A Guide to Public Companies and Bankruptcy
Many believe that economic disruptions caused by the COVID-19 pandemic will lead to increased bankruptcies. If that is true, a portion of those bankruptcies would include public companies. Set forth below are some key SEC reporting considerations for public companies that file for bankruptcy.
Initial 8-K Reporting Obligations
A public issuer must file a Form 8-K disclosing it has filed for bankruptcy. The required disclosures are high-level. The report is due within four business days of filing the petition. The SEC encourages companies to file as soon as possible after the bankruptcy, so that all investors and creditors have sufficient information about the issuer’s financial condition.
Form 8-Ks reporting bankruptcies typically include the reporting of other required events as well. Other required items commonly included are reporting of entry into debtor-in-possession financing arrangements and automatic acceleration of indebtedness caused by filing the bankruptcy petition.
Stock Exchange Listing Requirements
The listing rules of the NYSE and Nasdaq do not provide for automatic delisting of companies that file for bankruptcy. The approaches of the two exchanges are somewhat different however.
Rule 802.01D of the NYSE Listed Company Manual provides that if an issuer files or announces an intent to file for reorganization relief under the bankruptcy laws (or an equivalent foreign law), the NYSE may exercise its discretion to continue the listing and trading of the securities of the issuer. However, if an issuer is below certain continued listing standards (or subsequently falls below such standards) files or announces an intent to file for relief under any provisions of any bankruptcy laws, it is subject to immediate suspension and delisting.
Nasdaq Rule 5110 provides that Nasdaq may use its discretionary authority under the Rule 5100 Series to suspend or terminate the listing of an issuer that has filed for protection under any provision of the federal bankruptcy laws or comparable foreign laws, or has announced that liquidation has been authorized by its board of directors and that it is committed to proceed, even though the issuer’s securities otherwise meet all enumerated criteria for continued listing on Nasdaq. In the event that Nasdaq decides to continue the listing of such an issuer during a bankruptcy reorganization, the issuer is required to satisfy all requirements for initial listing, including the payment of initial listing fees, upon emerging from bankruptcy proceedings.
A Form 8-K must be filed if an issuer receives notice that it fails to meet a listing standard or the issuer has advised the exchange that it is in noncompliance with the listing standards. Additional Form 8-Ks may be required during the delisting process.
Ongoing Exchange Act Reporting Obligations
A bankruptcy filing does not terminate a public issuer’s obligation to continue to file reports required by the securities laws, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
In 1997, the SEC staff issued Staff Legal Bulletin No. 2, or SLB No. 2, which was meant to address requests to modify the Securities Exchange Act of 1934 periodic reporting of issuers that are either reorganizing or liquidating under the provisions of the United States Bankruptcy Code.
SLB No. 2 provides that the issuer in bankruptcy may request a “no-action” position from the staff of the SEC’s Division of Corporation Finance, or the Division, that limits reporting obligations under the Exchange Act. In providing a no-action position, the Division determines whether modified reporting is consistent with the protection of investors.
To obtain the relief described in SLB No. 2, the issuer should clearly demonstrate its inability to continue reporting, its efforts to inform its security holders and the market of its financial condition and activities, and the absence of a market in its securities. The issuer should submit its request promptly after it has entered bankruptcy, not when it is preparing to emerge from bankruptcy. The Division will consider a request as submitted “promptly” if it is filed before the date the issuer’s first periodic report is due following the issuer’s filing for bankruptcy. The Division will also consider a request to be submitted “promptly” if the issuer is current in its Exchange Act reporting after filing its Bankruptcy Code petition and through the date of its request.
SLB No. 2 asserts that generally, the Division will accept, instead of Form 10-K and Form 10-Q filings, the monthly reports the issuer must file with the Bankruptcy Court. The issuer must file each monthly report with the SEC on a Form 8-K within 15 calendar days after the monthly report is due to the Bankruptcy Court.
Notwithstanding the broad promise of relief set forth in SLB No. 2, the Division has only sparingly granted relief under its provisions. From 1997 through 2005, only 11 of 21 requests were granted. It is likely some applications were withdrawn when the SEC signaled they would not be granted so the foregoing statistics may not paint the full picture. It’s also possible that the Division may have verbally indicated that modified reporting relief is appropriate outside of the formal no-action letter process. Amongst these requests, the Division’s responses suggest that the nature and extent of trading in the issuer’s securities is the most critical factor. In particular, substantial trading volume and continued listing on a national exchange appear to be incompatible with relief under SLB No. 2 in the Division’s view.
