Companies Beef Up Risk Disclosures As Biden Era Begins

By Tom Zanki
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Law360 (February 19, 2021, 9:00 PM EST) -- Fossil fuel-energy companies and drug developers are among the most common issuers updating their risk disclosures to warn investors of potential policy changes that could harm their businesses under a Biden administration, securities filings show.

At least 97 companies had updated the "risk factors" sections of their Securities and Exchange Commission filings as of Friday to reflect President Joe Biden's arrival in office, based on a review conducted by Law360 with assistance from analytics provider Intelligize, which is owned by Law360 parent company LexisNexis.

Companies are responsible for refreshing their disclosures as business circumstances change. The arrival of a new administration or other geopolitical events often serve as a catalyst for reassessing risk factors, which are a standard part of periodic filings and initial registrations. Former President Donald Trump's election also generated a wave of new disclosures in 2017.

Risk disclosures satisfy an SEC mandate to educate investors, and they may provide a company a defense in the event its stock drops and shareholders sue alleging they weren't adequately warned about potential hazards. The latest disclosures stem from recent annual and quarterly filings with the SEC, as well as new prospectuses.

Most disclosures in the current wave come from two industries: fossil fuel companies and businesses involved in health-related endeavors, mainly drug developers, medical device companies and technology firms with health insurance platforms.

More than 60 energy or health-related companies combined have specifically mentioned Biden in their risk factors, and other industries have cautioned that a rise in corporate income taxes could affect their businesses. Some companies in distinct fields, ranging from banking and real estate to technology and cannabis, have disclosed risks particular to them.

"It makes a lot of sense to have industry-specific disclosure," Mayer Brown LLP partner Christina Thomas said. "A lot of these themes can be specific to an administration, but so many of these risk factors are always going to be a risk for companies. Some of these topics are cyclical or never really go away, even if an administration changes."

Energy companies that have filed fresh risk disclosures span oil and gas producers to service providers. Their concerns regard a shift in national energy policy toward renewable power, referencing policies like Biden's commitment to rejoining the Paris climate accord and related goals of reducing greenhouse gas emissions to fight climate change.

Dallas-based energy services and pipeline company Enlink Midstream LLC in its annual report Wednesday also noted Biden's support for federal limits on hydraulic fracturing and banning new leases for minerals production on federal properties.

These potential developments could increase operating costs or decrease demand for natural gas, Enlink said, and are common concerns among traditional energy companies. Drilling equipment supplier Now Inc. noted that, by comparison, it benefited from Trump-era deregulation.

"The Biden administration is expected to aggressively seek to regulate the energy industry and seek to eliminate in time the use of fossil fuels," Houston-based Now said in its annual filing on Wednesday. "This regulatory push will be magnified as the Democrats also control both houses of Congress."

Drug-related companies are constantly concerned about health care regulations, including potential changes to Affordable Care Act coverage or stricter regulations on drug pricing. Both have been hot-button topics in Democratic and Republican administrations.

Alnylam Pharmaceuticals Inc., which makes medicines to treat rare genetic diseases and central nervous system disorders, noted that the Trump White House pushed for reforms that would cap certain Medicare out-of-pocket pharmacy expenses and limit pharmaceutical price increases.

"Likewise, the Biden administration has indicated that lowering prescription drug prices is a priority, but we do not yet know what steps the administration will take or whether such steps will be successful," Massachusetts-based Anlyam said in its annual report on Wednesday.

And to the extent Biden-era policies more resemble the Obama administration than Trump's in terms of health care and energy, Mintz Levin Cohn Ferris Glovsky and Popeo PC member John Rudy expects companies will review disclosures from past years and see where things stand now.

"A good starting point for any lawyer is to go back and look at what they are saying in 2015, 2016," Rudy said. "Update it accordingly and watch what happens."

A fresh concern across many industries is the potential for higher corporate taxes. Clothing company Hanesbrands Inc. is among many companies worried about efforts to roll back parts of the Tax Cuts and Jobs Act, a 2017 bill that reduced the corporate income tax to 21%.

