While primarily securities laws documents, certain sections of the annual report on Form 10-K and quarterly reports on Form 10-Q implicate matters of Maryland law, including the risk factors, authorized share disclosure and exhibits. Most notable among these is a new requirement that the Form 10-K include a description of securities exhibit.
New Required Exhibit – Description of Securities
Earlier this year, the Securities and Exchange Commission (the "SEC") adopted certain amendments designed to "modernize and simplify disclosure requirements" in a manner "expected to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information." These amendments, adopted as part of the SEC's mandate under the Fixing America's Surface Transportation (FAST) Act, include changes to the disclosure requirements for Forms 10-K and Forms 10-Q filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Among the amendments, Item 601(b)(4)(vi) of Regulation S-K requires that a description of each class of a company's equity securities registered under Section 12 of the Exchange Act, as well as a description of any registered class of debt securities, warrants, rights or other securities, be included as an exhibit to any Annual Report on Form 10-K filed after May 2, 2019. For most calendar-year reporting companies (including nearly all REITs), this requirement will first apply to annual reports filed in early 2020. This new exhibit must include (i) the information typically included under the headings "description of securities" and "certain provisions of Maryland law and our charter and bylaws" in registration statements and (ii) descriptions of common stock and each registered class or series of preferred stock, notes, ADRs, depositary shares or other securities.
Public companies should factor into their timelines for preparation of their annual reports the time necessary to prepare this disclosure, particularly if the company does not have a currently effective shelf registration statement. Even a company that has recently filed a registration statement with this disclosure will need to consider whether the disclosure included in its most recent base prospectus must be supplemented or modified to reflect subsequent amendments to the charter or bylaws, issuances of new classes or series of preferred stock or other securities or more complete descriptions of the terms of existing classes or series of preferred stock, notes or other securities. For example, descriptions of subsequent amendments or new classes or series of preferred stock reported on a Form 10-Q or Form 8-K will need to be incorporated into the newly-required Form 10-K exhibit. In addition, companies should consider whether existing prospectus disclosure regarding a class or series of senior securities must be expanded to comply with the requirement under Item 601(b)(4)(vi) that the description include all of the material terms of each class of security registered under Section 12 of the Exchange Act (existing disclosure regarding senior securities that the company does not intend to reopen may address only the terms of the senior securities to the extent that these terms limit the rights of common stockholders).
Authorized Number of Shares and Classes and Series of Preferred Stock
Financial statements and other disclosures required or customarily provided in annual and quarterly reports include the number of authorized shares of each class and series of equity securities. Determining the accurate number of authorized shares of a class or series of preferred stock may be particularly difficult, because the number of authorized shares of a particular class or series may change without a further amendment to the charter noting such change. For example, the terms of a particular class or series of preferred stock may provide that reacquired shares (i) return to the status of authorized but unissued preferred stock or common stock without designation as to class or series (decreasing the number of authorized shares of that class or series while increasing the available preferred stock or common stock generally), (ii) remain unissued shares of the particular class or series (no change) or (iii) are canceled altogether (reducing both the number of shares of that class and of the authorized preferred stock generally).
In this regard, drafters should be mindful that, even if all of the outstanding shares of a particular class or series of preferred stock are reacquired and return to the status of authorized but unissued shares of preferred stock generally, some shares of the particular class or series may remain authorized if the shares were never issued.
Following the Model Business Corporation Act, the Maryland General Corporation Law and the Maryland REIT Law do not require "treasury shares." If a Maryland corporation or trust REIT acquires its own shares, the reacquired shares return to the status of authorized but unissued shares (subject to the reclassification issues noted above), undifferentiated from authorized shares that have never been issued. That said, some companies will want to separately maintain an internal record of previously-listed and reacquired shares, as the requirements for relisting such shares upon reissuance may be different.
Maryland law-related risk factors should also be annually reviewed, as these disclosures may become outdated, typically due to amendments to governance policies or bylaws in response to evolving governance trends.
Each Form 10-K must include (or incorporate by reference) as exhibits the charter and bylaws of the registrant "as currently in effect and any amendments thereto." With more frequent amendments to governing documents due to evolving governance trends, the exhibits, or exhibit list, may require more frequent updates. Moreover, consideration should be given to whether a listed exhibit is no longer effective and should be removed. For example, articles supplementary classifying a particular class or series of preferred stock may no longer be relevant if, as discussed above, all of the authorized shares of the class or series were issued and subsequently redeemed and, automatically or by reclassification, returned to the status of authorized but unissued preferred stock generally or were cancelled altogether.
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As always, we and our colleagues are available at any time to discuss these or other matters.