Although the number of publicly traded U.S. corporations that sought chapter 11 protection has declined from a record 257 in 2001 to fewer than 150 in 2004, there are a significant number of new filings each year. Many public companies seeking to reorganize or liquidate as debtors-in-possession (DIPs) are unable to meet their financial obligations and have curtailed operations. Retaining accountants to provide audited statements may be a heavy burden.² Nonetheless, just as with federal tax obligations, the requirement to file current and periodic reports with the Securities and Exchange Commission (SEC) continues throughout the pendency of a bankruptcy case. The automatic stay entered upon the filing of a petition under the Bankruptcy Code does not operate as a stay against the SEC, as a governmental unit, enforcing its regulatory power.³

Public company debtors⁴ are required to file current and periodic reports with the SEC pursuant to §§13(a)⁵ and 15(d)⁶ of the Exchange Act if they have:

• securities listed on a national securities exchange and registered pursuant to §12(b)⁷ of the Securities Exchange Act of 1934, 15 U.S.C. §§78a, et seq., (Exchange Act);
• securities registered pursuant to §12(g) of the Exchange Act;⁸ or
• a registration statement that has become effective under the Securities Act of 1933, 15 U.S.C. §§77a, et seq., (Securities Act).

If the debtor is delinquent in meeting its filing obligations when it seeks bankruptcy protection or cannot timely file all required reports as a DIP, the debtor may be subject to an administrative proceeding to revoke its registration under §12(j) of the Exchange Act.⁹ If the debtor's stock is trading, it also may be subject to a trading suspension pursuant to §12(k) of the Exchange Act.¹⁰ Discussed below are four ways in which a debtor may elect to address a reporting deficiency.

Become Current

While the SEC staff realizes that most entities seeking bankruptcy protection may find it difficult to cure a deficiency by complying with the reporting provisions of the federal securities laws, the importance of the reporting requirements adopted by Congress "to insure the maintenance of fair and honest markets in securities transactions" remains a priority.¹¹ A corporate debtor that has issued publicly traded securities incurs a continuing obligation to provide disclosure as a means to "essential[ly] preserve the free, fair and informed securities market."¹²

Bringing the reporting obligations current will eliminate impediments to broker-dealers making a market in the securities¹³ and provide both creditors and shareholders with critical information about the debtor. Properly audited financial statements may also assist the DIP in negotiating a reorganization plan and preparing a disclosure statement. Filing past-due reports is also a factor considered in assessing the need for sanctions against violations of the periodic reporting requirements of the Exchange Act.¹⁴

Request a Modification

Through Exchange Act Release 9660, the SEC implemented limited relief from continuing reporting requirements of a debtor under circumstances where "an unreasonable effort or expense would result if the benefits that might be derived by shareholders of the debtor from the filing of the information are outweighed significantly by the cost to the debtor of obtaining the information."¹⁵ In circumstances where a DIP is subject to the jurisdiction of the bankruptcy court, the SEC, "when not inconsistent with the protection of public investors," may accept reports that "differ in form or content from reports required to be filed under the Exchange Act."¹⁶ The SEC staff considers whether to accept modified reports based on:

• how difficult it is for the debtor to obtain the information necessary for those reports;¹⁷
• the debtor's financial condition;
• the debtor's efforts to advise its security-holders and the public of its financial condition and activities; and
• the nature and extent of the trading in the debtor's securities.

A debtor seeking relief from the reporting requirements must act soon after filing a bankruptcy petition. The debtor should take all steps possible to inform its interest-holders and the market of its ongoing financial condition and the status of its bankruptcy case, including filing any available information—such as the petition, schedules, statement of affairs and operating reports—with the SEC as current reports using Form 8-K and press releases.

The staff of the SEC Division of Corporation Finance provided its views on requests to modify reporting by issuers in bankruptcy in Staff Legal Bulletin No. 2.¹⁸ This publication states the factors for obtaining "no-action" relief. A review of no-action requests provides more insight into both the information necessary for an analysis and the specific facts under which relief is granted:

• The debtor timely filed notice of its bankruptcy filing and made other efforts—such as press releases—to inform its interest-holders and the market.¹⁹
• The debtor submits its request "promptly" (before the date the debtor's first periodic report is due following the debtor's filing for bankruptcy protection).²⁰
• The debtor has been current in its Exchange Act reports for 12 months before filing for relief under the Code.²¹
• The debtor discusses whether it has ceased its operations or the extent to which it has curtailed operations; management may reasonably represent that the filing of audited periodic reports would represent an undue hardship;²² and that information contained in reports routinely filed with the bankruptcy court is sufficient to protect public investors during the reorganization or liquidation.²³
• The debtor can demonstrate that there is essentially no trading in its securities.²⁴

If no-action relief is granted, the debtor may timely file its monthly operating reports, as prescribed by Bankruptcy Rule 2015 and local rules of the bankruptcy court, on Form 8-K in lieu of quarterly reports on Form 10-Q and audited annual reports on Form 10-K. The debtor must continue to file a Form 8-K to disclose any material events including those relating to reorganization or liquidation, and must satisfy the proxy, debtor tender offer and going-private provisions of the Exchange Act.

