A crucial vote on the U.K.’s Brexit deal is scheduled for next week. Londoners will have a lot to say about it, we know that much. What we don’t know, and what the SEC will be watching closely, is this: how much will public companies have to say about it?
SEC Chair Jay Clayton is encouraging them to speak freely. At a conference last month, he declared his “personal view” that “the potential impact of Brexit has been understated” in public company filings. While the Brexit process will have varied impact across industries, Clayton noted that even within the same industry, there has been a wide range of disclosures on Brexit-related risks. While a hypothetical “Company A” might be thoughtfully analyzing the risks associated with Brexit in its filings (discussing the potential effect on its supply chain or sales efforts, for instance) Company B in the same industry might be providing only a general, boilerplate language identifying Brexit as a risk. Clayton said he wanted to see disclosures “gravitate to company A.”
While Brexit has been unfolding in slow motion since 2016, the business risks have arguably never been more imposing. As of this moment, the Brexit deal that Prime Minister Theresa May struck for the U.K. appears to lack the votes necessary for approval by Parliament. A “no” vote could spark calls for May to step down; regardless, it raises the specter of a so-called “hard Brexit” in which the U.K. leaves the EU in March with no deal in place. That scenario is expected to be particularly chaotic for politicians and businesses alike.
The Wall Street Journal reports that companies are preparing for Brexit by, among other things, stockpiling raw materials and planning factory shutdowns. And as the law firm Cooley notes, one significant decision that public companies will face is whether they must “relocate to EU-based banks financial arrangements, such as syndicated loans, swaps and other derivatives, that are currently located at banks in London.” Thousands of financial contracts, collectively valued at $2.7 trillion–give or take a few hundred billion–could be affected.
With those kinds of stakes, C-suites may be heeding Clayton’s words and getting real about Brexit in public filings. The Intelligize platform shows 225 different 10-Ks and 10-Qs filed since November that either mention Brexit as a risk factor or bring it up in the MD&A discussion (“Management’s Discussion and Analysis of Financial Analysis of Financial Condition and Results of Operations”). And some are revealing. In a 10-K filed on November 29, for instance, GW Pharmaceuticals gives a relatively detailed explanation of the risks that it faces. The maker of cannabinoid drug therapies notes that certain activities relating to products cleared in the EU must be performed in the EU (it specifically singles out something called “batch release” and “pharmacovigilance”). Thus, the company says, “we are already in the process of establishing a network of subsidiary undertakings in the major European markets and planning to establish pharmacoviglance and batch release operations in the European Union.”
Look, nobody said it would be thrilling reading, but it’s informative. Jay Clayton probably appreciates it, and investors do too. After next week’s vote, there will be even greater need for “Company A’s” like GW Pharmaceuticals to disclose the challenges they face due to Brexit.