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In response to the news relating to the coronavirus disease 2019 (“COVID-19”), the U.S. government and its agencies, businesses, and investors alike are rapidly adjusting for the current and expected upcoming challenges. We provide a brief overview of the actions taken by the U.S. Securities and Exchange Commission (“SEC”), disclosures made by publicly traded companies in light of COVID-19, and considerations for SEC reporting companies as they continue to confront the evolving situation.
SEC Relief Measures
Due to the outbreak of COVID-19, the SEC has announced relief measures for certain publicly traded company filing obligations under the federal securities laws. On March 4, 2020, the SEC issued an exemptive order1 (the “Order”) that, subject to certain conditions and exceptions, provides publicly traded companies, and any other person required to make such filings, with an additional 45 days to make certain filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that otherwise would have been due between March 1, 2020, and April 30, 2020. Conditions to be met include, among other things, the following:
- The registrant, or any person required to make any filings with respect to such a registrant, is unable to meet a filing deadline due to circumstances related to COVID-19.
- Any registrant relying on the Order furnishes a Form 8-K or, if eligible, a Form 6-K by the later of March 16, 2020, or the original filing deadline of the report providing, among other things:
- reasons as to why it could not file on a timely basis, and the estimated date by which the report, schedule, or form is expected to be filed;
- if appropriate, a risk factor explaining, if material, the impact of COVID-19 on its business; and
- if the reason the subject filing cannot be timely filed relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, the Form 8-K or Form 6-K shall have attached as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report, or certification on or before the date such report is required to be filed.
- In any late filing made in reliance on the Order, the registrant, or any person required to make any filings with respect to such registrant, must disclose that it is relying on the Order and state the reasons why it could not file such report, schedule, or form on a timely basis.
Any registrant relying on the Order will not need to file a Notification of Late Filing on a Form 12b-25, so long as the filing is made within the time period prescribed by the Order.2 The SEC has specified that a late filing that is made in compliance with the Order will be considered “timely” for purposes of determining eligibility to use Form S-3 and Form S-8.3 We would expect that consideration to extend to foreign private issuers for purposes of determining Form F-3 eligibility as well. Further, the SEC affirmed that forward-looking statements that are provided by companies to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19, are subject to the safe harbor in Section 21E of the Exchange Act.4
Companies are asked to evaluate the impact of the pandemic on their operations and financial results and to adjust their public disclosure accordingly. If there is material information that should be disclosed, the SEC encourages companies to avoid selective disclosures and to disseminate such information broadly.5 In addition, if such information becomes materially inaccurate, companies should consider whether they need to update such previously disclosed information.
Current Observations Regarding Company Disclosure
Even before the Order was issued by the SEC, the growing impact of COVID-19 has been causing reporting companies to add and modify disclosure to reflect the challenges that the outbreak has had and may have on their specific markets, businesses, and prospects. Reporting companies are making disclosures around COVID-19 in these key areas of their periodic reports:
- Risk Factors: Per SEC guidance, risk factors should be tailored to the specific registrant and its business, as opposed to being generically applicable to any registrant or offering. At the moment, companies are taking different approaches. Companies that have significant operations or supply chains involving China, or that are particularly susceptible to the impact of COVID-19, are including more tailored disclosures. As the situation has progressed since late January, we have seen an increase in registrants that include disclosure of risks related to COVID-19 in their annual reports on Form 10-K or Form 20-F, and such disclosures have become much more specific as to the likely ramifications of the global pandemic on their business.
- MD&A: Companies are including COVID-19-related disclosures in their MD&A that are customized for their business and industry. This disclosure often covers potential trends or uncertainties affecting subsequent periods, and it identifies any direct business connection to China or surrounding areas, as well as any negative impact expected as a result of a reduction in people’s ability or willingness to travel. The language usually tracks the related risk factor or, where included, the financial statement subsequent events footnote.
