February 22, 2021

Form 10-K Selected Financial Data: Leave It In or Take It Out ?

Compliance with the changes to Reg S-K’s financial disclosure rules doesn’t become mandatory until August 9th, but companies are permitted to early adopt the changes on a line item-by-line item basis as of the February 10th effective date. One of those changes eliminates Item 301 of S-K and its requirement to include selected financial data in a company’s 10-K filing.  If you’re still trying to decide what to do about selected financial data in your 10-K, Jenner & Block has some help for you.

The firm surveyed 100 Form10-K filings made after the February 10th effective date of the rules by large accelerated filers & accelerated filers to see what companies were doing about selected financial data disclosure.  This excerpt summarizes the survey’s findings:

Approximately 40% of the Sample Eliminated Item 301 Disclosure: On the balance, we found that companies were slightly more likely to include the selected financial data than to omit such information based on the sample we reviewed.

– 61 companies within the sample included the selected financial data in the Form 10-K
– 39 companies within the sample omitted the selected financial data in the Form 10-K

No Distinct Patterns within the Sample: We did not detect any concrete patterns with respect to industry or company size. Companies of all industries and sizes elected to include and omit the selected financial data.

For Companies that Early Adopted, Use of Disclosure Varied: Some companies elected to explain why the information was omitted, some omitted the item entirely from the Form 10-K, and some used “Reserved” or similar disclosure.

On this last point, I think that if you’re going to eliminate Item 301 disclosure, the better approach from a technical standpoint is to continue to include the caption “Item 6 – Selected Financial Data” in the 10-K. Here’s why – Item 6 is still included in Form 10-K, and Rule 12b-13 says that an Exchange Act report “report shall contain the numbers and captions of all items of the appropriate form. . .”  It also says that unless the form provides otherwise, “if any item is inapplicable or the answer thereto is in the negative, an appropriate statement to that effect shall be made.”

So, while I doubt very much anybody will end up in SEC prison for just omitting Item 6 in its entirety, Rule 12b-13 indicates that you should continue to include it in your 10-K along with an appropriate statement about why you’re not disclosing the selected financial data that it calls for.  Looking for an example? Check out Zillow Group’s 10-K.

Delaware Chancery: “You Do NOT Have the Right to Remain Silent. . .”

The last 12 months have certainly lent themselves to TV binge-watching.  While most people binged on shows like “Tiger King” or “The Queen’s Gambit,” I took the road less traveled and binged on “Dragnet” reruns.  Yeah, I know that’s a pretty eccentric choice, but I simply can’t get enough of Sergeant Joe Friday & his partners.

Sure, the acting’s wooden & the world view’s problematic, but the 1950s version of the show just may be TV’s greatest example of the film noir style. The preachy 1960s version wasn’t nearly as good as its predecessor, and was often absurdly campy, but whatever its faults, Dragnet remains the seminal police procedural. Like Jack Webb or loathe him, he’s an auteur, and you don’t get “Hill Street Blues,” “NYPD Blue,” “Law & Order” – or even “LA Confidential” – without him.

By now, you’re probably asking yourself – “Okay, how is this goofy boomer going to tie his odd Dragnet obsession into something corporate law related?”  Well, hold my beer. . .

Back in the 1950s, Joe and his partners (of whom Frank Smith was indisputably the greatest) didn’t have to worry about niceties like Miranda warnings. That changed in the swingin’ 60s, and although you could always hear the edge in their voices when they did it, Joe & Bill Gannon never failed to advise a perp that he had “the right to remain silent.”

Now, unlike the perps Joe & Bill sent to San Quentin at the end of every show, a corporation doesn’t have a 5th Amendment right against self-incrimination. That’s because of something known as the “collective entity doctrine,” and a recent decision from – of all places – the Delaware Chancery Court makes it clear that’s the case even if you’re dealing with a single owner entity.  The case involved a discovery dispute in which one of the parties, a single-member LLC, asserted the 5th Amendment in response to a document production request.  Vice Chancellor Laster said no deal:

The overwhelming weight of federal decisions from the courts of appeals recognizes that the collective entity doctrine applies with equal force to a single-person entity. The United States Court of Appeals for the First Circuit has held that “the sole shareholder of a one-man corporation has no ‘act of production privilege’ under the [F]ifth[A]mendment to resist turnover of corporate documents.” The court explained that the choice to incorporate brings with it “all the attendant benefits and responsibilities of being a corporation,” including the responsibility “to produce and authenticate records of the corporation . . . .”

I just know that Joe Friday and Bill Gannon would have loved working a white collar beat. Dum-de-dum-dum. . .

Tomorrow’s Webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures”

Tune in tomorrow for the webcast – “Your CD&A: A Deep Dive on Pandemic Disclosures” – to hear Mike Kesner of Pay Governance, Hugo Dubovoy of W.W. Grainger and Cam Hoang of Dorsey discuss how to use your CD&A to tell your story and maintain high say-on-pay support, trends and investor expectations for COVID-related pay decisions, addressing “red flags” through storytelling, linking your CD&A to your broader ESG and human capital initiatives and ensuring consistency between your CD&A and minutes.

If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.

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John Jenkins