The rapid spread of the novel coronavirus disease 2019 (COVID-19) and global uncertainty surrounding government and market responses have caused financial market volatility to soar to levels not seen since the 2008 financial crisis. US public companies are dealing with a myriad of issues and questions about disclosure and other securities law obligations relating to COVID-19 and its related business and market disruptions.
This alert discusses several key considerations for public companies and provides guidance for helping to manage these risks and uncertainties presented by the COVID-19 crisis. We encourage our clients to check Baker McKenzie’s Coronavirus Resource Center for other analysis and resources designed to help understand, prepare and respond to the challenges posed by COVID-19 and its impact on capital markets and the economy.
Some Key Questions for Consideration
What should my company be disclosing now?
- Earnings Guidance. Companies that provide earnings guidance should review their existing guidance to see if it continues to be accurate. Depending on their circumstances, particularly if developments arising from COVID-19 make it likely that the company will not make its prior guidance or analysts' expectations, a company may want to "pre-release" earnings information earlier than it would otherwise do so, revise or even withdraw prior guidance. Some companies are holding mid-quarter investor calls to discuss their situation. A number of companies have withdrawn their prior 2020 earnings guidance and stated they will not be giving further guidance due to the COVID-19 related uncertainties.
- On March 25, 2020, the United States Securities and Exchange Commission (SEC) provided new guidance (Guidance) for these types of disclosures during this time (see CF Disclosure Guidance - Topic No. 9), including use of non-GAAP financial measures. The SEC noted in this guidance that assessing the evolving effects of COVID-19 and related risks will be a facts and circumstances analysis and that disclosure about these risks and effects, including how the company and management are responding to them, should be specific to a company’s situation.
- Other Disclosures. Other disclosure areas for consideration include risk factors, MD&A disclosures, liquidity and financial resources, legal proceedings, description of business updates and financial statement disclosures, among others, in upcoming filings. The SEC's Guidance also addresses preparing these and other disclosures during this time. As companies try to determine how COVID-19 may impact their businesses, they should consider the following, and refer to the SEC's Guidance for additional details and questions for consideration:
- current and future impact on financial condition and results of operations;
- impact on capital, financial resources and overall liquidity position;
- effect on assets and ability to timely account for assets;
- material impairments, increases in allowances for credit losses, restructuring charges, etc. likely to have a material impact on financial statements;
- adverse effects of remote work arrangements on maintenance of operations;
- challenges in implementing business continuity plans;
- effect on demand for products or services;
- impact on supply chain or distribution methods; and
- impact of travel restrictions and border closures.
The SEC encouraged companies to provide disclosures that would allow investors to see through management's eyes the current and anticipated impact of COVID-19 and proactively update disclosures as circumstances change.
In accordance with SEC rules, a company must be sure that any statements made are not materially misleading or omit information that would make the statement materially misleading.
Should I change my company's insider trading policy and practices?
- The COVID-19 pandemic presents unique challenges to companies due the vast array of employees that may possess material non-public information. Material confidential financial information is typically only known by directors, officers and other high-level corporate insiders. However, as COVID-19 is affecting inventory, supply chain, headcount, facility or store shutdowns, among other matters, many employees who have not historically been considered insiders could possess material non-public information. Additionally, while teleworking, many employees may have access to more financial data and company data than usual due to the unique nature of working remotely for the first time for many of them.
- The SEC has reminded all companies and related individuals to guard against insider trading during this unique time, and the Guidance also addresses this topic. The SEC noted "Companies and other related persons need to consider their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws. For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public."
- Companies should review their insider trading policies to consider if the policy is broad enough to clearly cover operational and business information that may be affected by COVID-19. Companies should consider which employees or groups of employees may have access to COVID-19 related material non-public information and consider whether to circulate the policy to that group and require confirmation of receipt and reading of the policy. Additionally, companies may want to review their pre-clearance policy for trading in company securities, including the scope of persons to whom the policy applies, and mandate pre-clearance to a larger universe of employees. Alternatively, a company may want to consider imposing an event-specific trading blackout period, during which all, or an identified group of, employees are prohibited from trading in the company’s securities.
How does this impact my company's credit facility, debt financial covenants and disclosure requirements? Should my company take a draw down for short-term financial needs and if yes, what disclosure obligations are triggered?
- A company should be reviewing its debt covenants in indentures and all credit facilities for any financial or other covenants that might be triggered in this unprecedented COVID-19 pandemic.
- A company should be reviewing the terms of any accordion or maturity extension feature of its credit facility. A company should also analyze what vote is required under its indenture(s) to extend maturity dates if there are near term maturities.
- Some companies are drawing down on their credit facilities for liquidity and cash reserve purposes, even without an immediate need for cash. Companies are also looking to quickly put in place new credit facilities for additional liquidity.
- Companies amending, extending or increasing their existing credit facility, making material drawdowns under their facilities or entering into new credit arrangements should consider their potential Form 8-K disclosure obligations under Item 1.01 (Entry into a Material Definitive Contract) or Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
- Companies should also consider whether covenant compliance issues or other compliance issues may trigger any disclosures under Form 8-K Item 2.04 (Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
- In its Guidance, the SEC noted the following periodic reporting disclosure questions to consider relating to credit agreements, debt instruments or other financing arrangements, among others:
- "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 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."
While we certainly hope that the COVID-19 pandemic is short-lived, we stand ready to assist however the path forward develops. To the extent that we can be helpful in thinking through questions or concerns regarding compliance and disclosure best practices during the COVID-19 pandemic, please do not hesitate to reach out to your Baker McKenzie contact.
Additional contributing author, Jennifer Brevelle, Senior Knowledge Lawyer, US Capital Markets.