The uncertainties, disruptions and dynamic circumstances created by the COVID-19 pandemic present numerous corporate reporting challenges. The Securities and Exchange Commission (SEC) recognizes the burdens companies face in meeting reporting requirements under these circumstances and has taken steps to alleviate those burdens.
The SEC also reminds public reporting companies of the need to assess potential impacts of the COVID-19 outbreak on their business and operations, and to keep investors and markets informed of material developments. SEC Chairman Jay Clayton has asked the SEC’s staff to monitor issuers’ disclosures regarding the current and potential impact of COVID-19.
The SEC’s advice should be heeded; doing so may protect against costly securities-related litigation. These circumstances highlight the need for issuers to focus on the following disclosure-related areas.
Management Discussion & Analysis (MD&A)
In filings requiring an MD&A, Item 303 of Regulation S-K, requires an issuer to identify any known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. It also requires an issuer to describe any known trends or uncertainties that have had, or that the issuer reasonably expects will have, a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.
In preparing its MD&A, an issuer will need to focus on the potential impact the COVID-19 pandemic can reasonably be expected to have on its future results of operations and liquidity.
Issuers should consider whether prior earnings guidance should be revised or withdrawn and whether the uncertainties presented by the COVID-19 pandemic are so significant that they should suspend providing earnings guidance.
Issuers should consider whether their most recently disclosed risk factors need to be supplemented to include a disclosure of the specific risk to them of the COVID-19 pandemic. This disclosure needs to be tailored to an issuer’s specific situation, given the admonition in Item 105 Regulation S-K to not present risks that apply generically to any issuer.
Subsequent Event Financial Statement Disclosure
A joint statement on coronavirus reporting considerations by SEC Chairman Jay Clayton, SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia and PCAOB Chairman William D. Duhnke III in February emphasized the 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, Subsequent Events.
Securities-related litigation is typically triggered by a drop in stock price and based on allegations that the company, directors and officers committed fraud on the market by omitting or misstating material facts necessary to adequately inform investors in their purchasing decision. Given that securities-related lawsuits have remained strong for decades, the COVID-19 pandemic may prove to be another avenue for a rash of new litigation if companies are not careful about making appropriate disclosures.
Safe Harbor Disclosure Regarding Forward-Looking Statements
Issuers should consider whether they need to supplement the safe harbor language they use in their securities filings and other public statements to avail themselves of the protection provided by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. It may be appropriate to include the COVID-19 pandemic in the list of the risks and uncertainties that may cause actual results to materially differ from those contemplated by the forward-looking statements.
While there is no bright line rule to determine whether a company has successfully availed itself of the safe harbor other than court guidance that boilerplate language will not suffice, every analysis is context-specific and COVID-19 disclosures will not be any different. As with any cautionary statements, COVID-19 statements must be substantive and tailored to specific future projections, estimates or opinions of a business.
More Frequent Updates May Be Required
Companies should work closely with corporate counsel and management to identify potential risks and convey them specifically to investors and the market as the pandemic evolves. Ignoring or underestimating the dynamic situation caused by the COVID-19 pandemic is risky. The SEC has said as much: “Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.”
For updates to be an effective protection against litigation risk, they need to be broadly distributed – the goal is to keep all investors informed. At least in the foreseeable future, the usual once-and-done may not be sufficient to inform investors and the market of material risks to a business as a result of the COVID-19 pandemic.