MOR) it files with the bankruptcy court under Rule 2015 of the Federal Rules of Bankruptcy Procedure. Issuers must file the MOR as an exhibit to a Form 8-K within 15 days after filing the MOR with the bankruptcy court. The issuer must also continue to satisfy any other Exchange Act requirements, such as the proxy and tender offer rules, as well as any other Form 8-K filings that become due.
Reporting Upon Emergence from Bankruptcy
The Staff Legal Bulletin also provides specific guidance for the filing of reports upon an issuer`s emergence from bankruptcy, depending on whether the issuer is reorganizing or liquidating. An issuer reorganizing under the Bankruptcy Code must file a Form 8-K when its reorganization plan becomes effective, disclosing the status of the reorganization and including an audited balance sheet. The issuer will be required to continue its normal Exchange Act reporting immediately upon the effective date of the reorganization plan; thus, there is no grace period before the issuer resumes its normal periodic reporting.
In addition, the post-reorganization filings (e.g., the next annual report on Form 10-K) must include audited financial statements for all periods for which audited financial statements are required, even for the periods during which the issuer was in bankruptcy. The issuer is not, however, required to file any Forms 10-K or Forms 10-Q it did not file during the bankruptcy in reliance upon the no-action position and the Staff Legal Bulletin procedures.
If an issuer is liquidating under the Bankruptcy Code, it must continue to disclose material events relating to the liquidation on Form 8-K, including a final Form 8-K to report the completion of its liquidation. Like a reorganizing issuer, it is not required to file any Forms 10-K or Forms 10-Q it did not file during the bankruptcy.
Among other things, a reporting issuer entering (or about to enter) bankruptcy should consider the possibility of modifying its Exchange Act reporting and, if a modification is desired, should prepare and file a no-action request with the SEC.