September 27, 2005

Director Resignations: Disclosure About Disagreements

Looks like Gretchen Morgenson of the NY Times and I have some of the same sources – she beat me to writing about the intriguing Form 8-K filed recently by Corinthian Colleges. This 8-K includes a 4-page letter from a resigning director that outlines the multiple problems he has witnessed during his tenure on the Corinthian board.

Rather than rehash the essence of Gretchen’s fine article, I thought I would provide some analysis as to the lay of the land regarding 8-Ks filed under new Item 5.02 when directors resign:

1. If there are no disagreements, disclose that fact. Most 8-Ks filed due to a director resigning disclose that there were no disagreements between the director and the company left behind. Many of these helpful 8-Ks go on to disclose the reason for the departure (egs. pursue other opportunities; health or age limitations; personal reasons).

2. Don’t raise questions in investors’ minds by not addressing the reason for departure (as required by Item 5.02(a)(1)(iii)) – such as “the resigning director did not give a reason for his decision in his letter” as noted in this Form 8-K filed by Monmouth REIT.

3. Train directors in the art of drafting resignation letters – providing reasons for the departure in the letter as well as the 8-K, including noting there were no disagreements that led to the departure, immensely help. Letters that raise questions by being silent as to “why” – such as this vague letter from a LitFunding director – don’t help, particularly if the 8-K itself doesn’t address the reasons for departure.

4. For me, the worst are 8-Ks that merely state that a director has resigned via a written communication – but the company fails to file the written communication as an exhibit to the 8-K as required by Item 5.02(a)(2) (and fails to disclose whether there were any disagreements). See the Form 8-Ks filed by Scan Optics and Power2Ship. Perhaps these companies had nothing to hide, but we don’t know from their scant disclosures.

5. The bottom line is that if there are disagreements between a resigning director and the rest of the board or management, don’t try to hide the disagreement – face it and explain it if you wish. So far, I have found about 10 8-Ks that fall in this category, including the Corinthian Colleges’ 8-K noted above and this one from Torvec that I blogged about a few months ago. I have posted a list of the 8-Ks that disclose disagreements in our “Director Recruitment” Practice Area.

“Stock Splits” Practice Area

We have created a new “Stock Split” Practice Area that includes a number of sample checklists that cover a timeline of required actions.