Extended Filing Deadlines – The Securities and Exchange Commission (SEC) issued an order on March 4 providing conditional filing relief for companies affected by the new coronavirus. The order gives such companies an additional 45 days from the original due date to file their Exchange Act reports (as enumerated in the order) that are otherwise due between March 1 and April 30. Among other conditions, any company claiming this relief must be unable to meet the filing deadline due to coronavirus-related circumstances and must furnish on Form 8-K or Form 6-K by the later of March 1 or the original filing deadline a summary of why the relief is needed in its particular circumstances and the estimated filing date. The full requirements are detailed in the order, a copy of which is attached here. The related SEC release also includes a reminder from the SEC chairman to provide investors with appropriate coronavirus risk-related disclosure.
Updating Disclosures/Regulation FD Compliance – With circumstances changing daily regarding the spread and impact of measures to contain COVID-19, public companies will need to consider their obligations for keeping their public disclosures current regarding the effect on their business. There are various itemized rules, some of which are discussed in more detail below, that may apply when a company is filing a required annual or quarterly report or a registration statement, prospectus or proxy statement, and that trigger an interim filing on Form 8-K or 6-K. Many of these disclosure requirements turn on whether the impact of the coronavirus is “material” to the aspect of the business covered by the item as of the time of the filing. In addition, companies that are in the market buying or selling their securities have an obligation to keep this information current between required filings, and insiders should not be permitted to trade unless all material nonpublic information has been disclosed. Because the situation is changing so quickly, stock prices are experiencing extreme volatility and investors and other stakeholders are clamoring for information on what may happen next. Companies are also under increased pressure to provide more frequent private and public updates absent a specific securities law requirement to warn or reassure these groups as to how the company is faring.
With these pressures, adequate risk factor disclosure can cover the gap between quarterly reporting while companies continue to assess daily events relating to the coronavirus and how they are impacting the business and whether investors can continue to rely on prior discussions of trends, expectations and guidance. However, once there is greater certainty about the specific impact and likelihood and magnitude of these challenges, companies may need to update the disclosure that had been provided regarding business, management’s discussion and analysis (MD&A), liquidity and financial resources, and other areas before the next required filing. Voluntary disclosures along these lines should be carefully considered, as they will raise questions in hindsight as to when each disclosure was made and the ensuing impact on stock price.
SEC Chairman Clayton said in a statement on Jan. 30, “This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers. However, how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”
Risk Factors and Forward-Looking Statements – Companies should review their existing risk factors, cautionary statement regarding forward-looking statements and similar disclosures to assess whether they continue to adequately caution investors as to how results may differ from previous expectations as a result of the pandemic. While much is still unknown, disclosure should be developed using disclosure controls and procedures that have been adapted to fully assess and identify the COVID-19 risks that are particular to the company’s industry, business and region, including anticipated supply chain, employee, customer demand, liquidity and impairment issues. In addition, statements of forward-looking information should be phrased using words such as “expects,” “believes,” “estimates” and “anticipates” to make it clear that the company seeks to take advantage of the safe harbor for forward-looking statements set forth in Section 21E of the Securities Exchange Act of 1934, as amended, with these statements subject to the accompanying appropriately tailored cautionary language.
Some companies may have last filed a Form 10-K or Form 10-Q (or equivalent) a few months or several weeks ago, and even those that have filed more recently may not have anticipated the latest developments. Over the past several days, some companies have filed a Form 8-K to either specifically add or update disclosure under the “Risk Factor” heading. The market is clearly already reflecting the overall impact of the coronavirus, so an interim filing to add general disclosure is generally not needed in order to provide the total mix of information relevant to investors. Instead, the focus with risk factor disclosure should be on whether new or more specific information is needed to caution against future developments that may not be apparent to investors.
Management’s Discussion and Analysis (MD&A) and Other Disclosure – MD&A is provided each quarter to disclose known trends or uncertainties “that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” and “that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.” COVID-19 could have a range of effects to be discussed within MD&A or related disclosure under the “Business” or “Legal Proceedings” sections where required in certain filings. Various triggering events under Form 8-K or Form 6-K could also occur as a result of the pandemic.
Actual or potential events that might be considered for disclosure under these requirements include significant supply disruptions, contract terminations, drop-off in demand due to closures (particularly in the hospitality, travel, entertainment and retail industries), changes in liquidity or debt arrangements (such as revolver draws, covenant breaches and defaults), lawsuits regarding allocation of risk and expense, illness of key executives, impairments and other charges due to reductions in force, shutdowns and valuations, and material changes in compensation arrangements.
Guidance – Companies providing guidance will want to pay particular attention to providing risk factors and other cautionary disclosures specific to the ways that COVID-19 may cause actual results to differ from these projections. A few companies have attempted to quantify the expected impact, while most others have either generally said that while they have considered the impact in formulating their guidance, actual results will likely differ due to the significant uncertainty surrounding the pandemic. A handful indicated that their guidance “excludes” the impact of COVID-19.
There is no statute requiring companies to update guidance, but courts have found that there is an obligation to do so in some circumstances. Some companies are providing updates to guidance, to the extent they have that level of certainty, or specifically announcing that their guidance can or may no longer be relied upon. So far, these are mostly in cases involving disclosure of some of the potential events listed above, such as a government restriction on continued operations, and if the company is otherwise providing an interim update it is likely prudent that the disclosure also specifically disclaim reliance on previously provided guidance.
Regulation FD Compliance – In addition to public disclosures, many companies are being asked by their business partners, lenders, landlords, customers and employees for reassurance of their financial wherewithal and contingency plans to weather the crisis or how their interests will be negatively impacted. If these responses provide material updates about the company’s challenges, prospects and actions taken, unless they are made on a confidential basis, they could violate Regulation FD. The need for more flexibility in talking to these groups could also make the best course of action a public update through a Form 8-K, Form 6-K or press release. Otherwise, absent a confidentiality agreement, responses may need to be narrowly tailored to specific questions or limited to publicly available information, such as balance sheet information, to the extent it remains current.
Share Repurchases and Insider Trading – In the quest to make lemonade, some issuers and insiders are viewing extremely low stock prices as an opportunity. Whether trading should be permitted for these transactions depends on traditional notions of whether all material information about the impact of the coronavirus on the company (or any other topic) is publicly available. In many circumstances, we expect that it could be very difficult to conclude that the market has all material information about any particular company without supplemental disclosure.
Several Form 8-K filings over the past few days have disclosed the authorization by boards of directors of stock repurchase programs to expand repurchase capacity and provide flexibility in light of market volatility. While these programs do not necessarily require disclosure updates between quarterly filings, a public announcement may be helpful for investors to be fully informed of the various factors impacting the stock price along with the daily market volatility.
In addition to disclosure, the board and management will also need to carefully consider liquidity issues and whether share buybacks are the best use of cash in light of the prolonged impact the new coronavirus is likely to have on the company and economy as a whole. These are also decisions that may be questioned in hindsight and may benefit from careful documentation of materiality considerations and available financial analysis.
Directors, executives and other employees subject to the company’s insider trading policy may also be interested in buying stock. Some companies have already experienced violations of insider trading policies by employees trying to take advantage of quickly moving market conditions. We recommend reminding employees that trading windows are closed, that restrictions apply to family members and other affiliates, if applicable, and, if windows are open, that they may close unexpectedly and any preclearance procedures must be closely followed. For directors and officers, consideration should also be given as to how these transactions might be perceived in light of the economic hardship that others are experiencing in connection with the company’s decline in business.
