The Coronavirus (COVID-19) pandemic and the responses of governments and societies to the crisis are having a profound impact on public companies and capital markets worldwide. Such companies, including those in the United States and the European Union, must make real-time decisions regarding shareholder meetings, proxy statements, securities filings and other matters informed by relevant regulatory bodies. The following provides an in-depth examination of many of these issues.
The outbreak of the Coronavirus (COVID-19) pandemic, as well as governmental and societal responses, is having a profound impact on public companies and capital markets around the world. As circumstances continue to evolve on an hour-by-hour basis, the following is intended to provide a general list of disclosure requirements and guidance that public companies should consider.
Considerations for US Companies
COVID-19 has directly impacted the ability of many domestic public companies to complete annual reports on Form 10-K and has dramatically impacted annual shareholder meeting planning and proxy statement preparation. The anticipated impact of the virus on 2020 results is also leading public companies to withdraw or update guidance and revisit management discussion and analysis (MD&A), risk factor and any other forward-looking disclosure in their upcoming periodic reporting. Real-time decisions being made by reporting companies in response to this crisis may also trigger Form 8-K disclosure. General counsel and chief legal officers are also quickly revisiting insider trading plans and considering closing trading windows that might otherwise be open given the anticipated impacts of the virus.
SEC Relief Regarding Inability to Make Timely Exchange Act Filings
On March 25, 2020, the Securities and Exchange Commission (the SEC) issued an Order (the SEC Order) under Section 36 of the Securities Exchange Act of 1934 (the Exchange Act) providing conditional relief for certain publicly traded companies and other persons from specified obligations to file or furnish information to the SEC. As a result, public companies may seek an extension on their filing deadlines, if, as a result of the circumstances surrounding COVID-19, they are unable to timely file a Form 10-K, Form 10-Q, proxy materials or other specified Exchange Act filings.
The conditional relief is granted with regard to requirements to file or furnish materials with the SEC for the period from and including March 1, 2020, to July 1, 2020, and applies to obligations under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, 14A, 14C and 15D, and Exchange Act Rules 13f-1 and 14f-1, as applicable. Relief is not available with regard to persons required to file a Schedule 13D or amendments to Schedule 13D. The relief provides a 45-day extension to the original filing date.
In order to qualify for the relief, a company or person must be unable to meet the applicable filing deadline due to circumstances related to COVID-19. Further, if a company is seeking relief, that company should furnish the following information or exhibits to the SEC on a Form 8-K or a Form 6-K, as applicable, by the filing deadline:
A statement that the company is relying on the SEC Order
A brief description of the reasons why the company could not meet its filing obligations, which reasons should be based on circumstances related to COVID-19
An estimated date by which the company expects to meet its filing obligation
If appropriate, a risk factor explaining the impact of COVID-19 on the company’s business, to the extent such impact would be materialIf the company’s inability to meet its filing obligation is related to the inability of a person other than the company to provide an opinion, report or certification that is required in order to meet such filing obligation, a signed statement by such person stating the reasons why such required opinion, report or certification cannot be provided in time to meet the filing obligation, which the company shall have attached as an exhibit to the Form 8-K or Form 6-K as applicable.
When a registered company or other person relying on the relief makes a filing under the extended deadline, such filing should include disclosure including a statement that the filer is relying on the SEC Order and the reasons why the filer could not meet its filing obligations by the original filing date. A public company relying on the SEC Order would not need to file a Form 12b-25 so long as the filing is made within the time period prescribed by the SEC Order. In addition, those companies may further rely on Rule 12b-25 if they are unable to file a required report on or before its extended due date.
The SEC Order supersedes an Order issued by the SEC on March 4, 2020, that provided the same conditional relief from filing obligations but only covered the period from and including March 1, 2020, to April 30, 2020.
SEC Guidance Regarding Shareholder Engagement and Virtual Annual Meetings
Specifically, to the extent that a public company has not yet mailed and filed its definitive proxy materials, it should consider whether to include disclosures regarding the possibility that the date, time or location of the annual meeting may change due to COVID-19.
