U.K. “Leave” Vote Disclosures–What Now?

In case you missed it, the United Kingdom voted last week to leave the European Union. And while this clearly is a huge global development (if the stock markets, currency exchange rates and headline type sizes are any indication), it very much remains to be seen how big it really is and what the world will look like post-exit. The truth is that no one knows what will happen or when, which leaves public companies wondering what to say in their SEC filings.

In the swirl of “leave” vote reporting and analysis, it is important to remember what has not yet happened. Because the “leave” vote was a nonbinding referendum, the British government must actually approve withdrawal from the E.U. before it is official, and there is at least some possibility (though perhaps small) that it will choose not to do so. The U.K. then must notify the European Council of its intent to withdraw from the EU pursuant to Article 50 of the Treaty on European Union, with the timing of that notification solely within the discretion of the U.K. and unlikely to occur until after a new Prime Minister is selected (David Cameron having announced his intent to resign as a result of the referendum vote). It is at least conceivable that the U.K. and E.U. could use the delay to revisit their prior immigration discussions and fashion a compromise arrangement that could short-circuit the entire exit process.

Assuming that the U.K. in fact invokes Article 50, then the terms of withdrawal must be negotiated, which could take several years. Until negotiations are finalized, the U.K. remains a member of the E.U. as before, though there may (or may not) be interim legislation dealing with specific issues. The outcome of those negotiations will determine the post-exit relationship between the U.K. and the E.U. and its 27 individual member countries, including such key matters as the movement of goods, services, capital and people. The permutations of potential freedoms and restrictions are just about limitless, meaning that the final arrangement could range from substantially unchanged (for example, the Norwegian model) to multiple new bilateral accords.

In summary, it’s hard to imagine a more uncertain situation or timeframe.

In light of the uncertainty, what can or should a company say now in its public filings?

The starting point is to determine the extent of the company’s current operations, or reasonable expectation of future operations, in the U.K. and E.U. Companies with minimal or no operations might reasonably conclude that no further disclosure is necessary. A company with material current operations or strategic expectations of material future operations in the U.K. or E.U. will need to consider more fully whether and when to update its business description, risk factors or MD&A, and whether to adjust its other public communications accordingly.

Calendar year companies should begin considering these issues for the upcoming second quarter Form 10-Q. Such companies should start by evaluating whether their existing “we do business internationally” risk factor is sufficiently descriptive to encompass the current situation. For many companies, it won’t be necessary to add a new interim risk factor addressing the “leave” vote. Note that Item 1A of Form 10-Q requires only that companies set forth “material changes” from risk factors previously disclosed in the company’s Form 10-K and that the SEC opposes generic risk factors such as “disruptions in the global economy could cause our revenue to decrease, which could have a material adverse effect on our financial results” (though I bet we’ll see quite a few like this next quarter). On the other hand, companies with operations that are uniquely dependent on or sensitive to E.U. risks should consider whether a new interim risk factor, or a substantive update to an existing risk factor, is needed.

A similar analysis applies to Form 10-Q MD&As. Companies must consider whether their operations or strategic plans might reasonably be materially impacted by current market disruptions or the U.K.’s ultimate E.U. exit. The Regulation S-K, Item 303, requirement to disclose known trends, demands, commitments, events or uncertainties will drive this analysis. For example, companies that are now considering relocating major facilities to the European continent may want to discuss that possibility and the potential impact on its operations, cash flows and liquidity. Financial services companies may be particularly impacted.

These issues should receive even more thorough consideration during preparation of the next Form 10-K, along with an analysis of whether the company’s business description should be revised in light of any changes in strategy, competitive position or otherwise.

This analysis becomes more urgent, and perhaps more acute, for companies that are currently, or soon will be, accessing the capital markets. In that case, companies must consider whether the operative prospectus (including filings incorporated by reference) remains accurate and complete in all material respects in light of the “leave” vote. The higher stakes of a capital raise (underwriting agreement representations and warranties, legal opinions and Section 11 liability, for example) could argue in favor of a more thorough disclosure than might otherwise be included in “routine” periodic reports. Companies currently active in the capital markets should also consider whether immediate Form 8-K disclosures are required before trading can continue.

Certainly, this will be an exceedingly fluid and opaque (and fascinating) situation for quite some time. It will be important to stay on top of new developments and understand their potential impact on your company’s business, while avoiding the urge to overreact to events that have not yet actually occurred.

All the best,

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