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Key Considerations for the 2021 Annual Reporting and Proxy Season Part I: Form 10-K Considerations

This is Part I of a two-part memorandum series outlining key considerations from White & Case’s Public Company Advisory Group for US public companies during the 2021 annual reporting and proxy season.

Part I of this memo describes our key considerations for Annual Reports on Form 10-Ks in two parts:

(1) Housekeeping Items for Form 10-Ks in 2021; and

(2) Top Nine Disclosure Considerations for the Form 10-K in 2021.

Part II of the series will describe key considerations for Annual Meeting Proxy Statements.

 

Considerations for Annual Reports on Form 10-K in 2021

Recent SEC rulemaking and other developments in 2020 have resulted in a number of changes to SEC filings, including your upcoming 10-K, as described below.

Housekeeping Items for Form 10-Ks in 2021

As a result of recent SEC rule changes, the following housekeeping items should be addressed for Form 10-Ks:

(1) Update 10-K Cover Page: First, make sure your Form 10-K cover page is updated to reflect the most recent change by adding the below language to the cover page.2  All US public companies will need to check this new 10-K cover page box—unless they do not provide an attestation report by their independent auditors on internal control over financial reporting because of their status as an emerging growth company or a non-accelerated filer.3

"Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

This is the third year in a row in which changes have been made to the Form 10-K cover page.4 Given all of these changes, it is important to confirm that your Form 10-K cover page reflects all recent updates.5

(2) Determine Your Filing Status: Second, confirm your filing status in order to complete your Form 10-K cover page. In particular, the SEC recently changed the definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 under the Exchange Act.6

  • As a result of this change, an issuer is not an "accelerated filer" if the issuer (i) is eligible to be a smaller reporting company ("SRC") and (ii) had revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.
  • However, an SRC with (i) a public float between $75 million and $250 million, and (ii) $100 million or more in annual revenues would still be an "accelerated filer" as well as an SRC in accordance with the June 2018 amendments to the definition of an SRC.7
  • The determination of a company’s filing status is crucial for determining the deadline for filing periodic reports for the fiscal year, among other requirements. See the SEC's compliance guide and information on filing deadlines.

(3) Check Exhibit Index: Companies should check their exhibit lists in light of recent changes to exhibit filing requirements in Item 601 of Regulation S-K. In particular, companies should ensure that they have reviewed and updated their exhibits in accordance with the 2019 changes to material exhibits as follows:

  • Material Contracts No Longer Required If Fully Performed: For companies that are not "newly reporting registrants,"8  Item 601(b)(10) now requires material contracts to be filed only if they are to be performed in whole or in part at or after the filing of the report.9  Accordingly, companies should review their exhibit index to check if any material contracts have been fully performed and can therefore be removed from the exhibit index as a result of this rule change.
  • Schedules of New Exhibits.
    • In General, May Omit Schedules from All Exhibits: Under paragraph (a)(5) of Item 601 of Regulation S-K, companies may now omit schedules and similar attachments to all exhibits, provided that: (i) the schedules/attachments do not contain material information; and (ii) the information in the schedules/attachments is not otherwise disclosed in the exhibit.
    • Provide List of Omitted Schedules, If Required: Amended Item 601(a)(5) requires companies that omit schedules to provide a list briefly identifying the contents of all omitted schedules, but this list is not required if the filed exhibit already includes this list or otherwise conveys the subject matter of the omitted schedules.
    • Remove Undertaking to Provide Omitted Schedules from Exhibit List. Under the SEC’s prior rule on exhibit schedules, companies were only permitted to omit schedules from plans of acquisitions under Item 601(b)(2) if they filed a list briefly identifying the contents of all omitted schedules together with an agreement to furnish to the SEC a copy of the omitted schedules upon request. However, under the amended rule, this "agreement "is no longer specifically required and therefore disclosure regarding such an agreement (often provided in a footnote to the exhibit list) should be removed. Nevertheless, note that the new rule still states that, "upon request," a company "must provide a copy of any omitted schedule to the Commission or its staff."10 
       
