COVID-19 Guidance for Public Company Disclosures and Securities Offerings
Amidst the ever-evolving circumstances related to the global COVID-19 outbreak, U.S. public companies issuing earnings releases and filing related periodic reports, as well as companies engaged in public and private securities offerings, must carefully evaluate complex disclosure considerations with respect to the business effects of the outbreak.
SEC Guidance and Relief
Since concerns about COVID-19 developed, the U.S. Securities and Exchange Commission (SEC) has issued statements and orders in an effort to provide guidance and filing relief for public companies.
In a statement on Jan. 30, 2020, SEC Chairman Jay Clayton recognized the uncertainty companies face regarding the current and potential impact COVID-19 will have on business, and importantly declared that "how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision." In a later statement on Feb. 19, 2020, Chairman Clayton also remarked that COVID-19 could have an impact on financial disclosures and audit quality. In light of these pronouncements, public companies must recognize that they have the obligation to monitor and analyze the impact on their business on an ongoing basis to determine the necessity for COVID-19 related disclosure and to stay abreast of continuing SEC guidance for issuers.
In addition, the SEC has provided filing deadline relief to public companies to mitigate the challenges caused by COVID-19. In particular, pursuant to a March 4, 2020 order, the SEC is providing affected publicly traded companies with an additional 45 days (and in some circumstances more time) to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. To take advantage of this relief, a public company must file a Current Report on Form 8-K stating why the relief is needed in its particular circumstances and must, in the words of Chairman Clayton, "provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from COVID-19 to the fullest extent practicable to keep investors and markets informed of material developments."
Public Company Disclosures
The specifics of a public company's disclosure depend on its industry, operations, geography, suppliers and customers. In general, all public companies should avoid boilerplate and tailor disclosures to the specifics of their business. Companies should also avoid presenting a topic as future possible risk if such factor is already having a material adverse effect on the company, and instead present it as such. Disclosure related to COVID-19 is likely to appear in:
Risk Factors in the next filing of a Form 10-K or Form 10-Q.
Management Discussion and Analysis ("MD&A") in the next Form 10-K or Form 10-Q.
Earnings releases.
Proxy statements.
In the Risk Factors section of a Form 10-K or Form 10-Q, public companies should consider disclosing material risks related to the impact of COVID-19 on its business and, despite the absence of a duty to update disclosures between the due dates for periodic reports, consider the possible utility of disclosing such information even earlier in a fresh cautionary statement filed on a Current Report on Form 8-K, especially if the issuer is uniquely affected in some way or if it is possible that an earlier statement warrants more immediate updating.
Example risk factor disclosures from the supply side may include topics such as the anticipated adverse effects of the cessation of operations, reduced hours of production, facilities being closed, production otherwise being affected through quarantine of employees or suppliers, limitations or restrictions on the transportation of goods to market, reliance on suppliers in disproportionately affected areas and other supply chain disruptions and logistics issues.
Example disclosures from the demand side may include risk factors regarding the expected adverse effects of a decrease in sales, the inability or unwillingness of consumers to gather in large numbers, limitations on travel, public perceptions of the safety of the good or service, quarantine of employees or customers and reduced consumer spending on discretionary items.
Many other possible adverse effects on the business warrant consideration as possible risk factors, including the effect of buying or selling into international markets, the impact on business expansions, merger and acquisition activity, the effect of a suppressed stock price on a company's potential currency for acquisitions and the uncertain duration of the virus and its effect on the business if such duration is prolonged. Obviously, the foregoing lists are not exhaustive, but are simply intended to prompt dialogue and further assessment of appropriate disclosures.
In MD&A, public company management should consider disclosing specifics regarding how demand for the goods or services of the business have been and/or will be affected. Due to timing, the COVID-19 outbreak may not have altered, and thus may not be incorporated into, companies' 2019 results of operations disclosed in the MD&A. However, management is required to disclose potential trends and uncertainties that may impact future periods and so, to the extent relevant, companies should include discussion of such trends and uncertainties – likely in first calendar quarter reporting – in light of COVID-19. To the extent COVID-19 has had an impact on the first calendar quarter, such historical reporting would also be required.
