United States: Market Trends 2018/19: Brexit Disclosure

This market trends article identifies Brexit-related disclosures that offer detailed discussions of its effects, including how Brexit might impact the company, its employees, management, operations, and prospects. The company name, its industry, and the type of filing are also provided in each sample disclosure for reference. This article concludes with recommendations on how to enhance Brexit-related disclosures and how to make them consistent with SEC's expectations.

Brexit and Its Resulting Uncertainties

The United Kingdom (UK) held a referendum on June 23, 2016, in which a slim majority voted in favor of leaving the European Union (EU) in an action commonly referred to as Brexit. The UK House of Commons passed a bill on February 8, 2017, authorizing the government to proceed with exit talks with the EU. On March 29, 2017, the British government tendered its formal notice to withdraw from the EU pursuant to Article 50 of the Lisbon Treaty. This withdrawal was supposed to take effect on the effective date of the withdrawal agreement, which was initially March 29, 2019, if no agreement had been reached by then. The UK House of Commons rejected the withdrawal agreement on January 15, 2019 (432 to 202 votes), March 12, 2019 (391 to 242 votes), and March 29, 2019 (334 to 286 votes). Since the withdrawal agreement was not approved on March 29, 2019, the new Brexit date was set on April 12, 2019 (and later extended to October 31, 2019) pursuant to Article 50 of the Lisbon Treaty. This extension was the result of a special European Council summit wherein the EU leaders met and agreed to provide the UK a six-month extension with the option to leave the EU earlier if its prime minister can secure the UK House of Commons' support for her Brexit deal. The UK will have to communicate to the EU until that date its intended action steps moving forward (i.e., ask for another extension, Brexit without any deal with the EU, etc.). Brexit brought considerable uncertainty to the UK's political and trade relationship with the EU and also as to the terms and conditions of its exit. It raised speculation as to which laws, rules, and regulations the UK will choose to retain or discard in connection with its withdrawal.

The UK economy remains resilient but experienced little growth in 2017, 2018, and early 2019. Financial analysts attributed this slowdown to the effects of Brexit-related uncertainties on business investments and confidence, higher inflation, and the weaker UK pound sterling, which negatively affected consumer demand and spending power. As Brexit's political, legal, regulatory, and economic effects continue to evolve, companies have the duty to ascertain and disclose the effects these may have on their businesses. Right after Brexit, several companies across various industries had already begun disclosing Brexit-related risks in their filings with the Securities and Exchange Commission (SEC). These disclosures generally were included in the Business, Risk Factors, and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) sections of SEC filings. Most of the initial Brexit disclosures were generic boilerplate provisions or laundry list of riks applicable to almost any company. These disclosures simply included general statements about Brexit and its uncertain effects but did not exactly disclose how Brexit might impact the company, its employees, management, operations, and prospects. This article identifies some Brexit-related disclosures that offer more detailed discussions of effects.

Brexit Disclosures in the Business Section

Item 101(a) (17 C.F.R. § 229.101) of Regulation S-K requires a reporting company to describe the general development of its business, including the material areas specific to it. In their Brexit disclosures in the Business section, companies mentioned that Brexit could materially impact the future regulatory regime that applies to their businesses, products, services, and employees in the UK. Only a few companies specified how, to what degree, and which aspect of their businesses would be affected by Brexit. Here are some examples of Brexit disclosures in the Business section:

  • OfferingRegistration

    • "We are making all reasonable preparations to ensure, in any scenario, that services can continue to be provided in the UK and throughout the EEA, post-Brexit. Accordingly, we have established a new legal entity in the Netherlands, Tradeweb EU B.V., and will offer services from a new Amsterdam office. We received approval in early 2019 from Dutch regulatory authorities to operate an MTF, an OTF and an APA, essentially replicating our current UK regulatory permissions. As a result of this approval, we now operate two MTFs, two OTFs and two APAs in Europe, increasing the complexity of the business." [Tradeweb Markets Inc., Form S-1/A filed April 2, 2019 (SIC 6200—Security & Commodity Brokers, Dealers, Exchanges & Services)]
  • PeriodicReports

    • "Our product for row crops is sold separately as Regalia Rx and for international markets, where the Regalia trademark is allowed, as Regalia Maxx. While we previously submitted Regalia for registration in the EU, which is one of the largest fungicide markets in the world, we recently withdrew the EU application due to Brexit and plan to resubmit using the Netherlands rather than the United Kingdom (UK) as the designated rapporteur." [Marrone Bio Innovations Inc., Form 10-K filed March 29, 2019 (SIC 2870— Agricultural Chemicals)]
    • "Several factors which are currently unknown will influence Brexit's impact on our business, including the form Brexit will take. We operate a staging facility in the UK, where certain core network elements and customer premises equipment is configured before being shipped to both UK and EU locations. The UK is currently also the central location of our stores of spare replenishment in our European operations. In respect to our UK workforce, we do not anticipate any adverse impact from Brexit as only a small percentage of the workforce are EU nationals. The same is true of UK nationals working in our EU located workforce. We are currently monitoring Brexit developments, reviewing our supply chain alternatives, and assessing the short- and long-term implications of Brexit on our operations. Nonetheless, based on current information, we do not anticipate Brexit will have a substantial impact on our business." [Level 3 Parent, LLC, Form 10-K filed March 19, 2019 (SIC 4813— Telephone Communications (Except Radiotelephone)]

