In business and corporate law, disclosure refers to the release of information about a company that may influence an investor’s decision. This information may reveal positive and negative aspects of a business including its operational details and financial reports. According to United States federal law, all publicly listed companies on the U.S. stock exchange must disclose all relevant financial information about their company. This law is relegated by the Securities and Exchange Commission (SEC), an agency in the United States federal government that aims to regulate the market by protecting investors and maintaining fairness.
Disclosure may also refer to full disclosure agreements and the duties of disclosure in U.S. contract law.
The United States federal government enacted legislation that mandated corporate disclosure through the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were passed as a result of the stock market crash of 1929 that led to the Great Depression. Many believed that lack of transparency in publicly-listed companies was a significant factor that caused the economic crisis. As a result, new disclosure requirements were meant to promote openness in the U.S. stock market and therefore prevent future financial crises.
The government has since fortified disclosure laws through the passage of the Sarbanes Oxley Act. Large publicly-traded companies, Enron and WorldCom, were found to have engaged in corrupt practices that led to the enactment of this law. The Sarbanes Oxley Act doubled down on disclosure regulations by ordering the release of any information that directly and indirectly, influences or might influence financial results of a public corporation. The act also criminalized violation of disclosure rules.
In some cases, disclosure may refer to the requirement of parties involved in a contract to expose all relevant information about their transaction. Full disclosure agreements, which are common in real estate transaction contracts and prenuptial agreements, require all transacting parties to have equal possession of all relevant information. Disclosure duties aim to cultivate an equal playing field and element of balance for parties involved in a contractual agreement. If a party fails to comply with their disclosure duties, they may be subject to sanctions by the court.
Disclosure is a key term in business, corporate and contract law. In most cases, disclosure of documents is not limited to printed information. It may also refer to electronically stored information (ESI) such as emails or messages.
Nonetheless, disclosure is a relatively broad term and its requirements vary depending on the specific circumstances. If you own a publicly-listed company and want to make sure you are abiding by SEC regulations, or if you are in need of assistance in drafting a full disclosure agreement, you should reach out to an experienced attorney. Our experienced business lawyers are here to help you navigate a number of important legal issues.
