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Reviewing SEC disclosures can yield dividends

V. John Ella//March 25, 2002//

Reviewing SEC disclosures can yield dividends

V. John Ella//March 25, 2002//

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ublic companies must, by law, disclose current financial and other information to the Securities & Exchange Commission (“SEC”). This information is available to anyone, not just shareholders, and it can be especially useful to attorneys wishing to learn more about a particular company. Before filing suit against any publicly held entity, therefore, it makes sense to review its annual report and other disclosures. Some attorneys refer to this as “opposition research” or “informal” discovery and maintain a separate sub-file for SEC filings.

The Internet is now the best practical source for obtaining SEC filings, which can be used in conjunction with other business information available on the Internet, including data from various Secretary of State Web sites. This article is a brief guide to finding, reading, and understanding 10-K’s, 10-Q’s, and related information available online.

Using the info

The type of information in public disclosures can be useful in a wide variety of cases. For example, in a recent case brought under the WARN Act, which may hinge on whether a company was seeking to raise capital or whether it faced “unforeseen business circumstances,” the author used the defendant’s SEC disclosures to help establish the timing of recent financial transactions.

Employment attorneys can use these disclosures to view the actual employment, severance, and noncompete agreements of the primary officers, directors, and other executives. They can also use SEC information to determine whether a “change in control” has occurred in order to invoke a golden parachute.

Collection and bankruptcy attorneys can track major financial events to determine the company’s ability to sustain a large judgment or to trace preferential payments. Transactional attorneys can review recent mergers and acquisitions. Securities fraud/class action attorneys can view what representations were made and when.

Competitors and their counsel can learn about the history of the company, its product line, where it is located and incorporated, who the primary officers and directors are, and a host of other information.

SEC disclosures are especially interesting to litigators because public companies are required to list and describe any “material” lawsuits that could affect the company’s bottom line. This has prompted a theory — often voiced, although probably exaggerated — that public companies may wish to settle lawsuits in an effort to avoid the necessity of public disclosure through SEC filings, which in turn might have a negative effect on the value of the stock.

SEC filings can provide other information as well, such as:

• a general history of the company over the last year;

• who it uses as general counsel; and

• recent transactions, expansions, purchases, acquisitions, sales, and personnel changes.

Online reports

One of the Internet’s most valuable and often-used resources has been, which was run by a private company and provided access to SEC filings and other useful information. (EDGAR is an acronym for “Electronic Data Gathering Analysis and Retrieval.”)

The SEC used to provide disclosure information on its own Web site, but in December 2001, the SEC announced that it signed a contract with EDGAR to handle all of its online access to this information, free of charge. As of April 2001, however, EDGAR is not always “free,” at least for some purposes. Forms can still be accessed without cost from www.freeed, but premium service is also available from, for a fee. The subscription fee, depending on your means, may be worth the money for improved formatting, easier searching and additional information.

Another popular site that offers SEC documents online, and is preferred by some securities law attorneys for formatting reasons, is Attorneys practicing ERISA law can download Form 5500’s, which are filed with the Department of Labor for various pension plans, without cost — after obtaining a password — from www.freeERISA. com.

Finally, never overlook the company’s own Web site, which often has a link to at least the most recent annual report, as well as other miscellaneous information that might not be in any publicly filed document but may be helpful in the informal discovery process.

Password pandemonium

Many Web sites charge a subscription fee, or at least require a password, in order to obtain certain information online. Examples include,, most newspapers and news magazines, as well as the Minnesota Secretary of State’s office,, which offers more extensive information for paid subscribers, including Uniform Commercial Code (UCC) filing information.

Keeping track of all of these passwords can be confusing, and law firms may want to keep this information consolidated, along with clear instructions for paralegals, law clerks and associates regarding what types of searches incur costs beyond the flat fee or subscription amount.

Public companies

According to the Securities & Exchange Acts of 1933 and 1934, a public company is generally defined as one having registered its securities for sale to the public, or one required to register as a result of having over 500 shareholders and more than $10 million in assets. The definition thus includes all companies listed on public stock exchanges such as the New York Stock Exchange, the American Stock Exchange and NASDAQ, regardless of their assets or number of shareholders.

Public companies are not all Fortune 500 companies. They also include companies which are not traded on an exchange but whose shares are tradable in the over-the-counter (OTC) or pink sheet markets. Minnesota has hundreds of public companies, most of which are not household names.

Privately held companies, of course, are not required to publicly disclose information and some of these companies can be quite large, such as Cargill, which is one of the largest privately held companies in the world.

