Form 8-K Mandate: All Prescription, No Diagnosis

Publicly traded companies are required to file a variety of reports with the Securities and Exchange Commission (SEC). In addition to routine quarterly and annual reports, the SEC requires that companies file a current report on Form 8-K to disclose specified events. When I first began practicing law nearly three decades ago, Form 8-K filings were relatively rare. This was due to the fact that a company was required to file a Form 8-K only in a handful of circumstances.

All of these reporting triggers were significant events such as a change in accountants or a company bankruptcy. In 2004, the SEC more than doubled the number of events that trigger an obligation to file a Form 8-K. Not surprisingly, the level of significance of these new triggers was much lower. As a direct result of this change, the number of Form 8-K filings for most companies skyrocketed. Recently, the SEC has added an additional item to Form 8-K. Beginning this month, public companies will be required to disclose voting results of stockholder meetings within four business days. While this may seem to be a minimal additional burden, the SEC's decision to make this change is noteworthy because it exemplifies the SEC's alarming willingness to impose new mandates without any substantial analysis or justification.

When proposing to add yet another triggering event, the SEC failed to assess the degree to which public companies already provide voting results to their stockholders. Rather, the SEC merely asserted that disclosure of voting results "could take a few months" under its current rules. While this statement may be technically accurate, it is certainly not complete. Many companies were already announcing voting results at their annual stockholders' meetings. Many companies were also voluntarily reporting voting results in Form 8-K filings. Had the SEC bothered to conduct even a very cursory review of recent filings, it would have found numerous examples of voluntary reporting.

When a regulatory agency proposes a new requirement, it is reasonable to expect that the agency would cite some particular harm that it is trying to address. In proposing this new requirement, however, the SEC did not do so - not even anecdotally. Thus, the rulemaking record lacks any rationale beyond the SEC's belief that mandating additional disclosures would be better. Even assuming that the SEC was correct, it never explained why companies would delay release of voting results if the market values immediate disclosure. Given the lack of any substantiating record, the SEC's proposal amounts to little more than a solution in search of a problem.

The SEC also did not account of the fact that California already provides shareholders with a right to obtain voting results in a timely manner pursuant to the California Corporations Code. For a period of 60 days following a shareholders' meeting, a corporation must upon the written request of a shareholder "forthwith" inform the shareholder of the result of any particular vote. This requirement applies to both annual and special meetings. A corporation must disclose the number of shares voting for, the number of shares voting against, and the number of shares abstaining from voting. In the case of election of directors, a corporation is required to report the number of shares (or votes in the case of cumulative voting) cast for each nominee.

Foreign corporations (i.e., corporations not organized under the California General Corporation Law) that are qualified to transact intrastate business in California are required to provide this information at the request of a shareholder resident. According to the California Secretary of State, there are more than 80,000 foreign corporations qualified to transact business in California. Even if a foreign corporation is not qualified to transact business in California, it can be subject to the disclosure requirement if it has one or more subsidiaries that are domestic corporations or foreign corporations qualified to transact intrastate business in California. Thus, it is very likely that most publicly traded corporations will be subject to California's disclosure requirement. Disturbingly, the SEC completely ignored these existing state law rights.

As a result of the SEC's new requirement, companies will incur additional internal and external costs in preparing and filing an additional Form 8-K. These costs are ultimately borne by all of the shareholders. Even assuming that some shareholders want this disclosure, the SEC offered no explanation for why all shareholders should incur costs to meet the desires of some shareholders. For example, one shareholder or group of shareholders may have a strong interest in a particular voting outcome that is not shared by the other shareholders. Because this shareholder has a special interest, it may be willing to expend its own resources in obtaining information regarding the outcome while other shareholders are not willing to expend their resources. The shareholder could submit a written request at relatively minimal cost. The SEC's proposal relieves the shareholder of these costs and transfers them to all of the company's shareholders. Thus, the SEC's rule is in effect a forced subsidy. When imposing new requirements, the SEC simply should not support self-interest at the expense of the common interest.

In economic terms, the SEC's new requirement is inefficient because it is not a Pareto improvement.  Under this concept, a change is considered to be a Pareto improvement if the change can make someone better off and no one worse off. This is not the only economic measure of efficiency, but it is an important  tool for assessing changes - especially for an economic regulator such as the SEC. In proposing new requirements, the SEC should explicitly address whether the change represents a Pareto improvement. If there is no Pareto improvement, the SEC should justify why the regulatory change is nevertheless efficient.

Finally, the SEC also seems to have ignored the fact that as it imposes more and more specific disclosure requirements on companies, it is actually impairing the quality of disclosure. More disclosure is not necessarily better disclosure. As the overall noise level of disclosure increases, it becomes harder and
harder to hear the truly material disclosures.

One more Form 8-K filing requirement is itself a small matter. However, this new mandate must be viewed in a larger context. The SEC should not impose additional requirements, however small, without a rational basis. A rational basis must be more than an unsupported claim by the SEC that it believes that the requirement will improve disclosure. The SEC must demonstrate why it is efficient to impose costs on all of the stockholders to benefit as a minority. Unless the SEC establishes a firm rational basis, it is acting like a doctor who prescribes medication without the benefit of a diagnosis.

Keith Paul Bishop is a partner at Allen Matkins Leck Gamble Mallory & Natsis in Irvine and an adjunct professor of law at Chapman University School of Law. He previously served as California’s Commissioner of Corporations.