  • Remove Personally Identifiable Information. In addition, Item 601(a)(6) of Regulation S-K explicitly allows a company to omit personally identifiable information from exhibits, such as bank account numbers, social security numbers, home addresses and similar information. Companies should take care to remove such personally identifiable information from their exhibits prior to their filing.
  • Consider Recent Changes for Confidential Treatment Request Orders:
    • Consider Confidential Treatment Requests for New Exhibits. As a reminder, pursuant to amendments adopted, companies are permitted to omit confidential information from material contracts without having to submit a formal confidential treatment request ("CTR"), so long as the redacted information: (i) is not material; and (ii) would likely cause competitive harm to the company if publicly disclosed (or effective March 15, 2021 under the new standard, "if the registrant customarily and actually treats that information as private or confidential').11  Companies should follow the procedures for redactions described in recent Staff guidance, which also notes that the Staff is selectively reviewing filings for compliance.12  As an alternative, companies can still use the traditional CTR process.13
    • Check for Expiring Confidential Treatment Request Orders. Prior to filing your 10-K, you should check if your company has any expiring confidential treatment orders on material agreements. Depending on the time period when the order was originally issued, there are different requirements to request a renewal of the order, as explained in SEC guidance issued in September 2020. 13
  • Consider, if Applicable, the New Registered Debt Exhibit. Effective January 4, 2021, companies with registered debt securities that are guaranteed by related entities are required to file an Exhibit 22 under new Regulation S-K Item 601(b)(22) listing (i) each affiliate whose securities are pledged as collateral for the company’s debt securities; and (ii) the securities pledged.14

(4) Electronic Signatures

  • Consider Using Electronic Signatures. Under prior SEC rules, all individuals were required to manually sign a signature page or other authentication document (the "authentication document") before or at the time of an SEC filing that provided their typed signature. Effective December 4, 2020, amended Rule 302(b) of Regulation S-T gives such individuals the option to sign the authentication document with an electronic signature, instead of with a manual, wet-ink signature.15  Reporting companies will thus be able to file periodic and current reports and registration statements using authentication documents that have been signed electronically by appropriate parties, CEOs and CFOs will be able to electronically sign the authentication documents for certifications required to be filed with Forms 10-K and 10-Q, and filers of Schedules 13D/G and Section 16 reports (Forms 3, 4 and 5) will be able to do so as well. However, in order to use electronic signatures for authentication documents, companies must abide by the attestation requirement described below.
    • If Using an Electronic Signature, Remember the Attestation Requirement. Before a signatory initially uses an electronic signature to sign an authentication document for an SEC filing, the signatory must have manually signed a blanket attestation stating that the use of an electronic signature will, for all future SEC filings, constitute the legal equivalent of the individual’s manual signature for authentication purposes. See Appendix A for a Sample Attestation. An electronic filer must retain this manually signed attestation for as long as the signatory may use an electronic signature to sign an SEC filing (and in any case, at least seven years after the date of the most recent electronically signed SEC filing) and furnish a copy of the manual signature to the SEC upon request.16
    • If Using Electronic Signatures, Establish Required Signing Process. In addition, companies using electronic signatures must abide by new processes established by the SEC. In particular, the signing process for electronic signatures is now set forth in the EDGAR Filing Manual17 and requires a number of steps, including that the signatory "present a physical, logical or digital credential that authenticates the signatory’s individual identity" and that the electronic signature "include a timestamp to record the date and time of the signature."18

 

Considerations for the Form 10-K in 2021

Below is our list of our top nine disclosure items to consider when preparing your upcoming Form 10-K in 2021.19