If a public company has already mailed and filed its proxy materials, a change in the date, time or location of such annual meeting, or a change from an in-person meeting to a virtual or hybrid meeting, can be effected by completing the following steps:
Issuing a press release that announces the change
Filing the announcement as definitive additional soliciting material on EDGAR
Taking all reasonable steps necessary to inform proxy service providers, the appropriate national securities exchange and other relevant agents and participants of such change.
The SEC staff will take the position that such actions, if taken promptly and sufficiently in advance of the meeting, constitute adequate notice to shareholders of the changes. In other words, the public company would not be required to take further action such as amending its proxy materials and mailing additional soliciting materials.
In addition, the SEC emphasized that the conduct of a company’s shareholder meetings, including the propriety of holding a virtual or hybrid meeting, is generally governed by state law and the governing documents of the company. Thus, public companies contemplating a virtual or hybrid meeting should, as an initial matter, confirm the applicable requirements under state law. If, due to hardships resulting from the outbreak of COVID-19, a shareholder proponent or representative is not able to present in person a shareholder proposal that otherwise meets the timeliness and procedural requirements for consideration at such meeting, the staff, pursuant to Exchange Act Rule 14a-8(h), will likely consider such hardship as “good cause“ for the proponent’s absence and will not consider such absence as a basis for exclusion of proposals submitted by the proponent for consideration at future meetings.
SEC Relaxing Signature Requirements of Rule 302(b) of Regulation S-T
On March 24, 2020, the staff of the SEC’s Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets announced that, in light of the COVID-19 outbreak, it will ease enforcement of the signature retention requirements of Rule 302(b) of Regulation S-T. Rule 302(b) requires that each signatory to an electronically filed document manually sign such document. The electronic filer must retain the manually signed document for five years and provide the SEC with copies of such document upon request. The staff stated that, although all persons subject to Rule 302(b) of Regulation S-T should continue to comply with its requirements to the fullest extent practicable, due to circumstances arising from COVID-19 the staff understands that some persons may experience difficulties satisfying such requirements.
Thus, the staff stated that it will not recommend enforcement action with respect to the signature requirements of Rule 302(b) if the following conditions are met:
A signatory retains the manually signed document and provides such document, as promptly as reasonably practicable, to the filer
The document specifies the date and time when the signature was executed
The filer establishes and maintains policies and procedures governing this process.
The statement also suggested that a signatory provide to the filer an electronic record (such as a photograph or PDF) of such document when it is signed, with the manual signature being provided to the filer as soon as practicable.
How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near- and long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources, changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)?
Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
Do you expect COVID-19 to materially affect the demand for your products or services?
Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
Disclosure responding to these questions and other narrative disclosure regarding the impact COVID-19 may be most appropriate in sections of an annual and/or quarterly report dealing with business operations and financial performance. Item 303 of Regulation S-K, which is incorporated into MD&A, requires a public company to discuss its financial condition, changes in financial condition and results of operations. It further requires a discussion of events, trends or uncertainties that are reasonably likely to have a material effect on its results of operations, liquidity or financial condition, or that would cause reported financial information not to be necessarily indicative of future operating results or financial condition.
Many companies are focusing on disclosures relating to liquidity, not only with regard to continuing operations but also with maintaining covenant compliance under credit facilities. The guidance addresses a broader scope of activities impacted by COVID-19. Companies are encouraged to consider the broader impact that may result from current and expected trends, including travel restrictions, interrupted supply chains, shelter-in-place requirements, paid leave for workers and closure of corporate offices. Each company should closely consider the trends that it can identify and the potential impact on business operations.
The guidance also addressed areas where COVID-19 will likely have an impact on the ability of public companies to report their earnings and financial results. Accordingly, public companies are encouraged to proactively address financial reporting issues. Where a GAAP financial measure is not available at the time of an earnings release because of COVID-19 related issues, companies may reconcile a non-GAAP financial measure to preliminary GAAP results that include either (1) provisional amounts based on a reasonable estimate, or (2) a range of reasonably estimated GAAP results. However, in filings where a GAAP financial measure is required (Form 10-K or 10-Q), companies should reconcile to GAAP without the provisional amounts or range of reasonably estimated results.
Risk Factor Disclosure
Many companies are reconsidering their risk factor disclosure in light of COVID-19.