"The results of the U.S. presidential election could lead to changes in tax laws that could negatively impact our effective tax rate," North Carolina-based Hanesbrand said in its annual filing on Feb. 12. "Prior to the U.S. presidential election, President Biden proposed an increase in the U.S. corporate income tax rate from 21% to 28%, doubling the rate of tax on certain earnings of foreign subsidiaries, the creation of a 10% penalty on certain imports and a 15% minimum tax on worldwide book income."

Fallout from the coronavirus pandemic has also been a recurring "risk factor." Some banks are now warning investors that policies aimed at relieving borrowers may affect their bottom lines.

Wisconsin-based holding company Associated Banc-Corp noted Biden's recent executive order to extend a federal eviction moratorium through March 31, as well as the president's proposal that such relief be extended until Sept. 30 as part of his COVID-19 package.

Associated Banc-Corp separately noted that Biden has requested that federal agencies extend a moratorium on foreclosures on federally guaranteed mortgages, which were set to expire on Dec. 31, until at least March 31.

"As a result of the forbearance and mitigation programs described above, we have experienced a significant decline in borrower loan payments, which may continue into the future and have a material impact on our earnings," Banc-Corp said in its annual filing on Feb. 9.

Thomas said she expects to see more coronavirus-related disclosures in 2021. Companies that have many employees who transitioned to remote work may need to disclose cybersecurity risks.

"COVID-19 related risk factors are going to be a big trend this year," Thomas said.

Apart from the pandemic, Associated Banc-Corp and other companies have noted that the Consumer Financial Protection Bureau, a consumer protection agency established under the Dodd-Frank Act, is expected to adopt more aggressive enforcement policies under Biden.

Home financier The Federal National Mortgage Association, or Fannie Mae, also noted in its annual report that the administration's attempts to address climate change could lead to a transition away from carbon-intensive industries, potentially unsettling certain regional economies and affecting the ability of borrowers in those regions to repay their mortgages.

Other industries have disclosed uncertainties particular to their business. Cannabis cultivator Acreage Holdings Inc. said in a recent registration statement that it's unclear whether the Justice Department under Biden, who has nominated D.C. Circuit Judge Merrick Garland to serve as attorney general, will adopt an aggressive marijuana enforcement policy.

By contrast, New York-based Acreage noted the Justice Department may reinstitute the Cole Memorandum — the 2013 U.S. policy memo limiting the criminal charges that could be brought against state-legal marijuana businesses — that was in effect under former President Barack Obama.

Technology companies are also disclosing new risks. Cloud communications platform Twilio pointed out that Biden during his campaign supported reimposing "net neutrality" rules governing internet providers, which Twilio said could lessen demand for its services.

San Francisco, California-based Twilio also noted that Biden and members of Congress want to review Section 230 of the Communications Decency Act, which protects internet companies from being held liable for what their users say online. Section 230 was also targeted by Trump, who urged its repeal.

"If we are found liable for our customers' or other users' activities, we could be required to pay fines or penalties, redesign business methods, or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability," Twilio said in a prospectus filed Thursday.

More companies are expected to file their annual 10-K reports in the coming weeks. Plus, companies filing for initial public offerings or follow-on offerings will submit registration statements.

As companies reevaluate their risks, Thomas said they should also be aware of recent changes to "risk factor" rules the SEC enacted last August, purportedly to improve usefulness and readability for investors. Those changes require companies to compile a summary of two pages or less explaining their risks if the full "risk factors" section of their SEC filing exceeds 15 pages.

Companies are also being urged by the SEC to focus on "material" risks and avoid generalities applicable to any business.

"This was an effort to give investors more tailored, company-specific disclosure," Thomas said of the latest rules. "And to get companies to look at what they've been providing and evaluate: Is this something that is specific to my company and to my business? Or is this something that you could say about any public company?"

--Editing by Philip Shea and Michael Watanabe.

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