When the federal government closes its doors, attention typically focuses on disrupted public services and the impact on government employees. For example, staff shortages have led to longer airport lines and flight delays since the shutdown began on October 1.
These shutdown-related travel disruptions pose challenges that extend beyond the inconvenienced passengers. Airlines and other publicly traded companies face significant business risks as they evaluate the impact of the shutdown on their operations and the broader economy. Companies must consider at least four different risk categories.
- Revelation
Companies must disclose all events that have a material impact on their performance in SEC filings. This requirement ensures that stakeholders remain informed of potential business interruptions and financial losses. For many issuers, a government shutdown is clearly material.
During the 2013 shutdown Delta Airlines face similar challenges as today’s carriers. The Atlanta-based airline disclosed in SEC filings that it has lost $25 million in revenue due to the 16-day government shutdown and several additional factors, each of which “pressure unit revenue by approximately one percentage point each.”
So far, few issuers have discussed the implications of the current shutdown in their filings. Regions Financial offers one notable exception. The financial services provider recently noted in its quarterly earnings presentations that “uncertainty in the economic environment due to the government shutdown” was the primary reason for a net increase in the qualitative provision for credit losses.
Airline CEOs have begun to publicly discuss the impact of the shutdown. During last week’s earnings call Scott Kirby, CEO of United Airlines predicted declining bookings if the shutdown continued, warning that “with each passing day, the risk to the U.S. economy increases.” His comments reflected similar concerns raised by Delta CEO Ed Bastian earlier this month.
With respect to the review and communication of material information regarding the closing, law firm Fenwick & West LLP advises companies to evaluate the immediate effects on quarterly profits. Fenwick also recommends considering potential regulatory delays and supply chain disruptions.
In addition to disclosure concerns, companies involved in corporate transactions face additional complications.
- Making deals
Companies planning mergers or acquisitions must also prepare for delays in closing the deal. After all, the Securities and Exchange Commission, which approves mergers and acquisitions, is working with federal employees affected by the shutdown.
Although companies can technically proceed with registered securities transactions, these deals lack standard regulatory approval. This raises the possibility of heightened scrutiny once the government resumes operations. Companies face an important question: Do the benefits of acting quickly outweigh the risks of proceeding without SEC review?
- IPOs
The SEC has indicated that it does not want the shutdown to halt IPOs.
Under guidance from the SEC Division of Corporation Finance, companies will not face enforcement actions for removing delaying amendments from registration statements to enable automatic effectiveness during the shutdown. Rule 430A allows security issuers to add pricing information later, allowing companies to move forward a price range and avoid waiting for the government to resume operations.
- Shareholder proposals
The shutdown adds another complication to the ongoing debate over shareholder proposals?
As a law firm Dorsey & Whitney LLP It is noted that the SEC will not process requests from companies to take no action under Rule 14a-8 during the closed period. This does not prevent companies from excluding shareholder proposals from proxy statements, but it does expose them to potential future enforcement actions. Furthermore, proxy advisory firms may view such exclusions as unfavorable.
Overall, disclosure issues appear to be the biggest and most universal risks for publicly traded companies during the shutdown. They would do well to keep the disclosure committees on their boards informed and consider how their communications with current audiences might be viewed in the future.
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