Reorganized debtors or their successors-in-interest who continue to meet the reporting criteria must resume all reporting obligations for all periods that begin after the plan becomes effective. Debtors that liquidate must file a final Form 8-K to report dissolution and dissolve the corporation, and file a Form 15 to terminate the company's reporting obligations under the Exchange Act.²⁵ Requests for relief²⁶ from the Exchange Act reporting requirements should be directed to the Office of Chief Counsel for the Division of Corporation Finance at [email protected].

Withdrawal of Registration

A debtor may be eligible to terminate its registration under the Exchange Act by filing a Form 15 "certification of termination of registration of a class of securities under §12 or notice of suspension of duty to file reports pursuant to §§13 and 15(d) of the Act" with the SEC.²⁷ To qualify to file a Form 15, a debtor must certify that the number of holders of record of a class of security registered under §12(g) is reduced to:

• less than 300 persons,28 or
• less than 500 persons where the total of assets of the issue have not exceeded $10 million on the last day of each debtor's three most recent fiscal years.²⁹

The debtor's duty to file future reports is suspended immediately upon filing a certification on Form 15. However, the termination of registration of the class of securities will generally take effect 90 days after the Form 15 is received by the SEC.³⁰

While the filing of a Form 15 may cease the debtor's ongoing requirement to file periodic and current reports, it would not remove the debtor's obligation to file all reports required under §13(a) of the Exchange Act that were due on or before the date it filed its Form 15. The filing of a Form 15 does not terminate a debtor's duty to continue fulfilling the filing requirements, if any, under the Securities Act.

Consent to Deregistration Proceeding

Failure to make periodic filings as required by Exchange Act §13(a), for which no showing of scienter is necessary, is sufficient grounds for revocation under Exchange Act §12(j).³¹ If the debtor is agreeable to voluntarily executing an agreed-upon revocation order, which is the maximum penalty in a §12(j) action, please contact the Division of Enforcement at [email protected].

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Footnotes

¹ The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or commissioner. This article expresses the author's views and does not necessarily reflect those of the SEC, the commissioners or other members of the staff. Substantial assistance in the research for and preparation of this article was rendered by Rebecca S. Smith, a student at the Georgia State University School of Law, and Marcela V. Schlaen, a student at the Emory University School of Law, through participation in the SEC's student observer program. Return to article

² Proponents of reorganization plans who prepare disclosure statements are not required to provide audited financial statements to meet the "adequate information" requirement imposed by §1125(a)(1) of the Code. See, also, S. REP. NO. 95-989, at 120-22 (1978), reprinted in 1978 U.S.C.C.A.N. 5787. Return to article

³ 11 U.S.C. §362(b)(4). Return to article

⁴ For purposes of this narrative, "debtor" refers to the issuer of one or more classes of securities registered pursuant to the federal securities laws. In securities law terms, this entity also may be an "issuer" or "registrant." When there are multiple debtors in a jointly administered chapter 11 case, "debtor" refers to the entity against which an equity security holder may properly file a proof of interest. See 11 U.S.C. §501(a). Return to article

⁵ 15 U.S.C. §78o(a). Return to article

⁶ 15 U.S.C. §78o(d). Return to article

⁷ 15 U.S.C. §78l(b). Return to article

⁸ 15 U.S.C. §78l(g). Return to article

⁹ Exchange Act §12(j), 15 U.S.C. §78l(j), provides that the SEC is authorized, by order, as it deems necessary or appropriate for the protection of investors, to revoke the registration of a security, if the SEC finds, on the record after notice and opportunity for hearing, that the issuer has failed to comply with any provisions of the securities laws or the rules and regulations thereunder. Return to article

¹⁰ 15 U.S.C. §78l(k). Return to article

¹¹ 15 U.S.C. §78l(b). Return to article

¹² Rule 12b-25 under the Exchange Act, introductory note. 17 C.F.R. §240.12b-25. See, also, H.R. REP. NO. 73-1383, at 13 (1934) ("No investor, no speculator, can safely buy or sell securities upon the exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys and sells. The idea of a free and open market is built on the theory that competing judgments of buyers and sellers as to the fair market price of a security brings about a situation where the market price reflects as nearly as possible a just price.... The disclosure of information materially important to investors may not instantaneously be reflected in the market price, but despite the intricacies of security values, truth does find relatively quick acceptance on the market."). Return to article

¹³ Exchange Act Rule 15c2-11 requires that a broker or dealer must have current information about a security and its issuer before entering a quotation for an over-the-counter security. 17 C.F.R. §240.15c2-11 (Apr. 25, 1991). Return to article

