Significant Litigation — When Does It Become Disclosable and What Do We Say?

Public companies frequently face litigation, regulatory investigations, government inquiries, audits, and other disputes in the ordinary course of business. Litigation disclosure analyses are rarely static, and companies should reassess disclosure obligations regularly as matters develop and additional information becomes available. Companies should also continually evaluate whether existing disclosure remains materially accurate and complete.

Disclosure considerations relating to litigation and other contingencies often involve overlapping legal, accounting, and business judgments. In many cases, the analysis is not limited to whether disclosure is technically required. Companies must also consider whether silence, incomplete disclosure, or stale disclosure could become misleading in context.

When Does Litigation Become Disclosable?

The principal litigation disclosure obligations arise under Item 103 of Regulation S-K and ASC 450-20 relating to loss contingencies.

Item 103 generally requires disclosure of material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject, together with similar information as to any such proceedings known to be contemplated by governmental authorities. Item 103(b) supplies two exclusions: proceedings involving negligence or similar claims that the business ordinarily generates, unless the claim departs from the normal kind, and proceedings involving primarily a claim for damages where the amount involved, exclusive of interest and costs, does not exceed 10% of the consolidated current assets of the company and its subsidiaries. Proceedings presenting in large degree the same legal or factual issues must be aggregated for purposes of that 10% calculation.

Notwithstanding those exclusions, Item 103(c) requires disclosure of any material bankruptcy, receivership, or similar proceeding involving the company or a significant subsidiary; any material proceeding in which a director, officer or affiliate, any holder of record or beneficial owner of more than 5% of any class of voting securities, or any associate of such a person is a party adverse to, or has a material interest adverse to, the company or a subsidiary; and certain environmental proceedings, which may not be treated as ordinary routine litigation incidental to the business.

Separately, ASC 450-20 requires companies to evaluate whether litigation or other disputes constitute a loss contingency requiring disclosure in the financial statements or accompanying footnotes.

Under ASC 450-20, companies generally evaluate whether a potential loss is:

• probable;
• reasonably possible; or
• remote.

The classification drives the required treatment. Where a loss is probable and the amount is reasonably estimable, the company accrues the loss and discloses the nature of the accrual, together with the amount if necessary to keep the financial statements from being misleading; where only a range is estimable, the company accrues the low end of the range and discloses the exposure above the amount accrued. Where a loss is reasonably possible — less than probable but more than remote — no accrual is recorded, but the company discloses the nature of the contingency and either an estimate of the possible loss or range of loss or an affirmative statement that such an estimate cannot be made. Where a loss is remote, neither accrual nor disclosure is generally required. Accrual and disclosure are not required for loss contingencies that are immaterial to the financial statements.

Companies concluding that potential losses are not reasonably estimable should be able to support that determination, including the underlying judgments, assumptions, and procedural considerations informing the analysis. The SEC staff has asked companies to describe the procedures undertaken to attempt to develop an estimate and, for each material matter, the specific factors preventing one.

What Should Companies Say?

Determining that disclosure is required is only part of the analysis. Companies must also carefully evaluate the content and specificity of the disclosure.

Disclosure considerations may include

• the procedural posture of the matter;
• the relief sought or potential exposure;
• the likelihood of loss;
• whether damages are reasonably estimable;
• whether accruals have been recorded;
• whether insurance coverage may apply;
• the risk of prejudicing litigation strategy; and
• whether prior disclosures remain materially accurate in light of new developments.

Companies should also consider whether litigation-related disclosure is consistent across risk factors, Item 103 disclosure, MD&A, and the financial statement footnotes. Companies should also consider whether litigation developments represent known trends or uncertainties requiring discussion in MD&A.

Companies should avoid overly generic disclosure that may become misleading through omission, while also balancing legitimate concerns regarding privilege, litigation posture, and negotiation strategy.

Litigation Developments and Settlements: Current Disclosure Considerations

Companies should also consider whether significant litigation developments or settlements trigger separate Form 8-K disclosure obligations or otherwise warrant current disclosure. For example, entry into a material settlement agreement that is not made in the ordinary course of business may trigger disclosure obligations under Item 1.01 of Form 8-K, along with a related exhibit-filing analysis under Item 601(b)(10) of Regulation S-K. In practice, companies more often report significant litigation developments voluntarily under Item 8.01 or furnish a press release under Item 7.01, particularly where they anticipate discussing the matter with analysts and investors. The analysis is highly fact-specific and often requires balancing disclosure considerations against privilege concerns, cooperation considerations, and litigation strategy.

Practical Checklist

Companies evaluating litigation disclosure obligations should coordinate closely among legal, finance, and investor relations teams and, when appropriate, involve the disclosure committee, auditors, and outside advisors, including litigation counsel.

• Does the matter trigger disclosure obligations under Item 103 of Regulation S-K?
• Should the matter be considered in applying the insider trading policy, including blackout and preclearance determinations?
• Does the matter constitute a loss contingency under ASC 450-20?
• Does the matter warrant current disclosure or trigger Form 8-K disclosure obligations, including under Item 1.01, Item 7.01 or Item 8.01?
• Should Item 103 disclosure be discontinued because the proceeding has terminated or is no longer material, and is the basis for discontinuing it documented?
• Does a settlement or other agreement require exhibit filing under Item 601(b)(10) of Regulation S-K?
• Is the potential loss probable, reasonably possible, or remote?
• Can the potential loss or range of loss be reasonably estimated?
• Have accrual determinations been evaluated appropriately?
• Is litigation-related disclosure consistent across the company’s disclosures?
• Could analyst, investor, or media communications create Regulation FD or selective disclosure concerns?
• Have litigation disclosure conclusions been reassessed following significant procedural, settlement, or investigative developments?
• Has the matter been addressed in the annual audit response letter to the independent auditor, and is that response consistent with the company's SEC disclosure?
• Have disclosure determinations and escalation procedures been appropriately documented?