(1) Business Section: Add Human Capital Management Disclosure. Amended Item 101 of Regulation S-K requires, to the extent such disclosure is material to an understanding of the company's business taken as a whole, a description of human capital resources, including any human capital measures or objectives that the company focuses on in managing the business. The amended rule provides non-exclusive examples of such human capital measures and objectives (i.e., "measures or objectives that address the attraction, development, and retention of personnel"), which may be material, depending on the nature of the company's business and workforce. However, each company's disclosure must be tailored to its unique business, workforce, and facts and circumstances. In additional, the amendments retain a requirement from the prior rule to provide the total number of persons employed. In developing a company’s human capital disclosure for its 10-K, companies should:

  • Assess Existing Human Capital Disclosure. Consider the company’s current, existing disclosure relating to human capital—including in risk factors of the 10-K and sustainability reports—in order to assess which information is available, verifiable and can be prepared without undue cost.
  • Consider Board and Management Focus for Human Capital. Consider which human capital measures or objectives the board and senior management focus on in managing the business.20 
  • Consider Ramifications for Human Capital Disclosure. Consider the company’s goals in providing this disclosure in its 10-K and understand the potential internal and external ramifications related to making such disclosure, including expectations of investors on a going forward basis.

In any event, legal departments should be reviewing drafts of human capital disclosure for liability risks and other issues, such as broad statements that may raise liability concerns due to lack of back-up support or controls processes. Although we expect many companies to take a moderate approach for this first year and weigh additional disclosures for subsequent years, the recent COVID-19 human capital disclosures in quarterly reports have provided many companies with a first step in the type of human capital disclosure that may be appropriate for this first year.21 

Moreover, this new section of the Form 10-K is providing companies with an opportunity to provide more traditional ESG disclosure typically found in sustainability reports for the first time in 10-Ks, and to the extent this information is verifiable and does not give rise to undue litigation risk, it may be appropriate and even beneficial for a company to include for this year. Each company’s facts and circumstances should be assessed for the appropriate level and type of disclosure for this new section.

(2) Revise Your Risk Factor Format.

  • If Risk Factor Section is Over 15 Pages, Add Summary Risk Factor Disclosure: If a company’s risk factor section exceeds 15 pages, the amended SEC rules, effective November 9, 2020, require the company to add a "series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the registrant or offering speculative or risky" and place this summary in the "forepart" or at the beginning of the Form 10-K. Many companies have chosen to combine this disclosure with their forward-looking statement legends in order to avoid repetition, and companies may consider this approach so long as the legend is titled to reflect its dual purposes (i.e., "Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary"), and the Company confirms that the legend will now include the company’s principal risk factors as well as those factors that could cause actual results to differ materially from the forward looking statements included in the filing (which in many cases may overlap, but should be reviewed carefully in light of both SEC requirements).
      
  •  Tailor Generic Risks or Add a General Risk Factor Section. For this year’s 10-K, companies need to review their risk factor section to determine if it includes risk factors that apply generically to any registrant or offering, and then either (i) tailor these risk factors to emphasize the specific relationship of the risk to your company, or (ii) disclose the generic risk factors at the end of the risk factor section under the caption "General Risk Factors".
  • Organize Risk Factors Under Relevant Headings: For this year’s 10-K, companies will need to organize risk factors into groups of related risk factors under "relevant headings", in addition to the subcaption currently required for each risk factor. This is typically done in registration statements, and to the extent not provided in your 10-K, will need to be done before filing this year’s 10-K.

(3)  Assess your Business Section and Legal Proceedings Section in Light of SEC Rule Amendments Effective November 9, 2020.22 In addition to the human capital disclosure described above, companies should consider the following for their business and legal proceedings sections:

  • Required Discussion of Material Changes to a Previously Disclosed Business Strategy. Companies are now specifically required under Item 101(c) to disclose "material changes to a registrant's previously disclosed business strategy." This is particularly relevant for a company that recently went public and provided a lengthy discussion of its business strategy in the business section of its IPO registration statement. Companies should also consider previous disclosure in quarterly reports, earnings conference calls and other investor communications regarding business strategy, and assess whether there are any material changes to this disclosure, particularly in light of changes due to the recent COVID-19 pandemic. The SEC’s adopting release emphasized the principles-based approach of the amendments and the ability of companies to determine the appropriate level of detail for these disclosures.
  • Consider Streamlining Disclosure that May No Longer be Required. In its rule amendments for the Business section, the SEC emphasized its principles based approach and that information that is material to a company’s business must be disclosed. At the same time, information that that was eliminated under the amendments to Item 101 of Regulation S-K and is not otherwise material for a company may be removed. For example, to the extent not material for a company, it may remove from its Form 10-K Business section: "the year in which the registrant was organized and its form of organization" and "the dollar amount of backlog orders". However, companies must provide disclosure on Business section topics (even those eliminated from Item 101(c)’s previous prescriptive disclosure list, as detailed in this chart in our prior memo) if material to an understanding of the business.23 
  • Confirm Your Business Section Includes a Discussion of Compliance with Material Government (Not Just Environmental) Regulations. Codifying common practice among reporting companies, amended Item 101(c) now specifically requires, to the extent material to an understanding of the business taken as a whole, disclosure of the material effects on capital expenditures, earnings and competitive position of compliance with government regulations generally, including but not limited to environmental regulations. Companies are also required to include the estimated capital expenditures for environmental control facilities for the current fiscal year and any other subsequent period that is material. Companies should ensure that regulatory disclosure in their Form 10-Ks adequately addresses all areas of government regulations generally that are responsive to this principles-based materiality standard.
  • Assess Your Environmental Legal Proceedings Disclosure. In reviewing their environmental legal proceedings disclosure, companies should consider recent amendments to the requirements for environmental legal proceedings under Item 103 of Regulation S-K, which add two points of flexibility to existing disclosure requirements.
    • Modified $300,000 Threshold for Environmental Proceedings Disclosure. Amended Item 103, which requires companies to disclose any proceeding under environmental laws to which a governmental authority is a party, increases the existing quantitative threshold for such environmental proceedings disclosure from $100,000 to $300,000. However, the amended rule also allows a company to opt for a different threshold of the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries on a consolidated basis, if the company:
      • determines such alternative threshold is "reasonably designed to result in disclosure of any such proceeding that is material to the business or financial condition"; and
      • discloses the threshold "in each annual and quarterly report," including any change thereto.

Given the hybrid threshold for disclosing environmental proceedings with governmental authorities, companies facing environmental proceedings should consider the nature and anticipated short- and long-term impacts of past and current environmental proceedings and determine the appropriate monetary threshold for their company under the amended rule.

In the end, companies will need to weigh the appropriateness and desire for a threshold higher than $300,000 against the requirement to publicly disclose, in each annual and quarterly report, their materiality threshold for disclosing such proceedings.

  • Hyperlinks and Cross-References for Legal Proceedings Disclosure Specifically Allowed. In light of the November 9, 2020 rule amendments, companies should consider providing their Legal Proceedings section disclosure in response to Item 103 of Regulation S-K by including a hyperlink or cross-reference to legal proceedings disclosure elsewhere in the same document, such as MD&A, Risk Factors or a note to the financial statements. Many companies already provide a cross-reference, and should also consider providing a hyperlink for ease of navigability in their Form 10-K. 24

 

Click here to download full PDF 'Key Considerations for the 2021 Annual Reporting and Proxy Season Part I: Form 10-K Considerations'

 

