SEC disclosures, meeting logistics and filings.
COVID-19 has raised a number of issues specific to public companies that file reports with the U.S. Securities and Exchange Commission (SEC). These matters include the application of SEC disclosure requirements to the COVID-19 situation, logistics for upcoming shareholder meetings and administrative challenges in complying with SEC requirements.
There are many areas where existing SEC rules, while not expressly mentioning pandemics, could require disclosure of the impact of COVID-19. Such disclosure considerations could arise in the context of an annual or quarterly report. Or there could be an issue that requires more immediate disclosure through a current report on Form 8-K (or, if a foreign private issuer, a Form 6-K) or a press release. Depending on circumstances, COVID-19 disclosures also may need to be discussed in registration statements, proxy statements or information statements. Recently, the SEC staff issued guidance on disclosure and other securities law obligations that companies should consider with respect to COVID-19.
Here are key issues board members should consider in the coming days, weeks and months.
Risk Factors. With the impact from COVID-19 growing rapidly, companies may become increasingly aware of additional ways in which the pandemic is posing specific risks beyond what they may have previously disclosed. It would be useful for companies to begin drafting more detailed risk factors relating to COVID-19 for inclusion in their next SEC filing that requires risk factors, such as an upcoming annual or quarterly report, or, if the company will be offering securities in a public offering, a registration statement. To keep the markets updated generally, a company might determine it appropriate to include a new or modified COVID-19 risk factor in a current report.
Forward-Looking Statements. Companies disclosing how COVID-19 may affect their future performance should consider framing their discussions to take advantage of the safe harbor for forward-looking statements set forth in the securities laws. For example, when discussing COVID-19 matters, companies may want to include an explanation, indicating that actual results may be materially different and using words such as “believes,” “expects” or “hopes.” Companies may also want to expressly include in their more general discussions the impact of COVID-19 as a factor that could impact actual results.
Management’s Discussion and Analysis. Management’s discussion and analysis (MD&A) must include information that a company “believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.” With COVID-19 impacting so many companies, it is important for the MD&A to not only discuss COVID-19 as a known trend or uncertainty, but also provide management’s perspective on the type and extent of the pandemic’s effect on the company, to the extent material. For example, has the company experienced supply chain issues, and are those issues anticipated to be ongoing? How has COVID-19 affected liquidity? Has the company drawn down on any bank facilities? Has the company closed any locations? If the company switched its workforce to telecommuting, has there been any reduction in productivity? Is the company party to contracts with force majeure provisions that are or may be triggered by the COVID-19 pandemic and, if so, is that having a material impact on the company’s business?
Financial Statement Footnotes. Companies should discuss with their accountants whether COVID-19 disclosure is needed as part of their financial statement footnotes, such as a subsequent event footnote.
Business. To the extent a company is filing a report or registration statement with the SEC that requires a business description, the company will need to consider whether additional or revised disclosure is needed because COVID-19 materially changed its business. For example, did the company exit any business line? Are some segments of the company’s business impacted more than others? Did the company lay off workers as a result of a business slowdown? Were any growth initiatives put on hold?
Litigation. Litigation arising out of COVID-19 may also require disclosure. For instance, it is possible that some companies might face class action lawsuits alleging failure to protect customers or workers from the virus.
Earnings Releases, Earnings Calls and Guidance. Companies should consider addressing the impact of COVID-19 in upcoming earnings releases. They should also be prepared to answer analysts’ questions about COVID-19 on their earnings calls. It may be useful to script and practice answers to such questions in advance. Companies that provided guidance to investors should consider updating that guidance, or advising investors to no longer rely on that guidance, to the extent their guidance has materially changed based on more current information.
Regulation Fair Disclosure. Companies may be fielding many questions regarding COVID-19 because of the pervasive effect it is having on the global economy. Public companies must be careful not to disclose material non-public information about how COVID-19 is affecting them only to some investors without disclosing it to the markets generally. Companies can avoid selective disclosure by making such information publicly accessible through a press release or a current report on Form 8-K available on the SEC’s filing database, EDGAR.
Insider Trading and Stock Repurchases. Directors, officers and employees of public companies should not be trading in securities while in possession of material, non-public information. If a company becomes aware of a COVID-19 development that may have material ramifications to the company, its directors, officers and employees, as well as the company itself, should generally avoid trading in the company’s securities until that development has been publicly disclosed. Companies may need to consider whether any special black-out period should be implemented to prevent insider trading when there is material information that has not been disclosed.
