Public Company Advisor - August 2012: Second Circuit’s Ikanos Decision Illustrates Pitfalls Surrounding MD&A “Trends and Uncertainties” Disclosure

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Item 303 of Regulation S-K requires the disclosure, in a company’s MD&A, of “any known trends or uncertainties…that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” A company’s failure to correctly anticipate which known “trends or uncertainties” ultimately will have a material impact and make corresponding disclosures may give rise to litigation in which nondisclosure will be judged in hindsight and with the benefit of knowledge of subsequent events that may not have been foreseen at the time of disclosure.

The Second Circuit Court of Appeals’ recent decision in Panther Partners Inc. v. Ikanos Communications, Inc. threatens to expand the litigation risk posed by Item 303. Although Item 303 requires disclosure only of known uncertainties that an issuer “reasonably expects will have” a material impact, in Ikanos, the Second Circuit held that the plaintiff adequately alleged a claim based on the company’s failure to disclose an “uncertainty” that the court determined “might reasonably” have been expected to materially impact future revenues.

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