Much like other risks to a business, the risks posed by COVID-19 and the response to COVID-19 depend upon the business of each reporting company and the range of harm that such incidents could cause to such company. Such risk disclosure should specifically consider the nature, extent and magnitude of the company’s exposure to the effects of COVID-19. While the materiality of COVID-19 risks and incidents at this point is likely unquestionable, the SEC staff generally expects public companies tailor and contextualize their risk disclosure and avoid using boilerplate or generic language that could apply to any company.
It is also important to remember the lessons learned from the SEC’s settled enforcement action against Mylan in October 2019. In that case, the SEC reinforced that it was misleading to portray things as “risks“ that are already actually occurring. Therefore, companies that are currently experiencing the impacts of COVID-19 on their operations, including through supply chain disruptions, should be clear not to characterize such impacts as “potential,“ if they are, in fact, actual.
Companies should also consider whether COVID-19 has a material impact on other risk factors that may have already been included as part of its Form 10-K disclosures. For example, the response to COVID-19 has led to a sharp rise in telecommuting that has placed a tremendous strain on company IT systems.
Risk factor disclosure is required in Form 10-Ks and may be included in Form 10-Qs as well. As discussed above, the SEC Order providing filing deadline extensions also asks companies to consider risk factor disclosure in the Form 8-Ks or Form 6-Ks that they file to perfect such relief, and several companies so far have included COVID-19 risk factors in the Form 8-Ks filed to announce the delay in filing their Form 10-Ks.
Other Disclosure Considerations
Corrections and updates. As circumstances related to COVID-19 change on an hour-by-hour basis, companies should consider whether they have a duty to correct statements if it is determined that they were untrue (or omitted a material fact necessary to make the disclosure not misleading) at the time (for example, if the company subsequently discovers contradictory information that existed at the time of the initial disclosure), or a duty to update disclosure that becomes materially inaccurate after it is made (for example, when the original statement is still being relied on by reasonable investors).
Forward-looking information. The SEC has emphasized that statements, to the extent they contain “forward-looking statements,“ would be subject to the safe harbor under Exchange Act, Section 21E. This would include statements regarding known trends or uncertainties regarding COVID-19.
Insider trading. Given the rapid pace of developments related to COVID-19, the SEC has repeatedly emphasized the obligations of reporting companies and corporate insiders with regard to trading in a company’s securities. On March 23, 2020, co-directors of the SEC’s Division of Enforcement issued a statement warning public companies with knowledge of material non-public COVID-19 risks or incidents to refrain from trading in their own securities and to implement procedures to prevent corporate insiders from trading. Many GCs and chief legal officers are considering event-driven blackouts for insider trading in light of COVID-19.
Regulation FD. The SEC staff has also repeatedly emphasized the prohibitions of Regulation Fair Disclosure (FD) with regard to selective disclosure of material non-public information and warned companies to avoid the selective disclosure of COVID-19 risks or incidents. Accordingly, companies should seek the advice of counsel prior to communicating with stakeholders about COVID-19 and its impact on business.
Form 8-K Disclosure Events Precipitated by COVID-19
Companies should keep in mind that the following actions taken in response to COVID-19 may trigger a disclosure obligation under Form 8-K:
Material drawdowns under lines of credit or other borrowing facilities (Item 2.03 –Creation of Direct Financial Obligations)
Plant closures or layoffs (Item 2.05 – Costs Associated with Exit or Disposal Activities)
Intra-period asset or goodwill impairment determinations (Item 2.06 – Material Impairments).
Takeover Considerations – Poison Pills
The drop in stock prices has many corporate raiders gearing up for an increase in their hostile takeover activities. Companies should analyze their vulnerability to potential activist threats and the adequacy of their takeover defenses. One solution includes putting a poison pill plan “on the shelf“ to deploy in response to an unwanted rapid accumulation of the company’s stock in the market or via tender offer. A poison pill, or stockholders‘ rights plan, is also designed to protect the company’s stockholders from coercive or abusive takeover tactics and to seek to ensure that stockholders will receive a fair and adequate price if the company is sold. A rights plan accomplishes this goal by giving negotiating leverage to a company’s board of directors and giving the board more control over the timing of responses to unsolicited bids. Because the adoption of a poison pill can adversely impact a company’s ISS rating, many companies prepare the documentation for a rights plan and put the plan “on the shelf“ to be adopted in the face of an active threat.
