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 sales@ccrcorp.com or call us at 800-737-1271.
If you have not figured this out about me yet, I like to torture myself by committing to write many time-consuming publications. It is a habit that I can’t seem to break.
One of these publications is the annual Proxy Season Field Guide, which is published by DFIN. The Ninth Edition is out, and is packed full of 340 pages of insights relevant to the annual reporting and proxy season.
So far this year I have been looking back on 15 years of contributing to CCRcorp publications and reflecting on some of my favorite blogs, podcasts, webcasts, conferences and publications over the years. I have participated in quite a few panels at the annual Executive Compensation Conference and Proxy Disclosure Conference during the last 15 years, so it is difficult to pick just one as my favorite. There were of course the puppet shows in 2015 and 2018, which I talked about in one of the Fond Farewell episodes of the Dave & Marty Radio Show. But I would have to say that my favorite appearance was the last one I did with the late, great Marty Dunn at the 2019 Proxy Disclosure Conference, in a panel called “I Like it Like That.”
This was the last in a series of panels over the years where we basically did a 10 minute comedy routine to give the audience a little break from the proxy disclosure and executive compensation topics. One of our perennial topics for the panel was “What Really Ticks Us Off,” but for the 2019 program we flipped the script and instead covered “What Makes Us Happy.” While we look relaxed up there, I recall that the panel required quite a bit of preparation, from acquiring the Hawaiian shirt and other props to searching around New Orleans for margarita mix. I can remember being backstage blowing up those palm trees and trying to get the parrot to sit on my shoulder, which turned into a wardrobe malfunction when I got on stage. The best part for me now is listening to Marty tell his classic stories and reflecting on what made us happy with what we do, and I am very grateful that we had the opportunity to do this panel before he died.
Overnight, Russia attacked Ukraine, despite intense efforts to find a diplomatic solution. The continuing tensions have prompted a spike in the price of oil and significant volatility in the stock market. While our concern for the safety of the people of Ukraine is paramount, public companies must consider whether and how to address the conflict and its attendant consequences in their public disclosures.
This timely Morgan Lewis memo points out that companies may need to address the conflict in their upcoming risk factor disclosures, and points out examples of disclosures that may be required depending on a company’s particular circumstances:
Against the backdrop of rising tensions between the United States and Russia, particularly as it relates to Russia’s actions in Ukraine, and the new sanctions announced on February 22 by President Joseph Biden and several European leaders against Russia, public companies should review their risk factor disclosure to ensure that it appropriately addresses the risks associated with these events as they relate to their business, results of operations, and financial condition.
For example, if a company’s business depends on exports or imports to or from Russia, its disclosure should appropriately convey the potential effect of bans, sanction programs, additional licensing requirements, and/or boycotts on its business, including supply chain disruptions and other restrictions, to reflect the uncertainty surrounding the escalating conflict as it is unfolding in real time.
Additionally, a company that materially depends on third parties for its operations should consider whether those third parties may be impacted by the events in Russia and Ukraine. For example, third party contractors may have staff, material operations, financial transactions, research and development facilities, equipment, or other properties located in Russia or Ukraine that could be directly impacted by the conflict, which, in turn, could result in material implications for the company’s operations.
Similarly, a public company may have a material customer base located in Russia or Ukraine whereby both the economic and security conditions could limit the company’s ability to provide its services or products to such customers, as well as limit its ability to receive payments, resulting in a potential loss of revenues.
One of the consequences of the Russia-Ukraine conflict is that the countries imposing sanctions on Russia – most notably the United States – are now facing an unprecedented cybersecurity threat, as state-sponsored cyberattacks are certain to follow. Public companies, financial institutions, stock exchanges, telecommunications and energy infrastructure and states and municipalities are all likely high on Russia’s target list. A recent Harvard Business Review article notes:
Conflict in Ukraine presents perhaps the most acute cyber risk U.S. and western corporations have ever faced. Invasion by Russia would lead to the most comprehensive and dramatic sanctions ever imposed on Russia, which views such measures as economic warfare. Russia will not stand by, but will instead respond asymmetrically using its considerable cyber capability.
The U.S. Cybersecurity and Infrastructure Security Agency (CISA) recently issued a warning of the risk of Russian cyberattacks spilling over onto U.S. networks, which follows previous CISA warnings on the risks posed by Russian cyberattacks for U.S. critical infrastructure. The European Central Bank (ECB) has warned European financial institutions of the risk of retaliatory Russian cyber-attacks in the event of sanctions and related market disruptions.
