COVID-19 Coronavirus: SEC Disclosure Obligations for Public Companies

 

COVID-19 has presented novel issues for public companies, including business development companies (“BDCs”), with respect to their disclosure obligations under federal securities laws. This OnPoint discusses recent SEC relief in connection with COVID-19, and provides guidance regarding public companies’ ongoing disclosure obligations. 

 

 

 

Pursuant to recent SEC Orders, a public company, including a BDC, may have an additional 45 days to file certain disclosure reports that otherwise would have been due between March 1, 2020 and July 1, 2020 if it shows that it is unable to timely file due to circumstances related to the COVID-19 outbreak. The initial order providing such relief was issued by the SEC on March 4, 2020 (See SEC Order), and on March 25, 2020 the SEC extended the time period to include filings due between March 1, 2020 and July 1, 2020 (See SEC Extension).

 

For public reporting companies that have a December 31 fiscal year end, this exemption will be most applicable to the first quarter 2020 quarterly report on Form 10-Q. However, the relief does not just apply to Form 10-Q; it applies equally to other reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), including Forms 10-K, 8-K and amendments thereof, definitive proxy statements and amendments thereto, and Schedule 13Gs and amendments. Notably, the relief applies to Schedule 13Gs that are due between March 1, 2020 and July 1, 2020, but does not apply to Schedule 13Ds or amendments thereto or Section 16 beneficial ownership reports (i.e., Forms 3, 4 and 5) that are due within that time period. 

 

Pursuant to the same SEC Orders, the SEC also provided relief with respect to Exchange Act requirements that companies furnish proxy statements, annual reports and other soliciting materials to security holders. In order to be eligible for such relief, the security holder must have a mailing address located in an area in which the common carrier has suspended delivery service of the type usually used for solicitation, and the company or other person making the solicitation must have made a good faith effort to furnish the soliciting materials to the security holder.

 

Virtual Shareholder Meetings

A number of public companies are electing to hold “virtual-only” shareholder meetings or “hybrid” shareholder meetings (i.e., an in-person meeting that also permits shareholder participation through electronic means), or are converting from an in-person shareholder meeting to a “virtual-only” or “hybrid” shareholder meeting. The SEC has provided guidance with respect to virtual-only and hybrid shareholder meetings, including simplified disclosure procedures with respect to changing a meeting date, time or location, or converting the annual meeting to a virtual-only or hybrid meeting.

 

The SEC guidance noted that the ability to hold a virtual-only or hybrid shareholder meeting is governed by state law and the company’s organizational documents. First, companies should review applicable state corporate law to determine whether virtual-only/hybrid shareholder meetings are permitted, and should confirm whether their organizational documents permit virtual-only/hybrid meetings or impose restrictions on when and how meetings can be changed or rescheduled.

 

The guidance from the SEC was issued on March 13, 2020 and updated on April 7, 2020 (See SEC Guidance). Please refer to Dechert’s OnPoint, Considerations for Board and Shareholder Meetings, initially published on March 16, 2020 and updated through April 7, 2020 for more information regarding virtual stockholder meetings.

 

In the SEC’s April 7, 2020 update to its guidance regarding virtual-only shareholder meetings, the SEC provided new guidance with respect to the delivery of a “full set” of proxy materials (i.e., a proxy statement or information statement, an annual report if required by the Exchange Act and a proxy card).

 

The SEC staff noted that some public companies would like to furnish their proxy materials through the “notice-only” delivery option permitted by Exchange Act Rule 14a-16, but that they may have trouble complying with certain provisions of the rule (e.g., sending such notice at least 40 calendar days before the meeting, providing timely information to intermediaries and responding timely to shareholder requests for paper copies).

 

The SEC staff encouraged public companies affected by printing and mailing delays due to COVID-19 to use all reasonable efforts to ensure that shareholders receive material information about a shareholder meeting in a timely manner, and noted that this may mean delaying a meeting if necessary. The SEC staff noted that, in circumstances where delays are unavoidable due to COVID-19, the staff would not object to an issuer using the “notice-only” delivery option in a manner that, while not meeting all aspects of the notice and timing requirements of Exchange Act Rule 14a-16, will nonetheless provide shareholders with proxy materials sufficiently in advance of the meeting to review such materials and exercise voting rights in an informed manner, and so long as the public company announces the change in the same manner required for a change to the meeting date, time, location or change to virtual-only meeting. The SEC also encouraged public companies and intermediaries to use their best efforts to send paper copies of proxy materials and annual reports to requesting shareholders, even if such deliveries would be delayed.

 

In order to use the SEC’s EDGAR system to make filings, an applicant must complete an online Form ID application, which requires uploading a notarized document that includes the information required to be included in the Form ID filing. Given recent difficulties filers have had securing notarization of their Form ID (either due to working remotely or otherwise not being in reasonable proximity of an authorized notary public), the SEC has granted temporary relief from the Form ID notarization process.

