Wednesday, October 27, 2010

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. ("Sensata") (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

"An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements."

Since the disclosure, Sensata's shares have climbed approximately 1.5%.

However, this has not stopped the new breed "FCPA" plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning "whether certain officer and directors of Sensata [...] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”)."

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