Wednesday, February 12, 2003

By DAN MARGOLIES

Columnist Sprint Corp.'s trauma over executive tax shelters and management succession has raised questions about the company's responsibility to report "material events" to shareholders.

So far, at least, the company appears to have adhered to the somewhat ambiguous requirements of the Securities and Exchange Commission.

The Securities and Exchange Act requires public companies to file so-called 8-K reports when certain events occur. The purpose of the disclosure rules is to ensure the dissemination of accurate information, which markets need to operate effectively.

The list of reportable events has expanded over the years, and the SEC is considering the addition of 11 more.

Right now, Form 8-K has nine disclosure items, including:

• A change in control of the company.
• The company's acquisition or disposition of a significant amount of assets.
• The company's bankruptcy or receivership.
• A change in the company's certifying accountant.
• The resignation of a company director.

Clearly, if William T. Esrey, Sprint's chairman and chief executive, and Ronald T. LeMay, the company's president and chief operating officer, were to resign as directors, Sprint would have to report it on a Form 8-K.

The rules also would require Sprint to report the reason for their resignations if they left because of a disagreement, provided a letter to the company describing the disagreement and requested that the company publicly disclose the matter.

Another disclosure item permits but doesn't require companies to disclose events that they deem to be of importance to their shareholders.

Arguably, that item could apply to Sprint's ongoing management crisis, but that isn't clear.

"The issue under Rule 8-K is the concreteness and maturity of the risk of personal bankruptcy for these individuals," said Kansas City lawyer Norm Siegel, referring to the specter of personal financial ruin raised by Esrey's and LeMay's tax shelters, which are being audited.

"Although we don't know what the IRS has privately told insiders, their public position places this squarely in the gray area. The concrete has been poured but hasn't set."

Among the new disclosure items under consideration by the SEC, none appears to apply directly to the current situation at Sprint. But the SEC has proposed expanding the item requiring the disclosure of a director's resignation to include the departure of a "principal officer" and the reason for the officer's departure.

The expanded rule has not been adopted yet and is prospective only. But if it were in effect today, Siegel said, "I think there is little question...that the board would be required to provide a description of the material circumstances" surrounding Esrey's or LeMay's termination.

The proposed expansion of the rule, however, has run into opposition from securities lawyers concerned about a company's potential exposure to litigation.

For example, companies worried about possible defamation lawsuits might understate the real reason for an officer's departure. That in turn could subject them to potential liability for misleading disclosure.

"Companies should not be forced into such a conundrum," the American Bar Association stated in its comments on the proposed rule.

In the same vein, a group of Silicon Valley securities lawyers commented that the disclosure of an officer's departure may be useful information for investors, but providing the reason for the officer's departure "adds little or no benefit to investors."

Instead, they said, it could create embarrassment and legal problems for companies and departing officers, and could lead to violations of the officers' right to privacy.