Controls and Procedures. Because the COVID-19 pandemic is affecting so many aspects of business, companies should consider making COVID-19 an express part of their disclosure controls and procedures. Companies may also need to assess whether COVID-19 is having an impact on internal controls over financial reporting.
Shareholder meeting logistics
Companies planning for shareholder meetings may be considering changing the date or location of their annual meeting as a precaution in light of COVID-19. In addition, if the law of the jurisdiction of formation permits a company to conduct a virtual meeting, it may want to replace or supplement an in-person meeting with an online meeting that shareholders may attend remotely. Companies considering a virtual meeting should also confirm that nothing in their governing documents or applicable law restricts their ability to convene a virtual meeting.
SEC staff has issued guidance for conducting annual meetings in light of COVID-19 concerns. According to the guidance, the staff takes the position that if a company has already mailed and filed its definitive proxy materials, it may notify shareholders of a changed date, time or location for its annual meeting without mailing additional soliciting materials or amending its proxy materials if, promptly after making its decision, the company:
• Issues a press release announcing the change.
• Files the press release with the SEC as proxy soliciting material.
• Takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as proxy service providers) and other relevant market participants (such as appropriate securities exchanges) of such change.
Companies that have not yet mailed and filed their definitive proxy materials should consider, based on their particular facts and circumstances, whether to include disclosure regarding the possibility that the date, time or location of the annual meeting may change due to COVID-19, according to the guidance.
Also, if a company plans to conduct its shareholder meeting either as a virtual meeting (conducted solely through the internet or other electronic means) or as a hybrid meeting (allowing shareholders to participate either in person or through electronic means), the company should notify shareholders, intermediaries and other market participants of such plans in a timely manner. Companies must disclose logistical details of the virtual or hybrid meeting, specifying how shareholders can remotely access, participate in and vote at the annual meeting. To the extent that the company has not yet filed and delivered its definitive proxy materials, such disclosures should be in the definitive proxy statement and other soliciting materials. Companies that have already filed and mailed their definitive proxy materials would not need to mail additional soliciting materials (including new proxy cards) solely for the purpose of switching to a virtual or hybrid meeting if they follow the steps outlined above.
Companies that use e-proxy to make proxy materials available through the internet must post additional solicitation proxy materials, including those addressing changes in meeting logistics, on their proxy voting websites. Companies making such changes after filing and mailing their definitive proxy statements should also consider whether their governance documents or governing laws have any additional notice requirements.
The guidance also encourages companies to permit the proponents or their representatives to present their proposals through alternative means, such as by phone, during the 2020 proxy season if feasible under governing law. When a shareholder proposal is included in a company’s proxy statement, SEC rules require the proponent or representative to attend the annual meeting and present the proposal unless there is “good cause” not to do so. The consequence of not satisfying this requirement is that the company may exclude any proposal submitted by that shareholder from its proxy statements for meetings held in the following two years. The guidance specifies that failure to attend the meeting as a result of COVID-19 will be treated as good cause.
SEC exemptive order
After issuing an exemptive order in early March to provide relief to public companies and persons required to make filings with respect to public companies unable to meet filing deadlines. The SEC the issued a new order extending the relief until July 1, 2020.
Any company relying on the order must furnish to the SEC a current report on Form 8-K by the original filing deadline for the report. This interim disclosure must state that the company is relying on the order and briefly describe the reasons why the company could not file the required document on a timely basis. In addition, the forms must state the estimated date by which the company expects to file the required document and, if material, include a risk factor explaining the impact of COVID-19 on the company’s business. If the required documents cannot be filed on time because of the inability of a third person to furnish a necessary opinion, report or certification, the forms need an exhibit signed by such person explaining the reason for the delay. Thereafter, the required document must be filed with the SEC no later than 45 days after its original due date and must disclose that the order is being relied on and the reasons why the required documents could not be filed on a timely basis. A separate Form 8-K or Form 6-K is required to be filed with the SEC for each document that is not able to be filed on a timely basis because of COVID-19.
A company relying on the order will remain eligible to use Form S-3, the SEC’s streamlined registration statement, if the company was current and timely as of the first day of the relief period and if it files the required documents within 45 days of its original filing deadline. A company relying on the order will also remain eligible to use Form S-8, the SEC’s registration statement form for employees and directors, if it was current as of the first day of the relief period and if it files the required document within 45 days of its original filing deadline.
The order also provides relief for the obligation to furnish materials to security holders when mail delivery is not possible. The security holder must have a mailing address located where the common carrier has suspended delivery of the type or class usually used for the solicitation as a result of COVID-19 and the company or person making the solicitation has made a good faith effort to furnish the soliciting materials to the security holder to qualify for the relief.
Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP.