Key Takeaways
- Litigation and regulatory developments related to PFAS continue to expand, exposing an increasing number of industries and companies to various risks
- Companies should assess the potential impact of PFAS-related regulatory and litigation risks on their business and update their risk factors, MD&A disclosures, and forward-looking statement safe harbor legends accordingly
- As with all risk factors, PFAS-related risk factor disclosures should be company-specific and should avoid hypothetical language that could render a statement misleading or limit the effectiveness of forward-looking statement safe harbor legends
With the annual report season underway, calendar year-end public companies are finalizing annual reports on Forms 10-K and 20-F. Risk factors are a key area requiring potential updates to these public filings. Generally, the risk factors disclosure framework requires each registrant to identify material factors that render an investment in its securities speculative or risky.[1] Well-drafted risk factors are not only critical for balancing a company’s communications with the market, but also for defending against allegations that statements in periodic filings or offering documents are false or misleading and, thus, reducing the risk of securities-related regulatory actions and litigation. For these same reasons, companies should evaluate these factors when drafting or updating their forward-looking statement safe harbor legends.[2] Given these considerations, public companies should carefully review their risk factor disclosures and forward-looking statement safe harbor legends and tailor them to their specific facts and circumstances. In doing so, companies should be proactive in considering emerging risks, like those arising from per- and polyfluoroalkyl substances (PFAS) related litigation or regulatory actions.
The Growing Litigation and Regulatory Risks of PFAS
PFAS[3] —often derisively referred to as "forever chemicals"—represent an emerging risk from both a regulatory and a litigation perspective, affecting a wide array of industries and companies. Individual and class action lawsuits involving a vast array of industries, entities, products and services are on the rise. In these lawsuits, plaintiffs argue that exposure to certain PFAS may have harmful health effects on humans. The scientific research surrounding the potential health effects of PFAS exposure is still evolving and not yet conclusive. Moreover, not all PFAS behave in the same manner or have been associated with the same alleged health or environmental risks.
The scope of potential liability is far-reaching and, at this juncture, may be difficult—if not impossible—to quantify, even for companies that recognize the significance of their potential risks associated with PFAS. While previous mass litigation involving asbestos or tobacco revolved around more clearly defined uses and exposures, PFAS may be found in an incredibly broad range of consumer and industrial products, as well as in drinking water and environmental media. As a result, PFAS-related lawsuits are expected to multiply and expand in scope, with class actions gaining momentum and drawing in an increasing number of previously unaffected industries.
PFAS-related risks are further heightened by rapidly evolving and often unclear regulatory initiatives on both the federal and state levels. The federal government and several states have enacted regulations prohibiting or restricting PFAS in specific products, setting water quality standards, and establishing other environmental standards and requirements for PFAS. While the long-term trajectory of the federal PFAS initiatives is currently unclear, Lee Zeldin, the newly-appointed Administrator of the Environmental Protection Agency, supported stringent PFAS legislation during his tenure in the U.S. House of Representatives and has highlighted his work on PFAS in his official biographical information. This suggests that expectations of a complete rollback of federal PFAS regulations may be, at best, premature. To the extent that federal regulations are not rolled back, the risks of federal regulatory action remain. Differing state regulations expose industries and companies to varying standards that often create obstacles to compliance and raise the risk of enforcement actions. Furthermore, there is no consensus on the definition of PFAS, with some regulators defining PFAS more broadly than others, which creates additional challenges for companies that want to understand their compliance obligations and extrapolate risks accordingly.
Incorporating PFAS Risk into Disclosures
To the extent a public company faces PFAS-related legal exposure—whether due to regulatory developments, litigation risks, or even potential reputational harm—it should ensure that its risk factor disclosures and forward-looking statement safe harbor legends accurately reflect those potential and confirmed risks.
Thus far, we have observed various approaches to addressing PFAS risks in public filings. Some issuers utilize a standalone risk factor for PFAS-related litigations and regulations. Others incorporate PFAS risks into broader environmental risk factors. In certain cases, companies have not yet assessed the full impact of PFAS. Such companies may consider including a more general risk factor (though generic disclosures should generally be avoided in favor of more specific disclosures).[5]
Fortunately, there are already examples of PFAS-related risk factors on EDGAR, providing companies with a foundation for tailoring disclosures to their specific circumstances. However, as with all risk factors, companies should avoid generic or boilerplate language. Furthermore, caution is warranted when describing risks that have already materialized—hypothetical statements about materialized risks may be deemed misleading by both the Securities and Exchange Commission and the plaintiffs’ bar. Beyond risk factors, companies should also consider whether acute PFAS-related risks that have already affected operations or constitute a known trend necessitate additional MD&A disclosures, including potential quantification.[6] A well-designed collaborative disclosure process involving input from internal teams and outside counsel is critical to ensuring the accuracy and completeness of disclosures of the actual impact of PFAS-related matters on the company’s business.
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For more information on risk factors and other disclosure matters, please contact a member of the Venable Capital Markets Practice and Securities Enforcement and Compliance Practice. To learn more about PFAS and strategies for addressing them within your company, contact a member of Venable's PFAS and Emerging Contaminants team.
[1] For general requirements to provide a description of the risk factors, see Item 105 of Regulation S-K, available here.
[2] For a general approach to drafting forward-looking statements' safe harbors, refer to the Venable forward-looking statements guide, available here.
[3] General information on PFAS provided by the U.S. Environmental Protection Agency is available here.
[4] Mr. Zeldin's official biography is available here.
[5] Item 105(a) of Regulation S-K is available here.
[6] See Item 303 of Regulation S-K, available here.