 

Effective from March 26, 2020 through July 1, 2020, applicants that are unable to obtain the requisite notarization for a Form ID filing may submit a manually signed document without notarization and indicate on the face of the signed document that it could not obtain the required notarization due to circumstances relating to COVID-19. Within 90 days of the issuance of EDGAR codes to the filer, the filer is required to submit a copy of the notarized manually signed Form ID document as correspondence via EDGAR. If such notarized document is not submitted within 90 days, the SEC may inactivate the filer’s EDGAR codes. The temporary order was issued by the SEC on March 26, 2020 (See SEC Temporary Order).

 

Form 8-K

Absent a specific triggering event, COVID-19 does not, in and of itself, require a Form 8-K disclosure. However, companies should continue to be thoughtful about their ongoing disclosure requirements as the COVID-19 outbreak continues. The existing rules for Form 8-K apply to COVID-19, but the outbreak may present novel issues with respect to disclosure on Form 8-K. Examples of events related to COVID-19 that would trigger a mandatory Form 8-K filing include material acceleration of a financial obligation (such as a credit facility) or a notice of delisting due to failing to satisfy financial or liquidity standards of an exchange. Furthermore, if the impact of COVID-19 is determined to be material on the business and operations of a public company, a company may consider a voluntary disclosure on Form 8-K to promptly advise shareholders and the public of material information.

Due to the uncertainty surrounding the impact of COVID-19, analysts, investors and other persons may be reaching out to seek information about the impact of COVID-19 on a company. The requirements of Regulation FD with respect to disclosure of material nonpublic information apply to information provided to analysts, investors and other persons in such cases. In the case of intentional disclosures, a company must make a Regulation FD disclosure simultaneously, and in the case of non-intentional disclosures, a company must make a Regulation FD disclosure promptly thereafter. The SEC has noted the importance of the public having access to timely information about companies in connection with the COVID-19 outbreak.

 

On March 25, 2020, the SEC’s Division of Corporate Finance issued Disclosure Guidance Topic No. 9 (See SEC Disclosure Guidance), which provides the SEC Staff’s current views regarding disclosure and other securities law obligations that public companies should consider with respect to COVID-19 and related business and market disruptions. In light of this guidance and existing rules under the federal securities laws, there are a few topics that public companies should focus on with respect to their upcoming annual or periodic reports on Form 10-K and 10-Q, registration statements, and other disclosures made under the federal securities laws.

 

In particular, the SEC Disclosure Guidance highlighted the need for public companies to consider whether the known or reasonably likely effects of and the types of risks presented by COVID-19 may be necessary or appropriate in: (i) management’s discussion and analysis, (ii) the business section, (iii) risk factors, (iv) legal proceedings, (v) disclosure controls and procedures, (vi) internal control over financial reporting and (vii) the financial statements. The SEC Disclosure Guidance also included a list of questions that companies should consider as they assess COVID-19 related effects and consider their disclosure obligations.

 

Please refer to Dechert’s OnPoint, Considerations for Boards of Directors, published on April 7, 2020, for a discussion of public company disclosure matters that boards should consider and review with company management. 

 

In the Management Discussion and Analysis section, companies should focus on whether the COVID-19 outbreak (i) has had a material impact on the company’s financial condition and results of operations, and (ii) would constitute a trend or uncertainty that it reasonably expects will have a material impact on its financial condition or results of operations.

Specifically, it may be helpful for companies to consider how COVID-19 is expected to impact future operating results and near and long-term financial condition, how COVID-19 has impacted their capital and financial resources (including cost or access to capital and funding sources, impacts to sources or uses of cash, and whether there is a material uncertainty regarding their ongoing ability to meet the covenants of credit agreements) and whether COVID-19 is expected to impact future operations differently than how it affected the current period. In such discussion, companies should also focus on potential remediation efforts that the company may take due to such trends or uncertainties.

 

In the Business section, companies should focus on whether COVID-19 has materially changed their business and whether such change should be reflected in revised or additional disclosure. Examples of events that would warrant revised or additional disclosure in the Business section include whether the company has closed any offices or facilities, whether the company has experienced disruptions in its supply chain or is considering new suppliers, whether particular business segments have been particularly impacted by COVID-19, and whether the company has laid off or furloughed employees as a result of COVID-19.

 

In the Risk Factors section, companies should focus on actual and potential risks to the company’s business in connection with the COVID-19 outbreak. Such risks may include disruptions to supply chains or methods used to distribute products/services, impacts on demand for a company’s products/services, the effects of an economic slowdown, disruptions from travel restrictions and border closures, cybersecurity risks (including with respect to employees teleworking), constraints or other impacts on a company’s human resources and productivity, a potential lack of access to capital markets, risks related an inability to meet the covenants in credit agreements, unexpected costs associated with allowances for credit losses, restructuring charges or other expenses, and litigation risks with respect to application of force majeure clauses. As with typical risk factor disclosure, companies should focus on the risks inherent to the company, and reliance on boilerplate language that does not adequately identify risks with specificity may not be adequate.

 

Potential litigation in connection with COVID-19 may also require disclosure and was highlighted as a consideration in the SEC Disclosure Guidance. Companies should consider potential contract disputes arising out of force majeure clauses or potential class action lawsuits from employees or customers in connection with exposure to COVID-19 and whether such litigation requires disclosure.

