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Do companies need to disclose potential litigation?

On Behalf of | Feb 9, 2023 | Business Litigation |

The short answer to the above question is “maybe.” Federal securities law requires publicly held companies to release financial reports. If there is a likelihood of a lawsuit and the ruling could impact the financial bottom line, the corporation should include the details in its report—those who do not risk potential fines, penalties, sanctions and the suspension of trading. There could also be felony criminal charges that the company willfully or knowingly made misleading or false statements. There could also be a class action on behalf of the stockholders.

What to include in the disclosure

The Securities and Exchange Commission (SEC) mandates that the disclosure include the following:

  • Names of all parties involved in the litigation
  • Date when the plaintiff filed the lawsuit
  • A factual account of the disagreement
  • The amount the plaintiff seeks in damages

Reasons the corporation need not disclose the litigation

When it comes to these matters, full disclosure is often the best policy rather than risking other penalties and additional legal action. Nevertheless, there are some valid reasons not to disclose the litigation:

  • Claims are a common part of doing business.
  • Damages sought are less than 10% of the company’s assets.

Other SEC requirements

The SEC also requires disclosure if there is a government agency or if a director, officer or shareholder with 5% or more stock ownership filed the suit. Failure to address these could lead to an SEC investigation and injunction that forces the corporation to disclose the info. Conversely, an SEC investigation may also clear the corporation of wrongdoing, which can mean no fines or penalties.

Set up a reserve

Some generally accepted accounting principles for running a public or privately held business exist. One example is setting a reserve account to cover damages or losses, mainly if there is a high likelihood that it will happen. The account should hold enough funds to address the lawsuit, and those who do not do this will need to explain why.

Legal guidance can make a difference

Boards, executives and decision-makers can get steady guidance from a business law attorney who handles litigation and disputes. They help clients weigh their legal options, including whether the client needs to disclose potential litigation.