As this Mandiant blog notes, we should be prepared but not panic. Our cyber defenses have evolved to handle sophisticated state-sponsored attacks, and they should hopefully be able to withstand the inevitable attacks from Russia and its allies. But it certainly is a good time to dust off those reminder emails to employees about being vigilant against attacks to corporate systems, the contingency plans for dealing with individual cyberattacks as well as disruptions to financial markets and the economy, and your disclosure plans in the event that your organization experiences a significant cybersecurity event. Check out our Cybersecurity Practice Area for some helpful resources.
We’ve posted the transcript for our recent webcast for members, “Rule 10b51- & Buybacks: Practical Impacts of SEC’s Proposals.” I was joined on this webcast by an all-star panel: Brian Breheny from Skadden, Ning Chiu from Davis Polk, Meredith Cross from WilmerHale LLP and Keir Gumbs from Broadridge Financial Solutions. We discussed the SEC’s December 2021 rule proposals in detail and addressed the practical implications of the proposed rules if they were adopted, including this nugget from Ning:
What’s key here is that many of us work with companies that already have processes and procedures in place to make sure that there is no abuse. Even for those companies, what is being proposed would require some big changes. So, if we stick with talking about the individual plans, as opposed to the corporate plans, to the extent that anybody that has a 14-day, 30-day, or even a separate quarter cooling-off period – we’re now talking about 120 days – under the proposal, any modification would be the end of the plan. Anything, probably even fixing a typo, as of right now, would end the plan. It doesn’t actually accommodate even de minimis changes. A modification would end the plan and you start a new plan. You start your new 120-day cooling off period. I have a couple key questions. One is on the prohibition on overlapping plans. What exactly is an overlapping plan when you’re covering the same securities? What does it really mean? The affirmative defense can’t just be adopted in good faith, but it must be operated in good faith. Those are some of the key things that we’re all trying to give advice on.
Like it or not, the proxy season is now upon us, and this White & Case memo highlights the Top 13 considerations for 2022 annual meeting proxy statements. Not surprisingly, taking the number one spot on this Top 13 list is a focus on board diversity disclosure. Other suggested areas to consider when preparing your proxy statement are disclosing a board skills matrix, focusing on board risk oversight disclosure, reviewing board considerations for independence, considering overboarding policies, revisiting human capital, CEO pay ratio, ESG, perquisites and related party transaction disclosures, addressing negative Say-on-Pay votes and considering basic proxy housekeeping items.
Paul Munter, the SEC’s Acting Chief Accountant, released a statement yesterday on FASB’s Agenda Consultation. Back in June 2021, FASB published its Invitation to Comment, Agenda Consultation to solicit broad stakeholder feedback about the FASB’s standard-setting process and its future standard-setting agenda. The Acting Chief Accountant’s statement highlights the importance of consultation with investors and other stakeholders to the standard-setting process. The statement addresses a number of the key areas of feedback that the FASB received during its consultation, which included disaggregation of financial reporting, climate-related transactions and disclosures, digital assets, intangible assets (including software costs and human capital costs), consolidation guidance, and hedging.
Tune in tomorrow from 2-3pm EST for our inaugural PracticalESG.com webcast – “Supply Chains: Tracking ESG Issues” – featuring Walbrook’s Pepijn van Haren, Orrick’s JT Ho, BlueNumber’s Puvan Selvanathan and Guidehouse’s Catherine Tyson. These experienced practitioners – from consulting, law, auditing and information technology – will be discussing how to minimize emerging ESG risks in the supply chain. This is an especially timely topic in light of shareholders approving a “Scope 3” proposal at a major retailer last month and another company facing legal allegations that it was responsible for forced labor in its supply chain.
Members of PracticalESG.com are able to attend this critical webcast – and access the transcript afterwards – at no charge. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com or calling us at 800.737.1271. If you sign up for a membership today, you can also receive 25% off the regular pricing – don’t delay!
It now appears that the Staff’s climate change reviews are finally wrapping up, as we begin to see the review correspondence posted on EDGAR for companies who received a climate change comment letter in 2021 from the Staff. This resolution is fairly anticlimactic, because the Staff’s sample comment letter published back in September 2021 largely gave us the lay of the land on what the Staff covered in these reviews.
In the correspondence that is now emerging, we see companies explain in significant detail their consideration of the Commission’s 2010 climate change guidance in drafting their Form 10-K disclosures, as well as provide details about their analysis of the materiality of climate change considerations. Consistent with our prior observations, the Staff often pressed companies on these topics in more than one comment letter, apparently not satisfied with the first round of explanations. In the end, while the review effort may not have moved the needle much on the climate change disclosure that public companies provide, it undoubtedly gave the Staff some perspectives on the state of disclosure today that could be useful toward the rule making effort that is still bogged down with the Commission.