Impact on Capital Markets
For the first time since 1997, severe market volatility triggered multiple uses of circuit breakers that halted trading across the entire stock markets. In addition, for the first time in its history and in an effort to adjust to the COVID-19 pandemic, the New York Stock Exchange (the NYSE) moved to fully electronic trading on March 23, 2020, and closed the iconic Wall Street floor. The NYSE emphasized that all trading and regulatory oversight of all NYSE-listed securities will continue without interruption.
The Nasdaq, which is already a fully electronic stock exchange, published a response to the SEC Order on March 6, 2020, clarifying that Nasdaq-listed companies impacted by the pandemic that satisfy the conditions in the SEC Order will not be deemed to be deficient under certain Nasdaq rules.
The same issues apply in respect of companies listed in Europe generally, including on the Euronext markets, the London Stock Exchange and other European markets. Companies must continue to comply with their fundamental obligations and must continue to maintain systems and control disclosures in respect of inside information to the public as soon as possible through the correct regulatory channels.
Relief Regarding Inability to Make Timely Filings
In Europe, pursuant to the Market Abuse Regulation, which is applicable throughout the EU, any knowledge of the epidemic’s significant impact on activity, performance or outlook must also be disclosed immediately. Given the uncertainty surrounding the future development of COVID-19, several EU regulators recommended that issuers periodically re-assess their estimated and anticipated impact on their activity and outlook with respect to their materiality and/or amount and that the newly sensitive nature of certain information (e.g., geographical areas of activity, production, outsourcing, supply, employees concerned) be communicated when issuers present their annual results.
In Germany, stock corporations need to assess the extent to which actual and potential effects of COVID-19 need to be included in commercial financial reporting. It may be necessary to include a supplementary report in the appendix to the financial reporting or a risk report in the (consolidated) management report. The preparation of the annual financial statements may be delayed.
Guidance Regarding Annual Meetings
Considerable simplifications were agreed upon for German and French stock corporations, respectively, by the German and French governments for the annual general meeting. For example, in Germany the companies now have the entire fiscal year to hold the annual meeting instead of the eight months otherwise required. In France, an additional delay of up to three months has been granted to issuers expected to publish their accounts for the periods ended December 31, 2019, or, at the latest, one month after the end of the COVID-19 crisis period, as such sanitary crisis period is determined by the French government. In addition, in both countries, the annual meeting can now also be held virtually with no physical meetings being required. The conditions for convening shareholders and board meetings have also been simplified and the possibilities for appeals due to formal defects have been greatly reduced.
Analysis will need to be conducted in the context of fundraisings on European markets, where companies will need to have an understanding of the impact of COVID-19 on the company’s business to ensure that the prospectus includes all information that is material to an investment decision and to ensure that that information is accurate in all material respects. Regulators will expect risks to be specific to the issuer (and not simply generic boilerplate) and drafted on the basis of the material risks and strengths identified in due diligence. In volatile markets, issuers should also pay particular attention to their undertakings in relation to the information contained in the prospectus and any associated termination rights in underwriting agreements.
In this context, the German federal financial supervisory authority, for example, has issued a statement warning potential investors to review whether the information on COVID-19 contained in market letters and other advertising publications is accurate.
Companies with international operations should inform themselves about financing and other support made available by authorities in individual countries where they operate. For instance, in the United Kingdom, the government and the Bank of England have announced the Covid Corporate Financing Facility, under which the Bank of England will purchase commercial paper with a maturity up to one year issued by domestic or foreign companies that make a material contribution to the United Kingdom’s economy, provided they were in sound financial health before the crisis.
Further, the European Central Bank has announced that it will provide additional funds in the amount of EUR 750 billion via an emergency purchase program for bonds (Pandemic Emergency Purchase Programme, PEPP) in order to mitigate the economic consequences of COVID-19. The program runs until the end of 2020 and concerns securities of the public and private sector.
