Disclosure of litigation: Overview, definition, and example
What is disclosure of litigation?
Disclosure of litigation refers to the requirement or practice of revealing or making known any ongoing or potential legal disputes or proceedings in which a party is involved. This disclosure is often required in various contexts, such as business transactions, legal agreements, regulatory filings, or financial reporting. The purpose of disclosing litigation is to inform other parties (such as investors, partners, or regulators) of the risks and potential financial or reputational impact that the litigation may have on the company or individual involved.
For example, a company may be required to disclose pending lawsuits in its annual financial report or during a merger or acquisition process to ensure that all parties involved are aware of potential liabilities.
Why is disclosure of litigation important?
Disclosure of litigation is important because it ensures transparency and helps all relevant parties assess potential risks. For investors, knowing about ongoing or potential lawsuits can affect their decision to invest in a company, as litigation can lead to financial liabilities, reputational harm, or operational disruptions. For companies, disclosing litigation helps manage risk by making the parties aware of any issues that could affect future business operations. Legal or regulatory bodies also use litigation disclosures to monitor compliance and assess the risk exposure of businesses.
By providing accurate and timely information about litigation, companies, and individuals help build trust with stakeholders, ensure compliance with legal obligations, and avoid potential legal complications.
Understanding disclosure of litigation through an example
Imagine a technology company, Company A, is in the process of being acquired by another company, Company B. During the due diligence process, Company B requests full disclosure of any ongoing litigation involving Company A. Company A reveals that it is currently facing a patent infringement lawsuit, which could potentially lead to significant financial damages. This disclosure allows Company B to assess the risk of proceeding with the acquisition, considering the potential legal costs and reputational damage associated with the ongoing litigation.
In another example, a public company is required to disclose any material litigation in its annual 10-K filing with the U.S. Securities and Exchange Commission (SEC). The company lists a shareholder class-action lawsuit alleging misleading financial statements and provides a description of the case and its potential impact on the company’s finances.
An example of a disclosure of litigation clause
Here’s how a disclosure of litigation clause might appear in an agreement:
“The Company agrees to promptly disclose to the other party any material litigation or legal claims that have been filed or are pending against the Company, its directors, officers, or employees. Such disclosure must include details of the litigation, including the nature of the claim, the parties involved, and any potential financial impact. The Company shall update the other party on the status of the litigation as necessary.”
Conclusion
Disclosure of litigation is a critical aspect of legal and business transparency. It ensures that stakeholders are informed of any potential risks that may arise from ongoing or pending legal disputes. By properly disclosing litigation, companies help protect their reputations, comply with legal obligations, and allow for informed decision-making by investors, partners, and other interested parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.