Are You Prepared? Important Reminders for the 2020 Form 10-K and Proxy Season

By Heyward Armstrong, Amy Batten and Alex Bowling

During the past year, the Securities and Exchange Commission (SEC) adopted a number of amendments to its rules and regulations and issued additional guidance that will impact the Form 10-Ks and proxy statements that public companies reporting on a calendar year end will file in the upcoming months.  Many of these changes are technical, but others will require action by companies’ boards and their committees.  We have spoken about many of these at our September 2019 and December 2019 educational events, and as many public companies are now in the midst of preparing their Form 10-Ks and proxy statements, this client alert includes a number of reminders to assist disclosure teams in complying with and taking advantage of these updated requirements.  

Form 10-Ks 

• Form 10-K Cover Page:
  • Stock trading information: The Form 10-K (like recently filed Form 10-Qs and Form 8-Ks) must include the company’s security exchange or principal U.S. market, trading symbol and class of securities registered under Section 12.
  • Section 16 checkbox: The Section 16 report checkbox should be deleted. 

• Inline XBRL: Inline XBRL now applies to most large accelerated filers (other than new large accelerated filers), and a number of other filers have voluntarily implemented Inline XBRL early.  Public companies should be sure to address the following requirements in their Form 10-Ks:
  • Cover Page: The cover page must be tagged with Inline XBRL to the extent the filer is subject to the general Inline XBRL requirements.  Because the cover page will pull the company name directly from EDGAR, if the name is misspelled in EDGAR (e.g., missing a comma), companies may want to correct the name on EDGAR prior to filing. 
  • Exhibits: Interactive Data Files containing financial statements and schedules should be filed as Exhibit 101 with “Inline” in the title on the exhibit list. Also, the Cover Page Interactive Data File should be listed as Exhibit 104 with “Inline” in the title and reference Exhibit 101.  

• Risk Factors (Form 10-K Item 1A; Reg. S-K Item 105): In connection with preparing Form 10-K, public companies should carefully review their risk factors, make any needed updates and include disclosures with respect to risks that have actually materialized. In addition to a general update, public companies should be mindful of various rule changes and guidance the SEC has issued over the past year, including the following:
  • New Reg. S-K Item 105: In connection with moving the disclosure requirements for risk factors to a newly created Reg. S‑K Item 105, the SEC reminded issuers that risk factors should be registrant specific and principles based.
  • IP and technology risks associated with international operations: On December 19, 2019, the SEC’s Division of Corporation Finance issued guidance regarding disclosure obligations that public companies should consider with respect to international intellectual property and technology risks.  In particular, this guidance reminds each public company that it should provide disclosures that evaluate these risks through the eyes of management, tailor its risk factors to its unique facts and circumstances and evaluate the materiality of these risks on an ongoing basis.
  • LIBOR transition: On July 12, 2019, the SEC Staff issued a statement on the upcoming transition away from LIBOR.  Among other things, the SEC Staff recommended that public companies disclose risks related to the status of company efforts to date to address the LIBOR transition and the significant matters that have not yet been addressed, as well as the company’s material exposures to LIBOR, including where the company cannot yet estimate the impact of the exposure.  These disclosures should be made through the eyes of management. 
  • Brexit: On March 19, 2019, William Hinman, Director, Division of Corporation Finance, provided remarks at the 18th Annual Institute on Securities Regulation in Europe regarding Brexit risks.  In particular, Mr. Hinman stressed the need for robust disclosures regarding Brexit risks that provide insights to investors as to how management assesses and analyzes these risks. 

• Properties Disclosure (Form 10-K Item 2; Reg. S-K Item 102): Disclosure regarding properties is now more principles based, with Item 102 now only requiring disclosure “to the extent material” of “the location and general character of the registrant’s principal physical properties.” 

• MD&A (Form 10-K Item 7; Reg. S-K Item 303): Item 303 is also now more principles based, although it remains to be seen whether companies will make significant changes to their disclosures.  In particular:
  • Periods covered: For a company required to file income statements covering three years (i.e., generally a company other than a smaller reporting company (“SRC”) or emerging growth company (“EGC”)), the discussion of the earliest of the three years may be omitted if included in a prior filing and the registrant discloses the location of such discussion.  A company may only avail itself of this disclosure relief if inclusion of information regarding the earliest of the three years is not necessary for investors to understand the company’s financial condition, changes in financial condition and results of operations (a number of companies have already taken advantage of this disclosure relief). 
    • Incorporation by reference: On January 24, 2020, the SEC Staff confirmed that merely identifying the location of such disclosure in a prior filing will not cause that discussion to be incorporated by reference into the current filing. (See S-K C&DI 110.02)
    • Necessary information: On January 24, 2020, the SEC Staff issued guidance confirming that, if information regarding the earliest of the three years is required because the public company believes that such information is necessary to understand the company’s financial condition, changes in financial condition or results of operations, it must be included or incorporated by reference into the current year’s Form 10-K. (See S-K C&DI 110.03)
  • Discussion required: The discussion required by Item 303 is now entirely principles-based, and “registrants may use any presentation that in the registrant’s judgment enhances a reader’s understanding.”  As part of revising Item 303, the SEC removed the requirement to, in certain situations, refer to the five-year selected financial data in MD&A.  In general, even after this rule change, public companies have continued to use year-over-year comparisons in MD&A, and we expect this approach to continue.  