Other Disclosure Considerations
In the context of companies listed on the London Stock Exchange, issuers must bear in mind that their obligations remain even if there are significant falls in share prices across the market. The obligation to disclose price-sensitive information captures upward price changes as well as downward changes and so companies should consider whether they are better prepared for, or less susceptible to, the impact of coronavirus than the market understands (for example, because they are diversifying or re-purposing products or services).
Like all other companies listed on EU markets, German listed companies are obliged to publish information that is not publicly known and which has the potential to have a significant impact on the share price. The German federal financial supervisory authority published, with regard to COVID-19, that in case an issuer must assume with sufficient probability that existing forecasts will be significantly missed, it must be assumed that this qualifies as insider information. If there are identifiable effects on the net assets, financial position or results of operations such that the business figures deviate significantly from their relevant benchmark, this may be subject to a filing requirement. The German federal financial supervisory authority pointed out that due to the current strong price fluctuations, it may be more difficult to examine the considerable potential for influencing the share price.
In France, the French Securities regulator (Autorité des marchés financiers, AMF) also indicated that even if there is no precise information to be disclosed, issuers disclosing their outlook for 2020 to the market are invited to communicate which assumptions they used in preparing this outlook, in respect of the potential impacts of COVID-19. Also, it indicated that the impacts of COVID-19 should be considered, if necessary, in the financial statements for the year ended December 31, 2019, as a post-closing event requiring disclosures, and where applicable, on the issuers‘ future financial statements, for example, with regard to the valuation of their inventories.
Impact on Capital Markets
Following several 24-hour short-selling bans imposed, respectively, by the Italian, Spanish, French and Belgian securities regulators solely on certain issuers‘ stock that had fallen by more than 10% in the previous day, the same local securities regulators took in mid-March 2020 unprecedented emergency measures to ban short selling for periods ranging from one month (France, Spain, Belgium and Greece) to three months (Italy) on all stocks listed on the respective local markets over which such regulators have jurisdiction.
An emergency short-selling prohibition, for a period of one month (from March 18 to April 16, 2020) was, for example, enacted by the AMF of France on all transactions that might constitute or increase net short positions on shares admitted to trading on Euronext French trading venues for which the AMF is the relevant competent authority as well as to all related instruments relevant for the calculation of the net short position. The ban applies to transactions executed both on a trading venue or over the counter (OTC) and applies to any natural or legal person domiciled or established within the EU or in a third country. This measure does not, however, apply to market-making activities, trading in index-related instruments or short positions entered into hedge positions on convertible bond or subscription rights.
The pan-European securities regulator that oversees the work of the EU local securities regulator, the European Securities and Markets Authority (ESMA), for the first time ever considered in separate opinions that these extended-period proposed bans by, respectively, the Italian, Spanish, French, Belgian and Greek local securities regulators were “justified by current adverse events or developments which constitute a serious threat to market confidence and financial stability“ and “appropriate and proportionate to address the existing threat to market confidence“ in these respective national markets.
Separately, under the 2012 EU Short Selling Regulation, ESMA also and for the first time made use of its emergency powers under Article 28 of said regulation to temporarily lower short selling reporting thresholds throughout the EU. Considering that lowering the reporting threshold is a precautionary action that, under the exceptional circumstances linked to the ongoing COVID-19 pandemic, is essential for authorities to monitor developments in markets, ESMA required during a three-month period starting on March 16, 2020, the holders of net short positions in shares traded on an EU-regulated market to notify the relevant national securities regulator if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision (against 0.2% under existing regulations).
The temporary transparency obligations apply to any natural or legal person, irrespective of their country of residence. They do not, however, apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, to market making or stabilisation activities.
The German federal financial supervisory authority has also issued a note on the scope of the short-selling bans of other authorities in Europe and exempted instruments relating to the indices Euro STOXX 50®, STOXX® Europe 600, MSCI Europe, MSCI EMU and the Index Euro STOXX® Banks. The rationale is that the responsibility for these instruments lies with the German financial supervisory authority and other EU authorities may not include these instruments in their short-selling measures.
From a more general perspective, the German financial supervisory authority has announced that it will adapt its supervisory practices and measures in light of COVID-19. It is intended to adopt a flexible approach and relieve banks in particular at an operational level. This shall enable banks to focus on the operational maintenance of their business operations and on lending to the real economy.