Directors’ and officers’ common sense will generally guide them in determining what events are significant enough to warrant their due care and possible disclosure. Partially due to a mandate by Congress in Sarbanes-Oxley, the SEC adopted new rules defining significant events requiring current disclosure on a Form 8-K. These rules are effective as of August 2004. If these events are deemed significant enough for current disclosure under Federal securities law, they will likely be deemed significant for exercise by directors and officers of their duties of care and loyalty under state law.
Directors and officers of all organizations, not just public reporting companies, should be aware that the following events are deemed significant enough to require current disclosure because it is likely that creditors as well as other regulators, including state attorneys general with respect to non-profit organizations, will also treat these events as significant with respect to the duties of care and loyalty under state law:
Entry into a material definitive agreement (or a material amendment) not made in the ordinary course of business;
Termination of a material definitive agreement not made in the ordinary course of business, other than by expiration of its stated term or as a result of all parties completing their obligations, if such termination is material;
Creation of a material direct financial obligation or a material obligation under an off-balance sheet arrangement (direct financial obligations generally means any short-term debt obligations not made in the ordinary course of business and any long-term debt, capital lease, or operating lease obligation required to be reflected or disclosed on a balance sheet);
Director or officer action committing to exit a business or otherwise dispose of either long-lived assets or employees that will result in material charges being incurred;
Completion of an acquisition or disposition of significant assets other than in the ordinary course of business;
Director or officer action concluding that a material charge for impairment of an asset (including securities or goodwill) is required under
GAAP;
Resignation (or declination to stand for re-appointment) or dismissal of the external auditor auditing the organization’s financial statements;
Receipt of notice either of the delisting of the organization’s securities or the failure to satisfy a rule or standard for continued listing of the organization’s securities for trading or quotation;
Director or officer action concluding that any previously issued financial statements should no longer be relied upon because of error;
Knowledge of directors or officers of a change in control;
Resignation or refusal to stand for re-election by a director or removal of a director (note: more disclosure is required if the resignation or refusal to stand for re-election is because of a disagreement relating to the organization’s operations, policies or practices or if the removal is for cause);
Retirement, resignation or other termination of a principal officer;
Appointment of a new principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer;
Election of a new director (including appointment filling a vacancy) that is not by vote of shareholders;
Appointment of a receiver or similar officer for the organization or its parents in a bankruptcy or similar proceeding;
Amendment of the articles of incorporation, code of regulations or bylaws other than by vote of shareholders;
Change in fiscal year other than by vote of shareholders;
Suspension of trading by any of the organization’s ERISA employee benefit plans because of a blackout; and
Substantive amendment to the code of ethics or business conduct applicable to principal executive, financial or accounting officers or any waiver of such provisions with respect to any such officers.
This list of significant events is not intended as either exclusive or exhaustive. The list is, however, instructive. In considering or otherwise dealing with any of these events, directors and officers should act in a manner believed to be in (or, with respect to directors not opposed to) the best interests of the organization and with the care that an ordinarily prudent person in a like position would use under similar circumstances.
