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On the D&O Diary, Kevin LaCroix blogged about the “Top Ten D&O Stories of 2023,” and focused on future implications of notable trends. Overall, he shared that federal court securities class action lawsuits were up 8% in 2023 over 2022. He also discusses how derivative suits are increasingly settling with significant cash components:

There was a time not long ago when it was unusual for the settlement of a shareholder derivative lawsuit to involve a significant cash component. The cases usually settled for the defendants’ agreement to adopt corporate therapeutics and the payment of plaintiffs’ attorneys’ fees. In more recent years, it has become more common for derivative suit settlements to include a significant cash component. Indeed, nine of the top ten largest derivative suit settlements over the last 20 years have taken place just in the last four years alone. The trend toward shareholder derivative settlements with significant cash components continued in 2023, as there were several settlements announced this year that are among the all-time largest settlements.

The blog then reviews in detail various factors that contributed to the increase in these lawsuits — including macroeconomic conditions and geopolitical risk. He hopes challenges from macroeconomic conditions will ease in 2024 due to the Fed’s shifting interest rate policy, although the interest rate environment and banking crisis weren’t the only macroeconomic factors triggering federal class action securities suits in 2023. He also cites labor supply and supply chain disruption issues.

He has no hope of geopolitical risk slowing this year. In 2024, he foresees increased business and operating difficulties for many businesses as a result of the “very dangerous geopolitical environment” and upcoming key elections.

As you work through 10-K updates this year, keep these factors in mind as you draft MD&A (in addition to risk factors). Both investors and the SEC are going to be interested in clear disclosure of known trends and uncertainties and the reasons for material changes from period to period. Here’s a timely reminder from White & Case’s recent alert on key considerations for your upcoming Form 10-K:

MD&A remained one of the top targets of SEC Staff comments, with the majority of this year’s comments focused on disclosures about results of operations. Many comments related to a company’s lack of sufficiently detailed disclosures about the reasons for material period-to-period changes in the financial statement line items. These included comments reminding companies that if two or more factors contributed to a material period-to-period change in a financial statement line item or subtotal, Item 303 of Regulation S-K requires disclosure of the reasons for material changes, in quantitative and qualitative terms, for each factor. Comments have also asked about the effects of macroeconomic factors, such as inflation, interest rates and supply chain issues. Companies should review their MD&A disclosures to confirm the reasons for material changes are disclosed with sufficient specificity to avoid these types of comments.

– Meredith Ervine