 

Companies should review closely their disclosure controls and procedures and the impact that COVID-19 may have had on such controls and procedures, and ensure that COVID-19 related information is appropriately communicated to management to allow for timely disclosure. In particular, the SEC Disclosure Guidance highlighted that companies should consider whether remote work arrangements may have affected disclosure controls and procedures, and whether there are any challenges that companies may anticipate in these systems and controls in light of COVID-19.

Additionally, the SEC Disclosure Guidance noted that companies should consider whether any changes are necessary to their internal control over financial reporting due to the impacts of COVID-19. Remote work arrangements and/or potential closures or disruptions in one or more company offices may mean that existing internal control over financial reporting is no longer effective, and companies may need to design alternative controls. Potential revisions to a company’s internal control over financial reporting, or its disclosure controls, may also expressly provide for the potential impacts of COVID-19.

 

In connection with the aforementioned review and, if applicable, the revisions to disclosure controls and/or internal control over financial reporting, companies should also focus on whether the Sarbanes-Oxley Section 302 and 906 certifications can be made and whether any changes are necessary to the certification process.

 

In addition to reviewing internal control over financial reporting, the SEC has noted that companies should work with their audit committees and auditors to generally ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances.

 

To this effect, the SEC emphasized that COVID-19 may impact audit firm access to information and company personnel and discussed the need for companies to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with ASC 855 “Subsequent Events.” (See SEC Statement issued on February 19, 2020.)

 

Additionally, the SEC Disclosure Guidance published by the Division of Corporate Finance expanded on the SEC’s previous statements with respect to audits and companies’ financial statements. Pursuant to such guidance, companies should proactively address financial reporting matters earlier than usual, and companies and their auditors should consider the need to consult with experts to determine how COVID-19 may impact the company’s assets and, if applicable, should engage those experts promptly. In assessing the impact of COVID-19 with respect to financial statements, companies should also consider whether they anticipate any material impairments (e.g., with respect to goodwill, intangible assets long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the financial statements.

 

Given the uncertainties surrounding the COVID-19 outbreak and its potential impact, companies should ensure that their disclosure regarding the potential impact of COVID-19 benefits from the safe harbor for forward-looking statements set forth in the federal securities laws. BDCs—which are unable to rely on the safe harbor for forward-looking statements set forth in Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933—should ensure that such disclosure benefits from the judicially created bespeaks-caution doctrine.

 

Companies should confirm that any disclaimer regarding forward-looking statements is robust and complete and that it disclaims that the results and effects discussed in the relevant report may be materially different than actual events. Additionally, companies should confirm that any forward-looking statements (in risk factors or otherwise) clearly signal the prospective nature of such statements. Additionally, if the potential impacts of COVID-19 may be especially material, companies may want to include an express provision for the potential impact of COVID-19 in their general disclaimer regarding forward-looking statements.

 

In a public statement recently issued by the SEC (See SEC Statement issued on April 8, 2020), the SEC staff noted the importance of forward-looking disclosure, highlighting that robust forward-looking disclosure will benefit investors, companies (due to market digestion of such information), and the country’s collective effort to fight and recover from COVID-19. To that effect, the SEC recognized that public companies may be advised to limit their forward-looking disclosure to limit legal risk, but encouraged companies to avail themselves of the safe-harbors for forward-looking statements, stating that “(g)iven the uncertainty in our current business environment, [the SEC] would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”

Earnings Guidance

 

Generally, federal securities laws do not require a public company to update prior forward-looking statements, such as those contained in earnings guidance. However, public companies should review prior earning guidance and consider whether to modify, suspend or withdraw such guidance due to the impact of COVID-19. In the event of a material change to prior earnings guidance due to the impact of COVID-19, it may be appropriate for a company to update prior earnings guidance or to advise investors to no longer rely upon such guidance.

 

With respect to future earnings guidance, the SEC Disclosure Guidance also recognizes that public companies may be considering how to report the evolving impact of COVID-19 in light of unexpected nonrecurring charges and expenses. For companies that are considering the use of non-GAAP financial measures to explain the impact of COVID-19, the SEC Disclosure Guidance noted that companies should highlight why management finds a non-GAAP measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The SEC Disclosure Guidance also provides instructions for reconciling non-GAAP financial measures to preliminary GAAP results that either include a provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results, discussing that such non-GAAP measures should not be disclosed more prominently than the most directly comparable GAAP financial measure, and that such measures should be limited to non-GAAP financial measures that are actually reported to the company’s board of directors.

 

Finally, in the SEC’s public statement issued on April 8, 2020, the SEC noted that “(t)his quarter, earnings statements and calls will not be routine”, and encouraged public companies, in their earnings releases and analyst calls, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. The SEC indicated that detailed discussions of current liquidity positions and expected financial resources would be particularly helpful, and also highlighted that company actions and policies with respect to the impact of COVID-19 on operations and, if material, the impact of financial assistance under the CARES Act or other similar COVID-19 related federal and state programs would be helpful in earnings releases and analyst calls.