Once a company becomes large enough, or decides to raise capital in the public marketplace, it begins the journey of becoming a public company by filing either a registration statement or a Form 10. These disclosures are extremely comprehensive and are intended to include all material information about the company, which is kept current with periodic additional filings.

There are more than 50 different forms that public companies may file with the SEC. This article, however, focuses on a just few key documents that can be obtained either from the SEC directly or through the Internet.

Annual report v. 10-K

Most lawyers and investors are familiar with the glossy annual reports published by publicly held companies. Shareholders’ annual reports are not exactly the same as a Form 10-K, however.

The 10-K is the annual report filed with the SEC. It must contain significantly more detailed information than the annual report and does not include color photographs or fancy charts. To be truly thorough, one should obtain a copy of both the shareholders’ annual report and the 10-K, although some of the information will overlap.

The main components of a 10-K are organized as follows:

Part I

• Item 1. Business (A thorough discussion of the history and nature of the company’s business, as well as its current status, its competition, research and development, personnel, subsidiaries, etc.)

• Item 2. Description of Property (A description of the company’s real estate, including cost, rents, leases, etc.)

• Item 3. Legal Proceedings (A disclosure of all material lawsuits.)

• Item 4. Submission of Matters to a Vote of the Security Holders (A description of any matter submitted to a vote of shareholders during the preceding calendar quarter.)

Part II

• Item 5. Market for the Company’s Equity and Related Stockholder Matters (Describes recent sales of equity securities.)

• Item 6. Selected Financial Data (A summary of the company’s financial position.)

• Item 7. Management Discussion and Analysis of Financial Conditions and Results of Operations (Management’s explanation of financial changes, trends and results on a comparative basis.)

• Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Generally applies to companies holding or trading market-sensitive instruments, such as derivatives, forward contracts or foreign currency.)

• Item 8. Financial Statements and Supplementary Data (The company’s audited financial statements.)

• Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

Part III

• Item 10. Directors and Executive Officers of the Company (Who they are.)

• Item 11. Executive Compensation (Amount of money they made, including stock options and perks.)

• Item 12. Security Ownership of Certain Beneficial Owners and Management (Equity holdings by officers, directors and shareholders owning 5 percent or more of the stock.)

• Item 13. Certain Relationships and Related Transactions (Transactions between the company and members of management or significant shareholders, including family members.)

• Item 14. Exhibits (Includes contracts, employment agreements, transaction documents, loan agreements, etc.)

To get an accurate picture when reviewing a 10-K and an accompanying annual report, which can be quite voluminous, focus on the numbers and hard data rather than relying on statements from the chairman of the board. Do not overlook the importance of footnotes and remember that the exhibits can be a valuable source of information and usually include copies of actual agreements and contracts.

The 10-Q

Form 10-Q is similar to the 10-K but the “Q” in this case stands for “quarterly” and is simply a smaller, more streamlined report filed with the SEC three times a year — after the end of each quarter, unless it is at the end of a fiscal year. Form 10-Q’s are different from 10-K’s in that they provide a continuing view of the company’s financial position during the year, rather than a comprehensive, overall summary of the big picture as provided in the 10-K.

The proxy statement

Proxy statements are sent out and filed with the SEC about six weeks in advance of a company’s annual meeting and state where and when the meeting will be held. The form, known as Form 14A, is designed to inform shareholders of issues that may be passed upon in the meeting, including the election of directors. For this reason, proxy statements usually contain a “Summary Compensation Table” which states how much the CEO and the four highest paid executives earned annually over the past three years in salary, bonus, stock options and any other compensation.

Form 14As also include a section labeled “Options, Grants in the Last Fiscal Year” which lists what options were issued and at what price, along with a table that estimates what options grants are worth, based on various assumptions.

Other sections to look for include “Election of Directors,” “Certain Relationships,” “Director Compensation,” and “Related Party Transactions,” which lists all payments nonemployee directors received for extra services — such as helping to broker a transaction or selling insurance to the company.

There may be other important filings as well, depending on the financial health of the company and what type of activity it is engaged in. For example, any significant occurrence, defined as an “unscheduled material event,” including a bankruptcy, merger or acquisition, the resignation of directors, or a change in the fiscal year, requires the filing of a Form 8-K.

Also, individuals with “insider” status must file certain documents, starting with a Form 3. Any insider trading activity must be reported within 30 days on a Form 4, and at the end of the year all such activity is reported on a Form 5. A list of other SEC forms and an explanation of what they are is available at

Hopefully this guide will help attorneys take advantage of the large amount of data public companies must disclose and other information available online.

V. John Ella practices in the areas of commercial litigation and employment law at Mansfield, Tanick & Cohen, P.A. in Minneapolis.

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