• Critical Audit Matters (Form 10-K Item 8; PCAOB AS 3101): The audit reports for large accelerated filers with fiscal years ending on or after June 30, 2019 must include a discussion of critical audit matters.  For more information regarding critical audit matters, please see our July 2019 Client Alert. 

• Incorporation by Reference
  • Financial statements (Securities Exchange Act Rule 12b-23): Public companies may not incorporate by reference, or cross-reference, information into their financial statements unless otherwise specifically required by the SEC’s rules, US GAAP or IFRS, as applicable (formalizing the SEC’s previous position).  Companies are still permitted, as appropriate, to incorporate by reference, or cross-reference, information into other parts of their Form 10-Ks from their financial statements.
  • Hyperlinks (Securities Exchange Act Rule 12b-23): Registrants are now required to provide hyperlinks to information incorporated by reference into a filing if such information is available on EDGAR.
  • Exhibits: The SEC deleted Reg. S-K Item 10(d) that prohibited incorporating by reference certain exhibits that were more than five years old, as this requirement was outdated given that companies have been filing exhibits electronically on EDGAR for more than 20 years. 

• Description of Registered Securities Exhibit (Form 10-K Item 15; Reg. S-K Item 601(b)(4)(vi)): Public companies are now required to file a description of their registered securities as an exhibit to Form 10-K, whereas this information previously was only required to be included in registration statements. 

• Material Contracts (Form 10-K Item 15; Reg. S-K Item 601):
  • Two-year lookback eliminated: Historically, Regulation S-K Item 601(b)(10) required public companies to file (and to maintain on their exhibit lists) material contracts when the contract was entered into not more than two years before the filing (even if there were no remaining performance obligations at the time of filing).  The SEC has eliminated the two-year lookback for all public companies with respect to Form 10-Ks.
  • Schedule and attachments for exhibits: Registrants may now omit schedules (or similar attachments) from exhibits if they do not contain material information and that information is not otherwise disclosed in the exhibit or the disclosure document (essentially extending to all agreements the practice that previously only applied to acquisition agreements).  Public companies must ensure that the exhibit includes a list (or similar disclosure) that briefly identifies the omitted schedules.
  • Confidential treatment requests: This process has been significantly streamlined, and public companies have had the benefit of these revisions since April 2019.  In particular, public companies may now simply omit confidential information without filing confidential treatments request with the SEC (subject to complying with certain procedural requirements).  For issuers submitting or renewing confidential treatment requests, the SEC issued updated guidance on December 19, 2019.
  • Personally identifiable information: The SEC has codified existing practice by providing in Reg. S-K Item 601(a)(6) that “information [that] would constitute a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses, and similar information)” may be omitted from the exhibit without a confidential treatment request.

Proxy Statements

• Hedging Disclosure (Reg. S-K Item 407(i)): Public companies are now required to describe any practices or policies regarding the ability of employees, officers, directors or their designees to hedge or offset any decrease in the market value of “registrant equity securities.”  If the company does not have any such practices or policies, it must disclose that fact or state that hedging transactions are generally permitted. 
• Delinquent Section 16(a) Reports (Reg. S-K Item 405)):
  • Heading change: The heading for disclosure of late Section 16 filings (i.e., Forms 3, 4 and 5) has been changed to “Delinquent Section 16(a) Reports” from “Section 16(a) Beneficial Ownership Reporting Compliance.”
  • No delinquent reports: If there are no delinquent reports, this section may be excluded.
  • Determination of late filings: Public companies may now rely on Section 16 reports filed on EDGAR to determine whether an insider has timely made all of his, her or its filings and are no longer required to rely on copies furnished by the insiders.
• Executive Officer Disclosure (Reg. S-K Item 401): If public companies include the applicable information regarding their executive officers in Part I of Form 10-K under the caption “Information about our Executive Officers,” this information does not need to be duplicated in their proxy statements.
• Audit Committee Report (Reg. S-K Item 407(d)(3)(i)): The SEC made a technical change in the audit committee report to remove the outdated reference to “the statement on Auditing Standards No. 61 . . .” and replaced it with “ . . . applicable requirements of the Public Company Accounting Oversight Board (‘PCAOB’) and the Commission.”
• Compensation Committee Report (Reg. S-K Item 407(g)(2)): The SEC confirmed what has become standard practice that EGCs are not required to include a compensation committee report.
• Leap Year: While certainly not an SEC rule change, as 2020 is a leap year, issuers who are incorporating by reference Part III of the Form 10-K from their proxy statements must be sure to file those proxy statements by April 29 instead of April 30 to be within the 120-day requirement.

If you have any questions regarding your Form 10-K or proxy statement, please do not hesitate to contact a member of the Public Companies group or your regular Smith Anderson lawyer.