Most 8-K filings are pretty straightforward, but some can still prove confusing. Some companies bury important information, or emphasize the rosy and downplay the gloomy. Further complicating matters: widespread misconceptions about what companies are required to do, and what kinds of developments are significant enough to appear in an 8-K.
Below, we tackle some of these sticking points. As always, if something in the filings doesn’t make sense, start by asking the company – and ask a couple outside experts as well, to make sure you’re getting all angles. If you’re still stuck, feel free to give me a shout.
Timing isn’t everything
Among investors, it’s widely believed that companies are supposed to file an 8-K within four days of any significant event. That’s partly true: When an 8-K is explicitly required, it generally must be filed within four days of the event triggering it. However, as with so much in the world of disclosure, it’s more complicated than that.
First, if something happens within four days of filing a 10-Q (quarterly report) or 10-K (annual report), a company can often include the information in that filing instead, and skip the 8-K altogether. (Exceptions include a change of auditors and the disclosure that previous financial statements are unreliable.)
Moreover, much of what companies choose to put into 8-K filings doesn’t have to be disclosed in an 8-K at all. This is particularly true of disclosures coded under Item 8.01 in Edgar. In some cases, these disclosures can seem so big and so significant – multimillion-dollar regulatory settlements, for example – that they must surely be material to the company.
But materiality isn’t sharply defined. And even where a development is unarguably material, companies often have an alternative to disclosure: simply not trading in its own securities. Fundamentally, when a company knows about a development that is material but not yet public, it has a choice: Disclose the information, or refrain from trading in its shares. That means no share buybacks, private offerings, etc. And the restriction applies not just to the company, but also to executives and others at the company who know of the undisclosed development.
This discretion typically ends when a company’s quarterly or annual-report deadline rolls around (though not always). Before then, big companies often choose to disclose. But they don’t have to, and smaller ones might choose not to. (There’s even an exception to the no-trading rule: so-called pre-established trading plans, or 10b5–1 plans, in which executives set up automatic purchases or sales that can continue regardless of underlying developments. These have been controversial, however.)
Remember how we said materiality isn’t sharply defined? Keep that in mind when you hear about a company failing to disclose something that a source says is “clearly” material.
The SEC says something is “material” is “there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision.” You can see the wiggle room: “substantial,” “reasonable,” “important” …
By the same token, however, this is a good question to raise when companies appear not to have disclosed information that proves to be significant – or at least, that does move the market when it comes to light. In April 2010, for example, the SEC charged banking giant Goldman Sachs with fraud, raising questions about whether the company should have disclosed litigation warnings from the SEC that came months earlier.
The big picture
Don’t rely just on the text in the 8-K itself. Many 8-Ks come with one or more exhibits, and those can be far more detailed than the main filing. Employment agreements can include perks – a free iPad or specific dollar amounts for rides on the corporate jet – that are considered too picayune to disclose in the 8-K itself.
By the same token, don’t skip the body of the 8-K just because the exhibit seems detailed. Press releases and earnings releases are among the most common kinds of exhibits, and they frequently omit less pleasant information in favor of the rosier details. The body of the 8-K often includes the grimmer reality, even if you have to wade through some boilerplate to get there.
Details to come
If an 8-K summarizes or refers to significant documents, but doesn’t include them, don’t give up. Check the next quarterly or annual report that the company files, especially if the missing document is an employment contract or other major agreement. Companies often don’t have to file exhibits with 8-Ks, but do have to file it eventually, and the deadline is usually the 10-Q or 10-K for the quarter in which the agreement was signed.
Hide the disclosure
Companies have a variety of techniques to minimize the chance that investors will notice or act on an unflattering disclosure.
Some are alluded to above: Filing detailed exhibits after the 8-K, or including significant elements in the 8-K but not in accompanying press releases or information sheets.
One common tactic is to file the information in an 8-K after the markets close (4 p.m.) on a Friday, or the day before a holiday or long weekend. Filings guru Michelle Leder calls this the “Friday night dump” – when companies take out the trash – and it’s a tried-and-true way to bury bad news. Sometimes companies cut it too close, however, and file the document after the SEC’s electronic filing window closes at 5:30 p.m. Then it shows up in Edgar first thing Monday morning.
Companies can also include a significant, negative disclosure in the same 8-K as an unrelated, routine event, like an earnings report. That’s another reason to always skim the entire filing, rather than just the top, and to check the item numbers listed for 8-K.
The reverse also works: If a company files a widely read 8-K – an earnings report, for example – or a humdrum one, like a boring bylaws change, a second 8-K later in the day can often escape notice. Reporters and investors who get an alert for the document may mistakenly think they’ve already seen it, or already read the headlines. Be sure to look, in case it’s more important than the first filing.