A June 5, 2008 proposal by the Financial Accounting Standards Board that could require public companies to disclosure more about their litigation risks is generating a storm of controversy. As discussed in Zusha Elinson’s June 24, 2008 Law.com article entitled "GC’s Bristle at Proposed Disclosure Rules" (here), under the proposed revision to FASB Statement No. 5 (which can be found here), "the threshold for reporting potential loss from a lawsuit would be lowered from ‘probable’ to anything but ‘remote.’" Companies would have to "estimate just how much legal threats might cost and the likely outcome" and "disclose more details about the underlying litigation and the reasoning behind their predictions."
As discussed at length in in the Point of Law blog (here), there are a number of concerns about these proposed changes. Among other things, they are concerned that the new rules could force companies to lay out their litigation strategies for opponents to see; potentially waive the attorney client privilege; and even lead to more securities fraud cases if litigation turns out worse than estimated.
It certainly doesn’t take much creativity to imagine circumstances in which a company that finds itself the unfortunate recipient of an unexpected runaway jury verdict subsequently gets hit with a follow on securities lawsuit filed by plaintiffs’ lawyers alleging on behalf of shareholders that the company failed to disclose its true exposure to the underlying litigation.
Similarly, it is easy to imagine companies eager to avoid this litigation threat finding themselves challenged to produce defensive disclosure that does not simultaneously compromise their litigation position or their settlement negotiation strategy.
An additional concern that might challenge companies faced with the new disclosure requirements would arise from questions surrounding available insurance coverage in connection with the litigation. Companies involved in serious litigation sometimes find themselves unable to establish what amount of its legal expense and even settlement or judgment amounts might be covered by insurance.
Since the ultimate financial impact on the company from litigation could well depend on as yet incomplete negotiations with their insurers, the estimate of the financial impact from the litigation could be particularly uncertain. Indeed, compelling disclosure under these circumstances might not only compromise their position in the underlying litigation but it could potentially compromise their position with respect to their insurers as well.
The comment period for the proposed revision closes on August 8.
Additional concerns regarding the proposed new rules are noted on Professor Larry Ribstein’s Ideoblog (here).
Special thanks to Walter Olson at the Point of Law blog (here) for providing links to the proposed revised rules.
Trade Marks: There are innumerable examples in William J. Bernstein’s entertaining new book “A Splendid Exchange: How Trade Shaped the World” (here) demonstrating that the world was “flat” long before its more recent evocation. I found the following a particularly interesting example:
On September 5, 1833, the American clipper Tuscany appeared at the mouth of India’s Hooghly River, took on a river pilot, and headed upstream to Calcutta. The news of its arrival was swiftly relayed upriver, throwing that city, whose name is synonymous with sweltering heat, into a state of excitement. The Tuscany carried a new and priceless cargo: more than a hundred tons of crystal-clear New England ice.
What makes this such a compelling example of the "flattening" of the world is what happened after the overseas introduction of this highly desirable but locally unavailable product:
The first heavy, inefficient steam-driven mechanical refrigerators, produced by dozens of inventors under numerous patents, were used in fixed ice-making plants far from natural ice sources –in the Caribbean, south of the Mason-Dixon Line, in West Coast cities, and particularly in the Argentinean and Australian meatpacking plants. Tudor’s Calcutta trade, which grew steadily more profitable for nearly half a century following his initial delivery in 1833, came to an abrupt end a few years after the opening of the city’s first artificial ice plant in 1878.
The elimination of the Calcutta ice trade may well have devastated the New England ice producers at the time. But in the end, the overall benefits of innovation and increased trade opportunities far outweighed the consequences from the loss of the long-forgotten ice trading monopoly. Changing needs, transport costs, and technological innovation continue to alter existing trade patterns, producing winners and losers at every turn.
Because sudden change can devastate beneficiaries of existing arrangements, the need to protect the status quo can sometimes seem necessary and even urgent. Bernstein’s book shows not only that trading societies have faced these problems repeatedly throughout human history, but how societies that have accepted and faced these problems have prospered.
A good short review of Bernstein’s book can be found here.