February 25, 2022
The Conflict in Ukraine: More Disclosure Considerations
In yesterday’s blog we highlighted some of disclosure considerations that could arise from the Russian invasion of Ukraine, but one issue that we did not address is what should companies do if they have already issued their earnings release and filed their Form 10-K? The invasion comes just as earnings season has wrapped up and larger companies with a December 31 fiscal year end have already filed their Form 10-K. In this way, there are parallels to what we saw with the onset of the COVID-19 pandemic, which became a concern in the United States in early March 2020, right after many companies had already wrapped up their earnings releases and periodic report filings.
In many ways, companies may have already covered the risks and uncertainties arising from the conflict in their Form 10-K disclosures, given that many companies include general risk factor warnings about the risks arising from wars and global economic instability. Further, many companies included risk factor disclosure this year about the risks arising from inflation, given that those trends existed before the crisis in Ukraine began. Many companies have also discussed in depth the supply chain challenges that they have already been facing, which could be exacerbated by the conflict in Ukraine.
In terms of determining whether a company must disclose now any risks or uncertainties arising from the Ukraine conflict, it is important to evaluate whether the company has an affirmative disclosure obligation that would require the company to address such material risks and uncertainties, including any upcoming SEC periodic and current reports, potential securities offerings, ongoing share repurchases, or other public statements (such as earnings announcements or investor day presentations). If a company chooses to make a statement regarding risks and uncertainties arising from the conflict, such statement may not be materially misleading, or omit information that would make the statement materially misleading. Companies have a duty to correct prior disclosure that the company determines was untrue (or omitted a material fact necessary to make the disclosure not misleading) at the time the disclosure was made.
In addition to the information expressly required by SEC rules and forms, a public company is required to disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” The SEC considers omitted information to be material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or that disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available.
The materiality of risks and uncertainties associated with the conflict in Ukraine depends upon the nature, extent, and potential magnitude of the impact on the company’s business and the scope of the company’s operations. In accordance with Basic v. Levinson, a company should consider both the probability of and anticipated magnitude of any impacts in light of the totality of the company’s business activity.
What we observed with the onset of the COVID-19 pandemic in 2020 was a push toward more current disclosure of information about risks and uncertainties, even though companies might have been able to wait to make those disclosures in their periodic reports. The SEC’s Chairman and the Director of Corp Fin called on companies to provide more “real time” disclosure, particularly given the profound effects that the pandemic and the measures taken to prevent the spread of the virus had on public companies and the extreme volatility in the stock markets. I think the conflict in Ukraine is somewhat distinguishable from those circumstances, given that the economic impact may be less widespread and more targeted toward particular industries.
For a more detailed discussion of the framework for analyzing these disclosure considerations, check out the article “Can It Wait Until the Next 10-Q” in the July-August 2021 issue of The Corporate Counsel. If you aren’t already subscribing to receive the current issues of this critical newsletter, email email@example.com or call us at 800-737-1271.
– Dave Lynn