For any number of reasons, a reporting company (as determined by Sections 13 or 15(d) of the Exchange Act of 1934[1]) may not file the required quarterly (10-Q) and annual (10-K) periodic reports. By not staying current on its filings, a company becomes delinquent and therefore, can be severely sanctioned by both the exchange on which they are trading and the Securities and Exchange Commission (“SEC”). If there are private issuances then there could be drastic Section 11 civil liability as well and 10b-5 problems.
Traditionally, if a company wanted to regain the ability to trade its securities, it needed to cure its deficiencies by filing all past delinquent quarterly and annual reports.
This is a daunting task, requiring a great deal of time and money. Often, particularly since the passage of Sarbanes Oxley, the companies are delinquent in their filings because they don’t have the financial resources to continue such filings. Being forced to cure all defective filings compounds the problem. Since the whole point of disclosure is to disseminate information the SEC created a cost-effective method whereby a delinquent filer could regain its standing and cure some of its delinquent filings.
This is done using a Comprehensive Form 10-K, also called a “Super 10-K.”
Why use a Super 10-K?
There are a number of reasons why a company would want to use a Super 10-K as it works to become current on all its filings. One major benefit of using a Super 10-K is that it allows the still-delinquent company to again trade its stock on a national securities exchange. Another benefit is that it demonstrates to potential lenders, shareholders, and the SEC that the company is taking steps to become current in their SEC filings, which status is a requirement in many debt covenants. Additional benefits include:
- the ability to provide all material non-public information needed under Rule 10b-5[2] and Regulation D;[3]
- avoiding a suspension of stock under Section 12(k) of the Exchange Act[4] (which includes over-the-counter markets);
- avoiding an administrative proceeding from the SEC to revoke the company’s registration under the Exchange Act of 1934;
- not needing to file as many Form 12b-25[5] reports notifying the SEC of late filing; and
- not needing to file a Form 15[6] with the SEC to terminate Exchange Act registrations.
What to include:
Until recently, the delinquent company first needed to send a written letter to the SEC’s Office of Chief Accountant at the Division of Corporate Finance requesting filing relief. However, under the current process there is no need to send an initial request, and, even if a request is sent, the SEC will not respond in writing.[7]
The applicable section of the SEC’s Financial Reporting Manual, Section 1320.4, provides very limited guidance as to what should be included in a Super 10-K. It simply states “if the registrant files a comprehensive annual report on Form 10-K that includes all material information that would have been included in those filings” it “will not issue comments asking a delinquent registrant to file separately all of its delinquent filings.” [8]
In addition to “all material information” that would ordinarily be included in 10-K and 10-Q filings, it would also be wise to include:
- a description of all delinquent securities filings and periodic reports;
- reasons for the delinquency;
- explanations as to how the company will realistically resume reporting;
- a plan of the company’s ability (including a calendar of actions to be completed by the company and its auditors) to complete the Super 10-K, including the date the filing will be made;
- a description of potential risk factors for investors, including investors’ inability to access all required financial records, the company’s weakness in internal control over financial reporting, the company’s potential inability to obtain financing, and the company’s inability to register securities on Form S-3, etc.;
- a description of any information that will not be included in the report that otherwise would be required, and the reason for the exclusion (for example, lost or destroyed records, death or incapacity of an executive, an eviction or other event that deprives the company of their records, etc.); and
- declarations of intent to timely file all future periodic reports.
It is important to note that the purpose of the Super 10-K, as well as all periodic securities filings, is to provide an accurate description of the company’s business as it currently stands. So the focus of the included items should be on the current state of the company, rather than on the state of the company as of the date the delinquent reports were due.
What to expect:
The Super 10-K is not a miracle solution for delinquent filers. Filing a Super 10-K does not, in and of itself, make the filer current for purposes of Rule 144,[9] Regulation S,[10] or Form S-8,[11] but it will ensure that the company won’t be suspended from trading its stock under Section 12(k) of Exchange Act.[12] In order for the company to become current, all missing periodic reports must still be filed. And, as mentioned above, this is no simple task. But by taking advantage of the Super 10-K, delinquent companies can regain some of the lost benefits, and bypass some of the requirements, that would otherwise accompany the trudge back to current status.
*This article is based on the articles Catching Up with Late Periodic Reports: The Multi-year Comprehensive Form 10-K, Practical Law Practice Note 9-502-2530; and Curing Delinquent Securities Filings: The Super 10-K, available at https://bradshawlawgroup.com/curing-delinquent-securities-filings-super-10-k/.
[1] https://www.sec.gov/about/laws/sea34.pdf
[2] https://www.law.cornell.edu/cfr/text/17/240.10b-5
[3] http://www.ecfr.gov/cgi-bin/text-idx?SID=465dc4251925603a672a767b7916fc49&node=sg17.3.230_1498.sg11&rgn=div7
[4] https://www.sec.gov/about/laws/sea34.pdf; also available at http://www.columbia.edu/~hcs14/SX12k.htm
[5] https://www.sec.gov/about/forms/form12b-25.pdf
[6] https://www.sec.gov/about/forms/form15.pdf
[7] See Section 1320.4 Delinquent Filers Not Operating Under the Bankruptcy Laws, available at
https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf
[8] Id.
[9] https://www.sec.gov/investor/pubs/rule144.htm
[10] https://www.sec.gov/rules/final/33-7505.htm
[11] See General Instruction A.1. of Form S-8, available at https://www.sec.gov/about/forms/forms-8.pdf
[12] https://www.sec.gov/about/laws/sea34.pdf; also available at http://www.columbia.edu/~hcs14/SX12k.htm
