“Legal Proceedings” Disclosure: Whether to Choose a Higher “Environmental” Disclosure Threshold?

In this 27-minute Vid-Guide, Weil Gotshal’s Howard Dicker and Bryan Cave’s Vicki Westerhaus analyze the SEC’s recent changes to Item 103 of Regulation S-K, the “legal proceedings” disclosure for the Form 10-K and 10-Q.

With the SEC’s changes, companies now have the opportunity to choose their own disclosure thresholds for proceedings under environmental laws to which a governmental authority is a party. Deciding whether to do that (and what level to select if you do) should be considered carefully. This is a brave new world because we don’t ordinarily see disclosure of the quantitative disclosure thresholds that companies rely upon being disclosed in SEC filings. 

At the 4:08 mark, Howard analyzes the “pro’s & con’s” of selecting a higher disclosure threshold for environmental proceedings. These are among the “con’s” he mentions:

1. Companies will need to actually disclose the dollar threshold used in each annual or quarterly report – except there is no need to mention the $300,000 default threshold if that is relied upon. 
2. Disclosing a threshold that a company itself selects might give ammunition to plaintiff attorneys that the chosen amount is the “materiality” level that should be used in non-environmental related situations.
3. Choosing your own threshold creates its own analysis requirements—including the need to assess whether the threshold is appropriate and being able to explain any changes to it.
4. If a company chooses its own threshold, it will need to (1) update its disclosure controls & procedures, (2) appropriately document the calculation of the higher election threshold amount, and (3) document the assessment & determination that the higher amount is reasonably designed to result in disclosure of proceedings material to the company’s business or financial condition.
5. It’s unclear how the SEC Staff is going the handle commenting on this area in the future, but this could be a low-hanging fruit question for them to ask (at least in the early years) that the company confirm that it has determined that the higher threshold selected is reasonably designed.