In earnings releases, public companies should also update forward-looking statement disclaimers to take into account COVID-19 and any other ancillary new risks. In regards to earnings guidance, companies should consider whether all current effects are incorporated into any guidance provided, whether a need to revise, or potentially rescind, prior guidance exists, and, assuming it has been so excluded, note the exclusion of the uncertain impact of the virus from full-year guidance. Management should prepare thoroughly for any related earnings call, including planning answers to questions related to COVID-19. In this context, it is also critical to remember the requirement of Regulation F-D to avoid selective disclosure and to ensure that the statements made verbally align with those made in writing.
In Proxy Statements, public companies will want to expand their oversight discussions to include board oversight of the impact of the virus, which obviously requires close coordination between directors and management. Relative to proxy statements, pursuant to its March 4 order, the SEC also provided relief for companies required to furnish proxy statements, annual reports and other soliciting materials to places where delivery service has been suspended and the company has made a good-faith effort to furnish the materials.
Annual Meeting Recommendations
Because virtual shareholder meetings are a potentially helpful way to minimize travel and avoid large group gatherings in the context of the COVID-19 outbreak, companies that are still preparing their proxy statements should review their state laws and governing documents to confirm the viability of this approach, inquire with a service provider who can assist with any identity verification or other state-imposed virtual meeting requirements, and get board approval to move to a virtual meeting. On March 13, the SEC issued new guidance permitting companies that have already issued their proxy statements for in-person meetings to change the date, time or location of their annual meetings (including changing to virtual meetings) by taking reasonable steps to inform relevant parties in lieu of additional mailings or proxy amendments. According to the guidance, reasonable steps include issuing a press release, notifying market participants and filing an announcement on Edgar (the SEC's online database). Companies should be aware of the minimum days of notice required under state statute (often 10).
If time or state statute does not allow, at a minimum a webcast would allow investors and the public to be able to observe an already-scheduled in-person meeting, though not participate remotely. Shareholders attending in that manner would vote through previously-announced methods. Any webcast information would be filed with the SEC as additional soliciting material.
Insider Trading Considerations
To avoid insider trading issues, if a thorough assessment of the COVID-19 business impact a company expects requires more time than exists prior to such company's next earnings release, such company may wish to consider keeping its trade window closed. Companies that do open trading windows should continue to monitor developments to determine if the decision should be revisited. The SEC's March 4 statement brought attention to this issue, stating that when a company "has become aware of a risk related to COVID-19 that would be material to its investors, it should refrain from engaging in securities transactions with the public and take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk."
Securities Offering Considerations
Public and private companies conducting securities offerings face many increased challenges, including numerous complications associated with the timing of the offering, market volatility, potential tightening of credit and other financial market risks. Beyond the above-discussed risk factor disclosure considerations, to conduct a securities offering, companies will need to disclose to potential investors the impact or potential impact of COVID-19 on their business, financial condition, liquidity and results of operations (historical and prospective) – in both public and private offering documents. Management should expect to receive, and should therefore be prepared to respond to, underwriter due diligence requests related to COVID-19. From a financial statement perspective, a company conducting a securities offering will need to consider if the disclosed projections incorporate the impact of COVID-19 and, if not, whether the company will be ready to present financials that do so prior to the offering. Additional considerations that may have bearing, depending upon the nature of the offering, include whether business-specific COVID-19 impacts have been discussed with the rating agencies and if the company's insurance policies will cover any of the related risks.
All companies conducting securities offerings should be aware of the increased risk of securities litigation in this context. To address this risk, companies should implement an action plan that includes continuously monitoring the situation and the potential implications for its business, considering the potential need to disclose new risk factors to investors, updating risk factors and cautionary statements, which are ideally suitably qualified to reflect management's current beliefs, on an ongoing basis; ensuring assumptions about projections are properly disclosed and the limitations of such assumptions are articulated and properly calibrating financial projections in light of the current circumstances.
Our public company and securities offering lawyers stand ready to assist you with your disclosures relative to COVID-19 and other considerations.
Kathleen Eick
Public Offerings
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