Subsequent to 2005, the SEC granted applications under SLB No. 2 only in connection with the high profile GM bankruptcy following the 2008 financial crisis. Importantly, the relief applied only to residual operations of “old GM” following a Section 363 sale to the “new GM” that operates today and not to the time the reorganization was pending.
Confirmation of Plan of Reorganization and Section 363 Sales
An order confirming a plan of reorganization triggers a required Form 8-K filing. The plan of reorganization must be filed as an exhibit as well.
An issuer’s Section 363 sale of assets can also trigger required Form 8-K filings. For example, the related asset purchase agreement may be a material contract that triggers a filing when it is entered into and the closing of a sale of assets may also trigger a required Form 8-K filing if the thresholds set forth in Item 2.01 of Form 8-K are met. In some circumstances pro forma financial information reflecting the disposition of assets may also be required.
Failure to file required reports may make it difficult or impossible to hold stockholders’ meetings. For instance, to solicit proxies for an annual meeting where directors will be elected, stockholders must be provided with an annual report on Form 10-K (or equivalent information) and certain other specific information, such as compensation and management information.
Termination of Exchange Act Reporting Obligations
Issuers will want to terminate their Exchange Act reporting obligations following a reorganization or liquidation in connection with a bankruptcy proceeding where permitted by relevant law. This is essentially a three layer analysis where all of the relevant prongs must be satisfied:
- Delisting from the exchange and deregistration under Section 12(b) of the Exchange Act (the balance of this commentary will assume the issuer has previously been delisted),
- Deregistering under Section 12(g) of the Exchange Act – Section 12(g) imposes reporting based on the number of shareholders and assets, and
- Suspension of obligations under Section 15(d) of the Exchange Act – Section 15(d) imposes reporting obligations based on filing and maintaining Securities Act registration statements.
The following table sets forth the general requirements to deregister a class of securities under Sections 12(g) of the Exchange Act and to suspend reporting obligations under Section 15(d) of the Exchange Act.
|Requirement||12(g) Deregistration (Rule 12g-4)||15(d) Suspension (Rule 12h-3)|
|Record holders||Held of record by fewer than 300 persons (higher threshold for certain banking entities)||Same|
|Record holders – alternative test||Fewer than 500 persons, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years||Same|
|Current reporting obligations||Not applicable||Issuer has filed all reports required by Section 13(a) (i.e., 10-Ks and 10-Qs etc.) for the shorter of its most recent three fiscal years and the portion of the current year preceding the date of filing a Form 15|
|Requirements related to recently filed registration statements||Not applicable||Suspension is not available for any class of securities for a fiscal year in which a registration statement relating to that class becomes effective under the Securities Act of 1933, or is required to be updated pursuant to section 10(a)(3) of the Securities Act, and, in the case of alternative test for record holders, the two succeeding fiscal years
The foregoing does not apply to the duty to file reports which arises solely from a registration statement filed by an issuer with no significant assets
Staff Legal Bulleting No. 18 provides some relief with respect to this requirement
|Filing requirements to terminate obligations||Form 15 must be filed||Form 15 must be filed|
Public companies that do not file required reports or take the steps to properly terminate their reporting obligations following bankruptcy will likely eventually attract the attention of the SEC Delinquent Filings Program. The SEC’s Divisions of Enforcement and Corporation Finance jointly established the Delinquent Filings Program in 2004 to encourage reporting companies that are delinquent in filing their periodic reports to submit their periodic reports or rectify deficient periodic reports. The SEC’s Delinquent Filings Group in its Division of Enforcement conducts investigations into possible violations of the federal securities laws’ periodic reporting obligations, and prosecutes administrative proceedings against these companies when appropriate. The Division of Corporation Finance identifies reporting companies that are delinquent filers and usually provides them with notice of their failure to submit periodic reports. If a reporting issuer identified as a delinquent filer fails to submit its periodic reports, the SEC may revoke the registration of the reporting issuer.
Section 12(k) of the Exchange Act gives the SEC the authority to suspend trading in a security for up to 10 trading days if the SEC believes that a suspension is required to protect investors and the public interest. A trading suspension by the SEC halts the trading in a security on all trading platforms (e.g., national securities exchanges, over-the-counter market, or alternative trading systems). In addition, Section 12(j) gives the SEC the authority to revoke, or suspend for up to twelve months, the issuer’s securities registration if, after an administrative hearing, the SEC finds that the issuer violated the Exchange Act by failing to file its periodic reports.