April 1, 2022

#MeToo: Will Federal Arbitration Ban Lead to More SEC Disclosure?

A recent article by Bloomberg Law’s Preston Brewer says that recent federal legislation banning mandatory arbitration claims in employment contracts may prompt more public companies to disclose information about these claims. This excerpt explains why that might be the case:

The new law puts a stop to the forced diversion of sexual harassment claims away from the courts. Companies will thus have to grapple with the uncertainty of potentially large judgments, including punitive damages. These potential scenarios will likely convince more and more public companies to describe the sexual harassment risk to their businesses in their SEC filings.

From a securities regulation perspective, the core determinant as to what a registered company should publicly disclose is whether the information would be material to an investor trying to make an informed investment decision. The greater the potential risk to the company, the more likely that such information needs to be disclosed in its SEC filings. The tension between this legal obligation and a company’s desire to present a positive public image is sure to increase.

Although the nature of this risk will vary from company to company, the risk isn’t simply the monetary costs of defending and paying settlements or judgments. A company may face significant reputational risks that can impair its brand and the company’s market value. Management may be distracted while defending against claims, thereby harming the business, and the greater public exposure of these court-litigated allegations (as opposed to closed-door arbitration) increases the risk that companies will lose key personnel who may be difficult to replace.

The article discusses the need for public companies to tailor risk factors to address this risk and notes out that industries with a track record of sexual harassment claims, such as tech, entertainment, & finance, may be more affected by the legislation than those in other industries.

John Jenkins