The novel coronavirus (“COVID-19”) continues to afflict companies in numerous ways. In the case of public companies, disclosure duties are implicated. No two companies are identical, so there is no “one-size-fits-all” disclosure prescription. Here, we present key disclosure issues to be addressed by public companies.
The Securities and Exchange Commission (the “SEC”) has taken an accommodating approach, offering relief by granting additional time for the filing of quarterly and annual reports with due dates prior to April 30, 2020 under certain circumstances – covered in other Foley alerts (click here for one such relevant alert, and click here for Foley’s Coronavirus Resource Center). Nevertheless, the substantive SEC disclosure duties remain in effect. The importance of addressing and fulfilling these duties thoughtfully is heightened when business and financial conditions undergo rapid and dramatic change.
This is a good time to review the full list of Form 8-K triggers appearing in the text of Form 8-K itself. COVID-19’s most immediate impacts may be obvious, implying speedy disclosure. For example, material contracts may require material amendments due to supply chain or distribution issues (Item 1.01 of Form 8-K), or the manufacturing facilities of an industrial company might need to be idled (Item 7.01 or 8.01). However, other more discrete impacts of COVID-19 may also require disclosure. For instance, a manufacturer with factories throughout the United States might not think it needs to file a Form 8-K just because a given state – say, California or Pennsylvania – issues a “shelter-in-place” order. Yet, if that company maintains a significant business presence in one of those states and the “shelter-in-place” order’s implications include the mandatory halting of that company’s “non-essential” business, then that company should consider whether to file a Form 8-K, issue a press release, or both. As another example, companies should also consider whether a draw on a previously disclosed credit facility is material, requiring disclosure pursuant to Instruction 3 of Item 2.03 (Direct Financial Obligations). General Instruction B(5) of Form 8-K reminds companies, “[w]hen considering current reporting on this form, particularly of other events of material importance pursuant to Item 7.01 (Regulation FD Disclosure) and Item 8.01(Other Events), registrants should have due regard for the accuracy, completeness and currency of the information in registration statements filed under the Securities Act which incorporate by reference information in reports filed pursuant to the Exchange Act, including reports on this form.” The text of Item 8.01 is especially relevant in a dynamic environment such as the present one. It allows companies to disclose “any events, with respect to which information is not otherwise called for by this form that the registrant deems of importance to security holders.” Our experience is that companies are using Item 7.01 or 8.01 (as applicable) of Form 8-K, a press release or a combination of both to update registration statements, periodic reports and guidance that otherwise might become or be alleged to have become materially misleading due to the passage of time and the occurrence of extraordinary events, such as of the impact that COVID-19 is having or expected to have on a company. COVID-19 is a “black-swan” event that begs Form 8-K and press release updating. Disclosure counsel should be consulted to help craft disclosures in these circumstances. The longer-term impacts of COVID-19 on a company may also call for eventual additional Form 8-K disclosures, such as material agreements or amendments (Item 1.01), the acquisition or disposal of assets (Item 2.01), the costs associated with exiting or disposing of businesses (Item 2.05), material impairments (Item 2.06), or specified officers temporarily turning over their duties to other persons (Item 5.02). Insolvency and bankruptcy situations are especially challenging, requiring help from disclosure counsel who have shepherded companies through those processes.
Public companies invariably include forward-looking statements (“FLS”) in their disclosure documents because certain “safe harbors” from liability may apply under Section 27A and Rule 175 of the Securities Act of 1933, as well as Section 21E Rule 3b-6 of the Securities Exchange Act of 1934. Currently, companies should ensure that cautionary statements provided in connection with the use of FLS properly outline how COVID-19 might bring about profound changes to the company, with the ultimate effect of materially altering projected outcomes or other FLS. Put another way, a company should ensure that, as to any FLS, it is properly warning the public that COVID-19, in itself, could negate that FLS. For most companies, updating cautionary statements about FLS to mention COVID-19 should not prove burdensome. Some companies may take the view that prior cautionary statements about FLS mentioning “pandemics” or “natural disasters” (or a “changing economic environment”) may suffice to contemplate COVID-19’s prospective impact. However, these companies should be mindful that relying on existing disclosure should not outweigh considering a “refresh” of that disclosure with assistance from disclosure counsel.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is another core area of disclosure. MD&A has long been one of the more rigorous tasks of periodic reporting, as companies must discuss many crucial topics, including financial condition, changes in financial condition and in results of operations over time, as well as: (i) known trends, demands, events, or uncertainties that will impact liquidity in a material way; (ii) material commitments for capital expenditures; (iii) known material trends with respect to capital resources; (iv) unusual or infrequent events or transactions, or any significant economic changes, which materially affected the amount of reported income from continuing operations; and (v) known trends or uncertainties that will have material impact on net sales or revenues or income from continuing operations. Significantly, MD&A presentation is both backward-looking and forward-looking. Therefore, a company’s MD&A must address how COVID-19 is expected by management to affect the business. These disclosures should include the availability and use of credit facilities and the impact of business interruption, if applicable, and guidance about future revenues and earnings should be analyzed for possible modification or withdrawal. Our experience to date is that companies are beginning to either not provide guidance or are withdrawing existing guidance in these early stages of the epidemic. Even specific “line items” to tabular disclosure of contractual obligations required by Item 303 of Regulation S-K – e.g., long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations – can be affected, in isolation, by COVID-19. Such impacts may need to be reflected on a granular level in the MD&A. Again, when in doubt or to the extent a specific point of compliance arises, companies should be asking disclosure counsel for review, analysis, and guidance.
Risk factors are required in Form 10-K and are required to be modified, to the extent material, in each Form 10-Q. Housed primarily under Item 105 of Regulation S-K, requirements for proper “risk factor” disclosure quickly go beyond the “letter of the law” and require careful, tailored analysis by each company. In this connection, SEC Chairman Clayton is emphasizing that risk factors related to COVID-19 should be as “robust as practicable in light of the circumstances” because “[h]ow companies plan and respond to the events as they unfold can be material to an investment decision.” Indeed, several companies have already been the subject of shareholder class actions for allegedly insufficient COVID-19 disclosures (click here for our previous client alert). As companies prepare their next Form 10-K or Form 10-Q, they clearly should be updating risk factor disclosure to take into account additional or increased risks due to the COVID-19 pandemic. Given that the current COVID-19 pandemic may either (a) reignite after an initial phase, or (b) be substituted by another similar pandemic in the future, companies should think ahead to how they are substantively preparing for such contingencies, and disclosing how similar future events may affect their businesses.
In summary, it is important for public companies to take additional steps now in order to mitigate their risk of suffering negative impacts from COVID-19. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.