- Financial Statement Subsequent Events Footnote: On February 19, 2020, SEC Chairman Jay Clayton noted in a public statement6 that companies and their auditors should consider whether financial statement disclosure about COVID-19 is appropriate in the subsequent events footnote. While most companies that have included such disclosure are heavily concentrated in the travel and hospitality industries, some companies with significant operations or supply chains involving China have also elected to make such disclosure. In each case, the subsequent events disclosure is tailored to the specific circumstances and operations of the company.
Given the current landscape, the global outbreak of COVID-19 presents many challenges and will have ramifications across many industries both in the near and long term. Companies should monitor the situation in, and related consequences to, their particular business segments, geographic areas, internal operations, and customer base. In turn, companies and their management need to continually assess whether it is necessary to provide additional or updated disclosure to the market.
As COVID-19 rapidly spreads globally, companies should evaluate whether there is a material change that may warrant updating or supplementing disclosure in a quarterly report on Form 10-Q or current report on Form 8-K (or Form 6-K). Companies that have listed securities should also be mindful of applicable stock exchange rules that require prompt disclosure of information that is likely to have a material effect on the price of their securities.7
Reporting companies will want to coordinate their investor relations efforts to keep their investors apprised of significant developments arising out of the COVID-19 pandemic. Specifically:
The effects of COVID-19 are undoubtedly far reaching and will continue to pose uncertain risks. Companies are reminded to remain diligent in promptly making and maintaining accurate public disclosure.
- Keep in mind selective disclosure considerations under Regulation FD. Given the significant impact that COVID-19 has had on global markets and global operations for reporting companies, registrants should consider any statements made about the impact of COVID-19 to be material, and make disclosures only in a Regulation FD compliant manner, such as through broadly disseminated press releases, Form 8-K, or compliant social media or website posting methods. Ensure that the investor relations department is prepared with a Q&A on the potential impact of COVID-19 on the registrant, and that such information is consistent with public statements. Foreign private issuers not otherwise subject to Regulation FD should still consider these best practices.
- Consider providing updates before periodic reports are due. Reporting companies should consider communicating known or potential consequences of COVID-19 as the situation develops. Any disclosures should be precise; generic statements should be avoided. In particular, reporting companies should consider updating previous disclosures where such previous statements are no longer accurate. For example, companies may need to update their disclosures since the U.S. federal government has issued certain temporary travel bans or since certain local and state governments have prohibited events that draw large crowds leading to the cancellation of festivals and sporting events.Not only are there immediate effects of such bans, cancellations, or postponements, but also rippling long term effects, such as changes in customer demands and complementary sectors.As a number of companies are issuing their scheduled annual or quarterly earnings releases, it may be prudent for such companies to reassess previously issued guidance. Some companies are revising previously issued guidance and providing specific detail as to the effects of COVID-19 on their business and operations. Instead of revising, other companies are withdrawing guidance on the whole due to the current level of uncertainty.
- Prepare for the next earnings call and periodic report. Reporting companies need to continually consider whether the effects of the spread of COVID-19 could impact financial conditions and results of operations. For example, a travel ban from certain European countries affects not just the airline industry, but also the tourism, transportation, food and beverage, and hospitality sectors. Questions related to COVID-19 may be expected during earnings conference calls, and therefore, management should be prepared to address these concerns. Reporting companies should also continue thinking about, and refining, their disclosure in periodic reports such as their next quarterly report on Form 10-Q (or Form 6-K), including in the areas of risk factors, MD&A, and Subsequent Events. In each case, the disclosure should be specific and go beyond overly broad economic or global health risks.
1 SEC Release No. 34-88318 (Mar. 4, 2020), https://www.sec.gov/rules/other/2020/34-88318.pdf. In addition to the above 45-day extension, the Order provides an exemption from Exchange Act requirements, subject to certain conditions, to furnish proxy statements, annual reports and other soliciting materials, and information statements to security holders when mail delivery is not possible.