The fallout from the 2019 coronavirus disease (COVID-19) outbreak has significantly impacted a number of global industries and financial markets, causing uncertainty and disruptions that continue to evolve.
SEC Conditional Regulatory Relief on Filing Obligations
On March 4, 2020, the U.S. Securities and Exchange Commission (SEC) issued an order providing “conditional” guidance and relief for certain reporting companies affected by the COVID-19 outbreak. The SEC order provides reporting companies with an additional 45 days to file annual and quarterly reports and proxy statements that would otherwise have been due between March 1 and April 30, 2020. This extension also includes certain other reports and filings due under Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, 13D-G (with exceptions), 14A, 14C and 15D of the Securities Exchange Act of 1934, and Exchange Act Rules 13f-1 and 14f-1, as applicable, and, except for ownership change filings under Section 13.The order provides that:
- Relief is applicable to reporting companies unable to meet a filing deadline due to circumstances related to COVID-19 issues.
- A company seeking relief under the order must furnish to the SEC a Current Report on Form 8-K (or Form 6-K if applicable) by the later of March 16 or the original filing deadline of the report clarifying:
- The reasons the report could not be filed on a timely basis;
- The estimated revised filing date of the delayed report; and
- Where appropriate (based upon materiality), a risk factor explaining the impact of the coronavirus on the company.
- In situations where the report is delayed as a result of a third-party opinion, report or certification, the Form 8-K should attach a statement signed by such third party explaining the reasons the third party is unable to furnish the required opinion, report, or certification on or before the date such report must be filed.
- The order provides relief for reporting companies that cannot deliver proxy materials to a stockholder after making a good faith effort for such delivery if the stockholder has a mailing address located in an area where delivery service customarily used by the company has been suspended due to the coronavirus outbreak.
One of the effects of the outbreak is the decision by many companies and organizations to cancel large gatherings or adjust the venue of gatherings. This has resulted in many reporting companies having concerns about the need to revisit the historic or designated location of their annual meetings, including a possible change to a virtual meeting. The timing of these potential challenges is heightened by the fact that many companies have either mailed or will be mailing shortly their annual meeting proxy materials. Reporting companies in this situation should note:
- Many reporting companies are organized in Delaware and Delaware law provides a path to conduct a virtual annual meeting (assuming the company’s bylaws do not prohibit it) so long as the company: 1. establishes reasonable measures to verify voter identity; 2. provides for stockholder participation in the annual meeting and the ability to vote; and 3. maintains customary records of the votes and other actions taken at the meeting.
- Companies should consider whether their proxy statement disclosure should highlight the possible need to alter the location of the annual meeting based upon various future factors including those that may be beyond the control of the company.
- Reporting companies needing to change the annual meeting location after the proxy materials have been provided to stockholders can issue a press release and file supplemental materials with the SEC to alter the location or convert to a virtual meeting. A company changing an annual meeting location or converting to a virtual meeting should consult with legal counsel and other consultants, such as its transfer agent, regarding applicable state laws and SEC rules and regulations.
Other Practical Disclosure Guidance Related to COVID-19
Under the SEC’s principles-based disclosure requirements, the SEC is recommending that reporting companies provide thoughtful disclosure regarding the impact of the COVID-19 outbreak on their business operations and results of operations. The following are practical takeaways to consider in connection with the evolving landscape of public disclosure disclosure related to the COVID-19 outbreak:
- MD&A, Risk Factor, Earnings Disclosures. Appropriate MD&A, risk factor, and earnings disclosures regarding the COVID-19 outbreak will depend on customary factors that are circumstance specific including operational questions such as where the company operates and in which industry the company operates. Many annual and quarterly reports filed with the SEC in the first quarter of 2020 have contained varying and company-specific disclosures related to the COVID-19 outbreak as follows:
- MD&A disclosure has not only been quantitative and qualitative comparisons between historical periods, it has also included adjustments to future expectations;
- Risk factor updates evidence material changes from prior quarters and have focused on challenges related to international operations (particularly China), adjustments to future plans, and effects on operations such as supply chain; and
- Earnings disclosures have focused on disruptions that have led to adjustments to guidance or projections, as well as forward-looking guidance regarding the overall anticipated effects that the outbreak may have on the business or earnings in the future, if any. Certain industries, such as health care, may actually have positive earnings guidance as a result of increased demand relating to services or products addressing the COVID-19 outbreak.
- Certain Other SEC Guidance Related to the Coronavirus Outbreak.
- In January 2020, the SEC proposed updates to MD&A, Item 303(a)(3)(ii), that would require reporting companies to disclose known events that are reasonably likely to cause a material change in the relationship between costs and revenues. This is helpful guidance in light of the evolving landscape of the COVID-19 outbreak.
- In recent dialogues with U.S. audit firms, the SEC:
- Acknowledged that the effects of the coronavirus outbreak continue to result in a dynamic situation that may be difficult to assess or predict but cautioned that reporting companies must respond to events as they unfold because the circumstances may be material to an investment decision;
- Urged reporting companies 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; and
- Requested that reporting companies ensure that the quality or timing of their audit is not compromised by factors related to the disruptions caused by the COVID-19 outbreak or initiate dialogue with the SEC to the extent this is a concern.
- The SEC has consistently encouraged reporting companies to initiate dialogue with the SEC regarding relief or guidance where a company has questions regarding the potential effects of the COVID-19 outbreak, including potential subsequent event disclosure.
Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.