1 Including amendments to Regulation S-K Items 101, 103 and 105, which became effective November 9, 2020. For more information, see our prior alert “SEC Adopts Amendments to Modernize Disclosures and Adds Human Capital Resources as a Disclosure Topic: Key Action Items and Considerations for US Public Companies.”
2 This change was adopted as part of the amendments to the accelerated filer and large accelerated filer definitions under Securities Exchange Act (“Exchange Act”) Rule 12b-2, effective April 27, 2020, as further discussed below.
3 See Item 308(b) of Regulation S-K.
4 In 2018 and 2019 pursuant to additional rule amendments, the changes to the Form 10-K cover page consisted of the following:
•    the addition of the trading symbols for all of your US-exchange-listed securities to the cover page in a table titled "Securities registered pursuant to Section 12(b) of the Act";
•    the removal of the statement and checkbox regarding Section 16 delinquencies “Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K");
•    the removal of language on "posting" the company’s Interactive Data Files on its corporate website, so that the statement and checkbox reads “Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)”; and
•    the removal of language next to the non-accelerated filer checkbox that companies "not check" the box if they are a smaller reporting company.
For more information, see our prior alerts “Key Considerations for the 2020 Annual Reporting and Proxy Season" and “Reminders for US Public Companies for the 2019 Annual Reporting and Proxy Season.”
5 The SEC website generally provides a current version of the SEC’s forms, available here. Regulation S-K is available here.
The final rule is available here. In addition, the amendments adjust the transition thresholds to (i) $60 million when transitioning from an accelerated filer to a non-accelerated filer and (ii) $560 million when transitioning from a large accelerated filer to an accelerated filer.
The rule is available here.
8 The term as defined in Instruction 1 to paragraph (b)(10) of Item 601 includes companies that are not subject to Exchange Act reporting obligations and certain shell companies.
9 The previous rule had also required material contracts that were fully performed before the filing date but that were entered into within two years of the filing to be filed.
10 See the adopting release FN 192, available here.
11 Effective March 15, 2021, the SEC adopted amendments to adjust the exhibit filing requirements by removing the competitive harm requirement and replacing it with a standard that permits information to be redacted from material contracts if it is the type of information that the issuer both customarily and actually treats as private and confidential, and which is also not material. See page 127 to 128 of this release, available here.  
12 For more information on the procedures for exhibit redactions, as well as information on Staff reviews of redacted exhibits, see Staff guidance available here
13 See Staff guidance updated in September 2020, available here. Also see prior Staff guidance on extensions available here.
14  See here
15 Under amendments to Regulation S-X Rules 3-10 and 3-16. See the adopting release, available here.
16  See the final rule amendment here and the press release here
17 In addition, signatories who have provided others with SEC signing authority through powers of attorney (“POA”) should execute an addendum to the POA granting such electronic signature authority.
18 See Section 5.1.2 of the EDGAR filing manual, available here
19 See page 5 of the adopting release, available here
20 For more information, see our prior alerts "SEC Adopts Amendments to Modernize Disclosures and Adds Human Capital Resources as a Disclosure Topic: Key Action Items and Considerations for U.S. Public Companies" and "Practical Tips for Preparing Upcoming Quarterly Disclosures.”
21 For more information on what human capital measures companies were disclosing in their Form 10-Ks prior to the effectiveness of the rule change, see our prior alert "ESG Disclosure Trends in SEC Filings."
22 For more information, see our prior alert, "ESG Disclosure Trends in SEC Filings."  With respect to COVID-19-related disclosures, employee welfare, health and safety and business continuity issues took the spotlight in first quarter quarterly reports filed with the SEC. For example, in first quarter 10-Q filings, 38 out of 50 top companies by revenue in the Fortune 100 (or 76 percent) included disclosure on employee health and safety. Nearly all of these disclosures referenced COVID-19 and measures companies were taking to protect and promote employee welfare. Many companies also highlighted their business continuity planning in disclosures in light of potential COVID-related disruptions. SEC disclosure guidance in Topics No. 9 and 9A emphasized the importance of disclosing material information regarding employee matters due to the pandemic, such as employees' transition to remote working arrangements, the modification of operations to comply with health and safety guidelines to protect employees, and constraints on human capital resources and productivity. The impact of COVID-19 on corporate operations cannot be overstated, and investors are interested in how companies are responding in terms of safety, logistics, and operational continuity.
23 The adopting release is available here
24 For more information, see our prior alert "SEC Adopts Amendments to Modernize Disclosures and Adds Human Capital Resources as a Disclosure Topic: Key Action Items and Considerations for U.S. Public Companies."

 

Alexandra Munson (Associate, White & Case, New York) assisted in the development of this publication.

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