January is a good time for calendar-year-end companies to re-evaluate, and update as necessary, their Form 10-K risk factors. This year in particular, the November election results introduce a wide range of new considerations for many companies and industries. It is important, therefore, for each public company to carefully consider how it may be impacted by President-elect Trump and the re-configured 115th Congress.
Risk factor updating is, of course, an ongoing, rather than annual, exercise. (See this Doug’s Note.) It is fair to say, however, that most companies reserve their most comprehensive re-evaluation (including analysis of peer disclosures) for their Form 10-Ks. In fact, only a few intrepid companies addressed the election results last quarter, perhaps due to the tight timing between the November 8th election day and third-quarter Form 10-Q filings.
New/amended risk factor possibilities…
Regulation S-K Item 503(c) requires the disclosure of uncertainties, possibilities or circumstances that could make an investment in a company’s securities risky or speculative. A few of the more commonly cited, election-related possibilities are listed below (I’m sure there are others):
- Tax reform—lower corporate rates, fewer deductions and credits, corporate inversion and repatriation adjustments, and increased business investment incentives;
- Trade reform—modifications to the Trans Pacific Partnership initiative and North American Free Trade Agreement, increased tariffs on U.S. imports, and general adjustments to international intellectual property regulation and enforcement;
- Healthcare reform—wholesale repeal, or significant amendment, of the Affordable Care Act;
- Environmental regulation and policy reform—changes in a wide variety of areas, including greenhouse-gas emissions, coal mining operations, and general enforcement priorities;
- Employment law reform—revisiting the new (though recently enjoined) federal overtime exemption regulations;
- Immigration reform—revisions to business immigration policies; and
- Financial and disclosure reform—revisions to the Dodd-Frank Act and related SEC rulemaking, including executive compensation regulations.
As you complete your risk factor analysis and drafting, keep the following in mind:
- Don’t wait too long to get started. Proposed changes may be controversial and could generate significant internal discussion.
- Item 503(c) specifically prohibits “risks that could apply to any issuer…,” meaning that each risk factor should either be tailored to your particular company’s situation or should be left out.
- Because Item 503(c) also requires that the risk factors be “concise and organized logically,” think about where new ones should be inserted and why. And while you are at it, be sure the rest of your existing risk factors also meet that standard.
- Be sure to use plain English.
- Remember that risk factor disclosure is a primary means of perfecting the forward-looking statement safe harbor by providing meaningful cautionary language, which makes this exercise doubly important.
All the best,