If the uncertainty creates risk, then the current state of play on the United Kingdom’s efforts to withdraw from the European Union represents risk in a highly concentrated form. On November 25, 2018, the 27 EU members approved the divorce pact that the U.K. negotiated with its EU counterparts, but the pact must now face a Parliamentary vote, on December 11, 2018. In the meantime, the March 29, 2019 withdrawal date looms. These upcoming events present uncertainties at both the economic and enterprise levels. The uncertainties in turn create challenges for potentially affected companies, including among other things the challenge of communicating about these issues to investors. As discussed below, SEC Chair Jay Clayton recently emphasized that the agency is “sharpening its focus” on Brexit-related disclosures, highlighting the significance of the disclosure-related concerns.


In a referendum vote on June 23, 2016, a majority of U.K. voters voted in favor of the country’s withdrawal from the European Union. Article 50 of the Lisbon Treaty specifies the process for withdrawing from the EU. When a party invokes Article 50 to withdraw from the union, the party and the EU have two years to agree to the terms of the split. U.K. Prime Minister Theresa May triggered this process on March 29, 2017, meaning that the U.K. is scheduled to leave the EU at 11 p.m. on Friday, March 29, 2019. (The various parties can of course agree to extend this deadline but for now all parties are proceeding as if the upcoming March date will be operative.)


Since triggering Article 50, the U.K. has been in negotiations with EU representatives on the terms of withdrawal. Earlier this month, the two sides reached what is in effect a Brexit deal. The deal consists of two parts.  The first is a 585-page withdrawal agreement, which sets the terms of the divorce. The agreement addresses a number of issues, including the size of the U.K.’s cash payment to settle its prior EU budget commitments; creates a transition period (until December 31, 2020) during which the U.K. agrees to abide by EU rules; defines the rights of U.K. residents residing in the EU and EU residents residing in the U.K.; and provides for a “backstop” to avoid the creation of a “hard border” between Ireland and Northern Ireland.


The second document is a political declaration setting out the framework for future relations between the U.K. and the EU.  The declaration describes in general, aspirational terms the kinds of relationship the two parties aim to establish in the future on a range of issues, including trade, defense, and security.


The U.K. government agreed to the withdrawal text on November 14, 2018, although a number of members of Theresa May’s cabinet resigned in opposition to the agreement. The agreement will now face a Parliamentary vote on December 11, 2018, after five days of debate.


As the New York Times noted in its November 25, 2018 article about the EU members’ approval of the deal, Mrs. May’s own Conservative Party is deeply divided about the deal and the opposition Labor Party promising to vote against the deal. As a result, the deal’s prospects appear grim. However, with the March 29 withdrawal date just ahead, Parliament faces a stark choice – either approve the deal or face a “chaotic exit without any deal.” If Parliament votes against the deal “there could be a push for a softer Brexit, new elections, or a second referendum.” Or Britain “could lurch toward a no-deal Brexit, an outcome no one wants on either side of the Channel.”


These highly uncertain circumstances present businesses with a very challenging picture, both in terms of business operations, and in terms of communicating with its investors. As discussed in a November 12, 2018 Wall Street Journal article, SEC Chair Jay Clayton recently made it clear in a speech at an industry conference that the agency is focused on how companies are disclosing to investors the risks they face as a result of Brexit.


The Journal article quotes Clayton as saying that the SEC is “sharpening its focus on corporate disclosures about the risks associated with the U.K.’s exit from the European Union …. My personal view is that the potential impact of Brexit has been understated …. I would expect companies to be looking at this closely and sharing their views with the investment community.”


As discussed in a post on the Cooley law firm’s PubCo blog, in light of Clayton’s warnings and with the annual 10-K season approaching, “companies should consider how Brexit could affect their businesses and whether that impact merits disclosure.”


With the March 29 deadline looming, many companies, according to the blog post, are “examining whether they will need to take action in advance, for example, by moving headquarters, factories, or other facilities or stocking up on materials and components.” For some companies, the most significant issue is “whether they will need to relocate to EU-based banks’ financial arrangements, such as syndicated loans, swaps, and other derivatives.” There reportedly are thousands of financial contracts with an aggregate value of approximately $2.7 trillion that could be affected.


As things stand, there is currently a “wide spectrum of disclosure about Brexit, even among companies in the same industry.” In the event of Brexit-related disruption in coming months, particularly if Brexit-related events cause supply train disruption, financial transaction disturbance, or other turbulence, companies’ operating results could be affected.


Were that to happen, affected companies’ prior Brexit-related disclosures undoubtedly will be scrutinized. Plaintiffs’ lawyers undoubtedly will launch hindsight allegations that the companies failed to warn investors about the possible problems that might emerge.


Of course, whether any of the worst problems will emerge remains to be seen, as does the extent to which any problems that might arise will affect business operations. All of that said, however, the possibility of liability claims arising following disarray as a result of Brexit-related disruptions represents a significant possibility, at least for companies whose disclosures do not fully identify the Brexit-related risks the companies face.