The business risks of corporate transparency

🔎 How can a company’s routine legal filings cause a scandal (and a huge loss for its shareholders), and what can we learn from it about corporate transparency?

Last month, a controversy emerged with the Polish fashion retailer LPP SA, one of eastern Europe’s largest. Despite announcing the sale of its Russian operations due to the 2022 invasion of Ukraine, it was alleged to still run its business in Russia through a chain of hidden subsidiaries. This claim comes from a detailed 100-page report by Hindenburg Research, a US investment research firm and short seller. Following the March 15 report, LPP’s stock, traded on the Warsaw exchange, plummeted and has yet to fully bounce back to its original value.

What stands out from the report is that a major part of the claims relied not on ground-level investigation but rather on publicly available information. More specifically - in order to show a chain of so-called secret subsidiaries, the report used cross referenced information and documents publicly availale from trade and companies registrars in various countries, including Turkey, UAE, Russia, Singapore and the UK.

This demonstrates the ease on which day to day filings of a company and its subsidiaries can reveal extensive information on the trading group, and how this information can be exploited by others.
In most countries, any company, even a private one, discloses details as part of its day to day compliance and filing. Most often than not, these details are made publicly available, and can be used to unearth new insights about the business operations of the company or its affiliates, or be construed to show it in a damaging light. For instance, connecting similar lists of officers across different companies (even in different countries) can reveal business networks, frequent changes of auditors might suggest financial irregularities (whether alleged or actual), and a subsidiary’s financial statements can show a group’s true revenue sources.

This is part of an ongoing trend towards greater corporate transparency worldwide. To illustrate - if a decade ago we wouldn’t have even imagined companies being required to publicly disclose their beneficial owners, today this requirement is prevalent across the world, including all EU member states and, as of this year, even in the US with its Corporate Transparency Act.

So what does this mean for corporate lawyers?

Corporate lawyers and officers must understand the public footprint that all companies in their group, and not only publicly-traded companies, leave behind and the stories such information might tell, and reconsider this as part of their ongoing compliance process.

As the corporate world progressively becomes more connected and transparent, the ability for outside parties to piece together publicly available filings increases, and so understanding the types of public information made available in different jurisdictions becomes vital.