In December 2019, COVID-19, a strain of coronavirus, emerged in Wuhan, China. The outbreak has become a global pandemic; the coronavirus has spread to over 80 countries and continues to disrupt and materially affect business operations worldwide. The effects and duration of COVID-19 remain unknown, raising concerns related to the disclosure obligations of companies subject to the U.S. Securities and Exchange Commission’s (SEC) rules and regulations.
The SEC has recognized the seriousness of the outbreak, including risks to the health and well-being of its own employees, becoming the first federal agency to ask its D.C. employees to work from home.1 In addition, the SEC has recognized the challenges the coronavirus outbreak presents to reporting companies. SEC Chairman Jay Clayton noted in a statement made in January that SEC staff would “monitor, and to the extent appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of the coronavirus.”2 He also noted that companies “need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855.”3 As a result of the uncertainty regarding the coronavirus, reporting companies must remain aware of and plan for the challenges that relate to their disclosure obligations.
Conditional Relief
On March 4, 2020, the SEC announced that it would provide conditional regulatory relief for filing obligations under the federal securities laws.4 Subject to certain conditions, the SEC order will allow certain public companies that are unable to timely file their periodic reports as a result of the coronavirus an additional 45 days to file disclosure reports that would have been due between March 1 and April 30, 2020. To be entitled to conditional relief, reporting companies must file a Form 8-K or, if eligible, a Form 6-K by the report’s original deadline, stating the following:
- Why the company is relying on the order
- The reasons why the company could not timely file the necessary material
- An estimate of when the material is expected to be filed
- If appropriate, include a risk factor explaining the impact of the coronavirus on the company’s business
The SEC order also grants relief from the requirement to furnish proxy statements, annual reports and other soliciting materials if a security holder has a mailing address located in an area where, due to the coronavirus, the common carrier has suspended delivery service and the company or other person making a solicitation has made a good faith effort to furnish the materials to the security holder.
Board of Directors
As is the case with any matter that affects a company’s operational results, management should be vigilant in keeping directors informed of the impact of coronavirus on the company’s operations. In addition, SEC regulations require companies to disclose the role of the board of directors in the risk oversight of the company and should provide information about the role of the board and senior management in managing material risks. Although these disclosure obligations were noted by the SEC in the context of cybersecurity, these obligations are likely to apply to the coronavirus outbreak where companies are facing uncertain and unfolding risks that can have a material impact.
Management’s Discussion and Analysis (MD&A)
Under Item 303 of Regulation S-K, a reporting company must provide information that it “believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.” Companies must disclose known trends, events or uncertainties that are reasonably likely to have a material impact on the company’s business. The SEC noted that how companies plan for and choose to respond to the uncertainty of events due to the coronavirus as they unfold can be material to an investment decision. Therefore, companies should consider whether their plans, uncertainties and projections regarding the coronavirus should be disclosed in the MD&A sections of their SEC reports.
Risk Factors
Risk factor disclosures in a company’s most recent annual report on their Form 10-K may need to be updated to address the coronavirus outbreak. These disclosures should be clear and illustrate how the coronavirus will have a material impact on their specific company’s operations. Risks related to the coronavirus may include disruptions to business operations from travel restrictions and customer behavior; quarantines of employees, customers and suppliers in areas affected by the coronavirus; inability to obtain financing; and closures of manufacturing facilities and warehouses. These disclosures should be specific to the disclosing company and not include generalized statements about the impact of the coronavirus. Notwithstanding this, these risks are likely to include more global ramifications caused by the coronavirus, such as a global economic downturn or market disruptions.
Annual Meetings
As an increasing number of companies are restricting travel, canceling conferences, rescheduling meetings and closing offices due to public health concerns, reporting companies must consider how to hold their annual shareholder meetings. A solution may be for companies to hold virtual meetings rather than physical meetings. To switch the location of an annual meeting to a virtual location, companies must file an amendment to their proxy statement announcing the change in location, consider shareholder notice requirements under state law and review the company’s bylaws for provisions regarding shareholder meetings. Most importantly, companies must verify that the state in which they are incorporated permits virtual meetings. Alternatively, companies may wish to consider relocating a shareholder meeting to their executive offices (if the meeting was otherwise to be held at a third-party site), where they will have more control over meeting logistics. If the company is moving the location of its meeting from a previously announced site, it will also have to comply with appropriate shareholder notice and proxy requirements related to the relocation.
Investor Communications
Many companies may receive inquiries from investors about the effect of the coronavirus on the company’s business. Under Regulation FD, when a reporting company discloses material nonpublic information to certain individuals or entities, the company must make a public disclosure of that information. Discussions of the effect of the coronavirus may occur during conference calls with analysts or investors. The SEC noted that when companies “do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly.”5 Thus, companies must be cautious about the information they provide to investors in informal communications or otherwise and consider whether public disclosure of these discussions is required under Regulation FD.
Restrictions on Trading
Reporting companies must be aware of restrictions on trading related to the coronavirus outbreak. Specifically, the SEC has stated that “where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to 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.”6 Therefore, companies must be active in implementing and continuing restrictions on trading during the period of the coronavirus. Again, when companies do disclose material information about the impacts of the coronavirus, they must take steps to avoid “selective disclosure and to disseminate such information broadly.”
Safe Harbor Disclosure
Under Section 21E of the Securities Exchange Act of 1934, companies can eliminate their liability for inaccurate forward-looking statements by including safe harbor language that identifies the factors that could cause forward-looking statements to be inaccurate. The SEC has noted that companies can take advantage of this safe harbor by providing forward-looking information that includes known trends or uncertainties surrounding the coronavirus.
Reporting companies must continue to be aware of the developments and effects of the coronavirus as it continues to unfold and as it relates to their continuing disclosure obligations under federal securities laws.
1Division of Corporation Finance Operating Status, Announcement, March 10, 2020, https://www.sec.gov/corpfin/announcement/division-corporation-operating-status
2Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure, Public Statement, January 30, 2020, https://www.sec.gov/news/public-statement/clayton-mda-2020-01-30
3Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality in China and Other Emerging Markets; Coronavirus — Reporting Considerations and Potential Relief, February 19, 2020, https://www.sec.gov/news/public-statement/statement-audit-quality-china-2020-02-19
4SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19), Press Release, March 4, 2020, https://www.sec.gov/news/press-release/2020-53
5SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19), Press Release, March 4, 2020, https://www.sec.gov/news/press-release/2020-53
6SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19), Press Release, March 4, 2020, https://www.sec.gov/news/press-release/2020-53