Pursuant to various securities laws rules and regulations, issuers are required to disclose risks in various required filings.
With increasing frequency, such risk disclosures take up several pages and often serve as little more than defensive disclosures to guard against opportunistic plaintiffs’ counsel who may allege securities fraud if the issuer did not disclose to investors obvious risks that may impact the company.
For instance, this recent 10-K filing of Nova Lifestyle Inc. (a California-based furniture company) contains approximately 35 risk factors including the following obvious risks:
(i) changes in economic conditions in the industries and markets served by our customers could adversely affect demand for our products; (ii) if we lose our key personnel, or are unable to attract and retain additional qualified personnel, the quality of our services may decline and our business may be adversely affected; (iii) if we are unable to manage our growth, we may not continue to be profitable; (iv) we may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all; and (v) increases in income tax rates, changes in income tax laws or disagreements with tax authorities could adversely affect our business, financial condition or results of operations.
In addition to these generic risks, Nova Lifestyle also disclosed the following:
“Our compliance with the Foreign Corrupt Practices Act may put us at a competitive disadvantage, while our failure to comply with the Foreign Corrupt Practices Act may result in substantial penalties.
We are required to comply with the United States Foreign Corrupt Practices Act, or the FCPA, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties. Non-U.S. companies, including some of our competitors, are not subject to the provisions of the FCPA. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.”
In the FCPA’s modern era, there are some who are likely refuse to accept or acknowledge that the FCPA may put certain companies at a disadvantage. Yet if Congress was able to accept and acknowledge this fact when passing the FCPA in the mid-1970’s, why can’t this fact of the global marketplace be universally accepted or acknowledged today?
In the mid-1970’s, a certain degree of competitive disadvantage was accepted by Congress in enacting the FCPA. For instance, Representative Moss stated as follows during a House hearing:
“[T]o think that no loss of business would occur in every instance would be unrealistic. Can we allow this to occur? Yes, if that is the small price we must pay to return morality to corporate practice. Yes, if that is the small price we pay to show that U.S. firms compete in terms of price, quality, and service and not in terms of the size of a bribe. Real competition works. The vast majority of American companies have operated successfully in foreign countries without the need to resort to bribery.”
Likewise, Treasury Secretary Michael Blumenthal stated during the same hearing as follows:
“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in this practice, I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”
Accepting or acknowledging that the FCPA may put certain companies at a disadvantage, is by no means the same as suggesting that the FCPA should be repealed or that FCPA enforcement should become less vibrant. Rather, it is as basic as accepting or acknowledging that Driver A may get to his destination sooner if unconstrained by speeding laws compared to Driver B who is constrained by speeding laws.
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