Disclosure Leads List of Risks for Companies During Shutdown

When the federal government shuts down, attention typically focuses on disrupted public services and impacts on government employees. For instance, staffing shortages have caused longer airport lines and flight delays since the shutdown began on October 1.

These shutdown-induced travel disruptions create challenges beyond inconvenienced passengers. Airlines and other public companies face significant business risks as they evaluate the shutdown’s impact on their operations and the broader economy. Companies should consider at least four distinct risk categories.

1. Disclosure

Companies must disclose any events that materially impact their performance in SEC filings. This requirement ensures stakeholders remain informed about potential business disruptions and financial losses. For many issuers, a government shutdown clearly qualifies as material.

During the 2013 shutdown, Delta Air Lines faced similar challenges to current carriers. The Atlanta-based airline disclosed in SEC filings that it lost $25 million in revenue due to the 16-day government shutdown and several additional factors, each of which “pressured unit revenue by approximately one percentage point apiece.”

So far, few issuers have addressed the current shutdown’s effects in their filings. Regions Financial provides one notable exception. The financial services company recently noted in quarterly earnings presentations that “uncertainty in the economic environment as a result of the government shutdown” was the primary reason for a net increase in qualitative allowance for credit losses.

Airline CEOs have begun discussing the shutdown’s impact publicly. During last week’s earnings call, United Airlines CEO Scott Kirby predicted declining bookings if the shutdown continues, warning that “every day that goes by, the risk to the U.S. economy grows.” His comments echoed similar concerns raised by Delta CEO Ed Bastian earlier this month.

Regarding assessment and communication of material shutdown-related information, law firm Fenwick & West LLP advises companies to evaluate immediate effects on quarterly earnings. Fenwick also recommends considering potential regulatory delays and supply-chain disruptions.

Beyond disclosure concerns, companies involved in corporate transactions face additional complications.

2. Dealmaking

Companies planning mergers or acquisitions should also prepare for delays in closing the deal. After all, the Securities and Exchange Commission, which approves M&A transactions, operates with federal employees affected by the shutdown.

While companies can technically proceed with registered securities transactions, these deals lack standard regulatory approval. This raises the possibility of enhanced scrutiny once the government resumes operations. Companies face a key question: Do the benefits of moving quickly outweigh the risks of proceeding without SEC review?

3. IPOs

The SEC has indicated it does not want the shutdown to halt initial public offerings.

According to SEC Division of Corporation Finance guidance, companies will not face enforcement action for removing delaying amendments from registration statements to allow automatic effectiveness during the shutdown. Rule 430A permits securities issuers to add pricing information later, enabling  companies to proceed with a price range and avoid waiting for the government to resume operations.

4. Shareholder Proposals

The shutdown adds another complication to the ongoing debate regarding shareholder proposals?

As law firm Dorsey & Whitney LLP noted, the SEC will not process corporate no-action requests under Rule 14a-8 while closed. This does not prevent companies from excluding shareholder proposals from proxy statements, but it does expose them to potential future enforcement action. Additionally, proxy advisory firms may view such exclusions unfavorably.

Overall, disclosure issues seem like the largest and most universal risks for public companies during the shutdown. They would be well-advised to keep the disclosure committees on their boards of directors in the loop and think about how their communications with the public today might be viewed in the future.

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