¹⁴ See e-Smart Technologies Inc., Initial Decisions Release No. 272, Feb. 3, 2005, Administrative Proceeding File No. 3-10977, available at http://www.sec.gov/litigation/aljdec.shtml. Return to article

¹⁵ Exchange Act Release No. 34-9660 (June 30, 1972), 1972 WL 121308. Return to article

¹⁶ Id. Return to article

¹⁷ See Exchange Act Rule 12b-21. 17 C.F.R. §240.12b-21 (Dec. 31, 1948). Return to article

¹⁸ Staff Legal Bulletin No. 2 (CF) (Apr. 15, 1997), 1997 WL 180967, available at http://www.sec.gov/interps/legal/slbcf2.txt. Return to article

¹⁹ Form 8-K requires the issuer to file a current report on that form within 15 days of specified events relating to a bankruptcy filing. Return to article

²⁰ Hauser Inc., SEC No-Action Letter, (July 17, 2003), 2003 WL 21757248 (relief requested before the next required filing was due). But, see AorTech Inc., SEC No-Action Letter, (Sept. 14, 1990), 1990 WL 286905 (SEC staff declined to provide no-action relief where the debtor requested relief about two years after commencing the chapter 11 case, on the eve of confirmation). Return to article

²¹ See Laclede Steele Co., SEC No-Action Letter, (July 25, 2002), 2002 WL 32165825 (debtor timely filed periodic public reports for the 12 months before bankruptcy filing). Return to article

²² United Merchants and Manufacturers Inc., SEC No-Action Letter, (Nov. 19, 1996), 1996 WL 669940 (debtors' human resources are currently fully occupied with bankruptcy matters). Return to article

²³ Evolve Software Inc., SEC No-Action Letter, (July 16, 2003), 2003 WL 21697395 (press releases and monthly operating reports will adequately inform market). Return to article

²⁴ Evolve Software Inc., supra Note 24 (trading volume decreased 97 percent since sale of substantially all assets in bankruptcy). But, see Weirton Steel Corp., SEC No-Action Letter, (Mar. 23, 2004), 2004 WL 691776 (relief denied where debtor focused solely on de minimis trading relative to market value rather than market interest in trading); Hawaiian Holdings Inc., SEC No-Action Letter, (Oct. 1, 2003), 2003 WL 22284096 (relief was denied where debtor's common stock was listed on Amex). Return to article

²⁵ Evolve Software Inc., supra Note 24. Return to article

²⁶ See Securities Act Release No. 33-6253 (Nov. 3, 1980), "Procedures Utilized by the Division of Corporation Finance for Rendering Informal Advice," 17 C.F.R. §231. Return to article

²⁷ Exchange Act Rules 12h-3, 17 C.F.R. §§240.12h-3 (May 9, 1996). See, also, 17 C.F.R. 249.323 Form 15. Return to article

²⁸ If, at the beginning of a debtor's fiscal year, the security is held of record by less than 300 persons, it is eligible for automatic suspension and filing a Form 15 is not obligatory. Exchange Act Rule 15d-6, 17 C.F.R. §240.15d-6. See Manual of Publicly Available Telephone Interpretations, §M, ¶32, available at http://www.sec.gov/interps/telephone.shtml. Return to article

²⁹ Exchange Act Rule 12g-4, 17 C.F.R. §240.12g-4. A "holder of record" is any person identified as the owner of the securities on records maintained by or on behalf of the debtor. Exchange Act Rule 12g5-1, 17 C.F.R. §240.12g5-1. "Total Assets," for purposes of §12(g)(1) of the Exchange Act, is defined as the total assets shown on either the debtor's balance sheet or the consolidated balance sheet of the debtor and its subsidiaries, whichever is larger. Exchange Act Rule 12g5-2, 17 C.F.R. §240.12g5-2. Return to article

³⁰ For more detailed information, see Exchange Act Release No. 34-37157, May 1, 1996, 61 F.R. 21354. Return to article

³¹ Stansbury Holdings Corp., Initial Decisions Release No. 232, July 14, 2003, Administrative Proceeding File No. 3-11108, 2003 SEC LEXIS 1639 (the administrative law judge found that in order to determine the appropriate sanction, i.e., a limited suspension or permanent revocation, the SEC should be guided by the public-interest factors identified in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979). Under Steadman, several issues should be considered, including (1) the egregiousness of the respondent's actions, (2) the isolated or recurrent nature of the infraction, (3) the degree of scienter involved, (4) the sincerity of the respondent's assurances against future violations, (5) the respondent's recognition of the wrongful nature of its conduct and (6) the likelihood of future violations. No one factor is controlling); accord, WSF Corp., Initial Decisions Release No. 204, May 8, 2002, Administrative Proceeding File No. 3-10668, 2002 SEC LEXIS 1242. Return to article