Public Companies Begin Accounting for Shutdown Threat in Disclosures, Contracts

Public Companies Begin Accounting for Shutdown Threat in Disclosures, Contracts

The longest shutdown of the federal government on record ended last week after 35 days. But keep that champagne on ice: in about three weeks, we might do it all over again.

Announcing a short-term agreement with Congress to put government employees back to work, the president threatened last week to force another shutdown if he couldn’t strike a deal to fund construction of a wall on the southern border. Over the weekend, his acting chief of staff, Mick Mulvaney, reaffirmed the commander-in-chief’s position.

Whether another shutdown comes to fruition in February or not, “government-by-shutdown” feels like something of a new normal around Washington, D.C. Seventeen years passed between the 1996 and 2013 shutdowns; meanwhile, three of them have occurred in the last six years. When shutdowns occur, the strain on furloughed workers and the absence of public services take center stage, but the ripple effects extend much further in the national economy. Public companies are certainly among the affected. They are now coming to grips with how the specter of more shutdowns impacts their businesses—and what they should disclose about that risk.

As we’ve discussed on the blog, the latest shutdown has already been cited by issuers as a risk factor to their operations. Now, some are adding disclosures in standard forward-looking language in their financial statements to account for the side effects of Shutdown Fever.

For example, pest control provider Rollins Inc. noted in its 2018 earnings statement filed on Jan. 23 that “the impact of the U.S. government shutdown” was among the “various risks and uncertainties” that could cause the company’s actual results to diverge from its forward-looking statements. Other companies that have added similar language to their filings this year include Teledyne Technologies and financial services giant Bank of America Corp.

In other cases, companies are adding provisions to private contracts to protect themselves from arguments that could arise in the event of a shutdown. Multiple companies have exempted government shutdowns from qualifying as “material adverse effects,” which, in M&A contracts, typically allow the acquiring party to avoid completing the deal.

Industrial technology company Fortive Corp.’s acquisition of Johnson & Johnson subsidiary Ethicon Inc., executed in September, offered one example of such a tactic. The contract language nixed “any actual or potential sequester, stoppage, shutdown, default or similar event or occurrence by or involving any governmental entity affecting a national or federal government as a whole” as material adverse effects.

Similarly, a deal completed last year by Kimbell Royalty Partners, LP, an owner of oil and natural gas mineral and royalty interests, included an even broader exemption for “national or international political conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, the occurrence of any military or terrorist attack, a shutdown of the United States federal government or any default on the debt obligations of any sovereign entity.”

It remains to be seen if the above measures become routine best practice for either forward-looking-statement disclosures or private M&A deals. Nonetheless, the fact that companies are going to these lengths on even a limited basis reflects a recognition that they can no longer count on the rock-solid stability of the U.S. government for their long-term planning.

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