International Focus

Brexit and SEC Requirements for Public Companies

It’s better to be prepared than to get prepared

Attorney Laura Anthony, the founding partner of Anthony L.G., PLLC, a national corporate, securities and business transactions law firm, looks at the ripple effects of Brexit throughout the global markets. Reprinted with permission. Visit www.lawcast.com

WEST PALM BEACH, Florida, Dec. 16, 2019 /PRNewswire/ — According to a recent article by Francine McKenna of MarketWatch, Securities and Exchange Commission Chairman Jay Clayton warned an audience of international bankers, “If we have a hard Brexit, there will be friction, there will be price volatility, there will be problems.” Clayton continued, “Brexit is already here,” and advised financial executives that preparations should be made for a variety of scenarios, including a “hard Brexit.”

Clayton, unlike doomsday analysts, advised financial executives to prepare for numerous different scenarios, with only one of them, the hard Brexit, being the worst possible outcome.

In a well-planned and systematic manner, the SEC has recently begun requiring that public companies disclose their game plans for dealing with a financially disruptive Brexit.

Nature of Brexit Disclosures

Recently, William Hinman, the Director of the SEC Division of Corporation Finance, gave a speech at the 18th Annual Institute on Securities Regulation in Europe and the topic of Brexit was front and center. Consistent with recent disclosure rule amendments and guidance, Director Hinman noted that the US “disclosure regime emphasizes materiality” and “principles-based disclosure requirements.” In essence, management must determine whether Brexit impacts their business, financial condition or risks and make disclosure accordingly.

Also consistent with SEC rules and guidance, generic disclosures related to the impact of Brexit do not provide meaningful input for investors. Each company has its own considerations and given the differences across industries and companies, there is no one specific data point or piece of information that all companies could provide to disclose material information relating to their Brexit-related risks.

In his speech, Director Hinman asked the audience, “For those of you involved in crafting disclosure documents, you can ask yourself a straightforward question: would these disclosures satisfy the curiosity of a thoughtful, deliberative board member considering the potential impact of Brexit on the company’s business, operations and strategic plans?” Director Hinman also shared six topics for companies to consider as a starting point when assessing and drafting Brexit-related disclosures.

The six topics include:

Is the business exposed to new regulatory risk given the uncertainty of which set of laws and regulations will apply and whether transition agreements will be in place? One example is the loss of passporting arrangements that currently permit UK entities to provide services to businesses and customers throughout the EU. Industry-specific examples include risks to clinical trials and product development due to varying regulations for biopharmaceutical companies and regulatory and antitrust issues impacting airlines including new flying restrictions.

Are there significant supply chain risks due to the potential disruption to the UK’s access to free-trade agreements with other nations and any resulting changes in tariffs on exports and imports? Customs administration could cause new delays in supply chains.

Does the company face a material risk of losing customers, a decrease in sales or revenues or an increase in costs due to tariffs or other factors? A company whose product demand is sensitive to exchange rates or tariffs may require disclosure related to decreased demand and increased costs and changes in working capital.

Does the company have exposure to currency devaluation, foreign currency exchange rate risk or other market risk? Brexit will likely heighten foreign exchange volatility, which may increase hedging activity and market risks.

What is the company’s exposure to contractual risk in the face of Brexit? Companies will need to review existing contracts with counterparties in the UK or the EU to determine whether renegotiation or termination is necessary. Furthermore, to the extent that new entities are formed in the UK, there may be risks associated with the ability to assign or enter into new contracts.

If we have a hard Brexit, there will be friction, there will be price volatility, there will be problems; Brexit is already here...

Do Brexit-related issues affect financial statement recognition, measurement or disclosure items, such as inventory write-downs, long-lived asset impairments, collectability of receivables, assumptions underlying fair value measurements, foreign currency matters, hedge accounting or income taxes?

That was not the first speech by either Hinman or other SEC executives, though the message and guidance has been consistent. In addition, several accounting firms and industry publications have weighed in on the issue. In addition to the disclosures delineated by Director Hinman, companies should consider risks associated with the following:

Migration risk such as the process of migrating businesses, assets and contracts in a short period.

Data Protection Risk
The EU General Data Protection Regulation governs the processing of personal data and information by which individuals might be identified. Unless otherwise addressed, the UK will no longer be an EU “safe data” zone under the GDPR and data transfers will become more complex.

Labor Risk
Brexit might impact staffing availability and the movement of employees across borders.

Structural Risk
Companies might undertake corporate structural changes such as modifying corporate structures and creating or eliminating subsidiaries.

Intellectual Property Risk
Brexit will change the landscape of UK and EU trademark and design portfolios. IP right owners need to be ready for its impact and take steps to mitigate the effect.

Lending Risk
Some EU27 States have relatively light regulatory requirements for corporate lending, while others require lenders to be licensed locally. Ancillary services may also require local authorization. For example, the issuance of letters of credit or third-party guarantees in Ireland is an activity which is, in the absence of passporting rights, subject to local licensing requirements.

Syndicated Loan Risk
English law governs the content of and the transferability of a large portion of syndicated loans within Europe and the vast majority of hedging agreements within the EU. English law-governed finance agreements will continue to be interpreted by the English courts, and a no-deal Brexit will not prevent courts from entering judgments. However, a no-deal Brexit may affect the degree to which those judgments are enforceable within the EU27.

Collateral and Netting Risk
Currently EU member states, including the UK, benefit from rules which protect collateral and netting rights of contractual counterparties. Unless reciprocal arrangements are put in place by the UK and EU27, the regime will no longer apply.

Ultimately, whether the impact from Brexit is nominal or calamitous, the SEC has made it clear that Pubcos are indeed responsible for being prepared.

 

 

 

Attorney Laura Anthony
Laura Anthony, Esq. is the founding partner of Anthony, L.G., PLLC, a national corporate, securities and business transactions law firm. For more than two decades Ms. Anthony has focused her law practice on small and mid-cap private and public companies, capital markets, NASDAQ, NYSE American, the OTC markets, going public transactions, mergers and acquisitions, registered public and exempt private offerings and corporate finance transactions, Regulation A/A+, securities token offerings, Exchange Act and other regulatory reporting requirements, FINRA requirements, state and federal securities laws, general corporate law and complex business transactions. The Anthony, L.G. PLLC team has represented issuers, buyers, sellers, underwriters, placement agents, investors, and shareholders in mergers, acquisitions and corporate finance transactions valued in excess of $1 billion. ALG has represented in excess of 200 companies in reverse merger, initial public offering and direct public offering transactions. Palm Beach Attorney Laura Anthony is also the creator and author of SecuritiesLawBlog.com, the host of LawCast™, Corporate Finance in Focus and a contributor to The Huffington Post, Law360 and the ABA Journal.