Brexit Disclosures in the Risk Factors Section

Item 503(c) (17 C.F.R. § 229.503) of Regulation S-K requires a description of material risks (including Brexit-related risks, if material) that impact a business, and how these risks affect the issuer or an investment in the securities being offered. For further information, see Market Trends 2016/17: Risk Factors, Top 10 Practice Tips: Risk Factors, and Risk Factor Drafting for a Registration Statement. The disclosure has to be in plain English, and not a sweeping general statement applicable to any issuer or offering. For further information on plain English, see Top 10 Practice Tips: Drafting a Registration Statement and Glossaries in Prospectuses and Annual Reports — Background. Here are some examples of Brexit disclosures in the Risk Factor section:

  • OfferingRegistration

    • "On March 29, 2017, the UK invoked Article 50 of Lisbon Treaty to initiate complete withdrawal from the European Union by March 30, 2019, and therefore, the regulatory drug approval process in that country may be significantly different from the current drug regulatory policies in the European Union. We currently are considering holding our clinical trials in the UK, among other countries, and therefore this event could significantly impact our efforts to successfully bring [our lead product candidate] PRP, to market. It is not yet possible for us to determine the impact of the UK's withdrawal from the European Union, but any additional costs or delays in obtaining approvals may hinder our ability to conduct clinical trials or market PRP in the UK." [Propanc Biopharma, Inc., Form S-1 filed February 25, 2019 (SIC 2834— Pharmaceutical Preparations)]
  • Prospectuses

    • "Although it is not possible to predict fully the effects of the UK's exit from the EU, it could have a material adverse effect on, amongst other things, European fund managers, companies, and investors, and could therefore have a material adverse effect on our investment in the European Cities Fund. Furthermore, the UK's future financial services regulatory regime is unclear. Much of the UK's financial services regulation is derived from EU law. During the life of our investment in the European Cities Fund it is likely that the investment manager of the fund will incur additional costs in determining the impact of the UK's future relationship with the EU, and any changes in law and regulation on, amongst other things, its management structure, the structure and its underlying Investments. Should the European Cities Fund investment manager deem it appropriate, there may be a restructure as a result of the effects of the UK leaving the EU and investors may be liable for some or all of the restructuring expenses incurred in relation to this." [Nuveen Global Cities Reit, Inc., Form 424B3 filed March 29, 2019 (SIC 6798—Real Estate Investment Trusts)]
    • "Brexit has created uncertainty with regard to the status of the United Kingdom as an 'adequate country' for the purposes of data transfers outside the European Economic Area, or EEA. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated. These changes may require us to find alternative bases for the compliant transfer of personal data from the United Kingdom to the U.S., and we are monitoring developments in this area. If our operations are found to be in violation of any of the aforementioned requirements, we may be subject to penalties, including civil or criminal penalties, criminal prosecution, monetary damages, the curtailment or restructuring of our operations, loss of eligibility to obtain approvals from the FDA, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, or the imposition of a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, any of which could adversely affect our financial results." [Alnylam Pharmaceuticals, Inc., Form 424B5 filed January 15, 2019 (SIC 2834—Pharmaceutical Preparations)]
  • PeriodicReports

    • "Particularly in a dynamic regulatory environment, anticipated changes to laws and regulations may require us to invest in compliance efforts or otherwise expend resources before changes are certain. For example, the ongoing uncertainty around Brexit, including relating to timing and the range of possible outcomes, has required us to consider and in some cases implement strategies for mitigating potential disruptions to our supply chain." [The TJX Companies, Inc., Form 10-K filed April 3, 2019 (SIC 5651—Retail— Family Clothing Stores)]
    • "Our Retail Pharmacy International and Pharmaceutical Wholesale divisions have substantial operations in the United Kingdon and other member countries of the European Union[...] Given the complexity and uncertainty surrounding the potential withdrawal and negotiations, including with respect to terms of trade and customs, there can be no assurance regarding the terms, timing or consummation of any such arrangements, including whether there will be any additional extensions, an orderly withdrawal or a so-called 'hard Brexit' with no continuing U.K. participation in the EU's Single Market or the EU Customs Union. The proposed withdrawal could, among other potential outcomes, adversely affect the tax, tax treaty, currency, operational, legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union and significantly disrupt trade between the United Kingdom and the European Union and other parties. Further, uncertainty around and developments regarding these and related issues has contributed to deteriorating market conditions and could further adversely impact consumer and investor confidence and the economy of the United Kingdom and the economies of other countries in which we operate and cause significant volatility in currency exchange rates. In the event of a 'hard Brexit,' the related risks and uncertainties could be further exacerbated." [Walgreens Boots Alliance, Inc., Form 10-Q filed April 2, 2019 (SIC 5912—Retail—Drug Stores & Proprietary Stores)]

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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