On March 25, 2020, the Securities and Exchange Commission (SEC) issued an order (the Order) extending the conditional exemptions from reporting deadlines and proxy delivery requirements under the Securities Exchange Act of 1934 (the Exchange Act) for public companies affected by COVID-19. The SEC also issued CF Disclosure Guidance: Topic No. 9, discussing the SEC’s views regarding disclosure considerations and other securities law matters related to COVID-19.
SEC Order Extends Relief from Filing Obligations Until July 1, 2020
The SEC issued an Order providing companies that are unable to meet their filing obligations as a result of COVID-19 with additional time to file certain reports, subject to specified conditions. The Order provides companies with a 45-day extension to file or furnish certain reports (see below) that would otherwise have been due between March 1 and July 1, 2020. The Order also grants relief from the requirements of furnishing proxy and information statements when mail delivery is not possible. The Order supersedes and extends the SEC’s original order dated March 4, 2020.
Conditions to Take Advantage of Extension
In order to take advantage of the Order, a company must comply with the following conditions:
- The company is unable to meet the filing deadline due to circumstances related to COVID-19.
- The company files a Form 8-K or Form 6-K, as applicable, by the original filing deadline for the subject report, which must include the following:
- A statement that the company is relying on the Order providing for conditional relief
- A brief description of the reasons the company could not file the report on a timely basis
- The estimated date by which the report is expected to be filed
- A company-specific risk factor or factors explaining the impact, if material, of COVID-19 on its business
- If the reason the company cannot file the subject report in a timely manner relates to the inability of any person, other than the company, to furnish any required opinion, report or certification, the Form 8-K or Form 6-K, as applicable, must include as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification.
- The report must be filed no later than 45 days after the original due date.
- The report that is the subject of the exemption must disclose that it is relying on the Order and must state the reasons why the company could not file it on a timely basis.
The relief applies to reports required to be filed under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), and 15(d) and Regulations 13A, 13D-G, 14A, 14C, and 15D, and Exchange Act Rules 13f-1 and 14f-1, which includes, among others, Forms 10-K, 10-Q, and 8-K. The Order, however, does not provide any extension for the filing of Schedule 13Ds or amendments to Schedule 13D (relating to beneficial ownership and changes in beneficial ownership by greater-than-5% holders). The Order also does not extend the deadline for filings required pursuant to Section 16 of the Exchange Act (i.e., Forms 3, 4, and 5).
For purposes of Form S-3, Form S-8, and Rule 144(c) eligibility and preservation of well-known seasoned issuer (WKSI) status, a company relying on the Order will remain eligible (namely, current and timely) and will preserve its status if the company was current and timely in its Exchange Act filing requirements as of the first day of the relief period and if it files any report due during the relief period within 45 days of the filing deadline for the report.
A company relying on the Order is not required to file a Form 12b-25 so long as the report is filed within the time period specified by the Order. Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the Order will be considered to have a due date 45 days after the filing deadline for the report. Thus, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended 45-day due date.
Relief for Proxy Delivery Requirements
The Order also provides relief related to furnishing proxy soliciting materials (proxy statements, information statements, annual reports, and other soliciting materials) to security holders when mail delivery is not possible, provided that the following are true:
- The company’s security holder has a mailing address located in an area where, as a result of COVID-19, the common carrier has suspended delivery service of the type or class customarily used by the company making the solicitation.
- The company making the solicitation has made a good faith effort to furnish the soliciting materials to the security holder, as required by the applicable rules, including rules applicable to the particular method of delivery.
The original SEC Order can be found here, and the modified SEC Order extending relief can be found here.
Division of Corporation Finance Provides Guidance on COVID-19 Disclosure
On March 25, 2020, the Division of Corporation Finance issued Disclosure Guidance: Topic No. 9, providing the staff’s views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The guidance encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Additionally, the guidance makes clear that the effects COVID-19 has had on a company, including what management believes the impact might be, how the company is planning for COVID-19-related uncertainties, and how management is responding, could be material information for investment and voting decisions.
The guidance reminds companies that their disclosures should be specific to their situation, and contains a detailed list of items that companies should consider for disclosure (see below). We recommend that every public company’s disclosure committee (or the comparable internal group that reviews the company’s periodic filings) review and discuss this list as soon as possible. While acknowledging that the impact of COVID-19 is evolving rapidly and involves uncertainties, the SEC encourages companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management. The SEC also encourages companies to proactively update disclosures as facts and circumstances change.
The SEC specifically reminded companies of the following points:
- Disclosures are required in management’s discussions and analysis (MD&A) of material known trends, and disclosure is also required of material matters not necessarily addressed by line-item disclosure requirements. The disclosure requirements of the federal securities laws apply to a broad range of evolving business risks, even in the absence of a specific line-item requirement. A number of existing rules require disclosure about the known or reasonably likely effect of, and the types of risks presented by, COVID-19. Accordingly, disclosure of these risks and of COVID-19-related effects may be required or appropriate in MD&A, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.
- Make use of the safe harbor for forward-looking statements. Much of the disclosure regarding COVID-19 involves forward-looking information that may be based on assumptions and expectations regarding future events. The SEC reminds companies that providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19, can be undertaken in a way to avail companies of the safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act for this information.
- Refrain from trading prior to dissemination of material nonpublic information. Companies, directors, officers, and other corporate insiders must refrain from trading when in possession of material nonpublic information (outside of a 10b5-1 plan), including material information related to COVID-19. When a company has become aware of a risk related to COVID-19 that would be material to investors, it should refrain from securities transactions until investors have been informed of the risk.
- Comply with Regulation FD. Companies are reminded that when disclosing material information related to the impacts of COVID-19, they must comply with Regulation FD and avoid impermissible selective disclosures of material nonpublic information.
Disclosure Questions to Consider
The guidance contains a non-exhaustive list of topics that companies assessing COVID-19-related effects and their disclosure obligations may wish to consider, including, but not limited to, the following:
- Financial Condition and Results of Operation. 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 your near- and long-term financial condition? Do you expect that COVID-19 will impact future operations differently from how it affected the current period?
- Capital and Liquidity. 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? Do you expect to disclose or incur any material COVID-19-related contingencies?
- Assets. How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
- Material Impairments. 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?
- Controls. 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? What challenges do you anticipate in your ability to maintain these systems and controls?
- Business Continuity. 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?
- Demand. Do you expect COVID-19 to materially affect the demand for your products or services?
- Supply. 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?
The SEC notes that COVID-19 will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings and encourages companies to proactively address financial reporting matters earlier than usual. For example, to the extent a company or its auditors will need to consult with experts to determine how the evolving COVID-19 situation may impact its assets, including impairment of goodwill or other assets, it should consider engaging with those experts promptly so that its reporting remains as timely as possible, as well as complete and accurate.
Reporting Earnings and Financial Results
The guidance addresses certain considerations regarding how to report the ongoing and evolving impact of COVID-19 on financial results in light of unexpected nonrecurring charges and expenses, with the recognition that the impact of COVID-19 on businesses may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve.
With respect to the use of non-GAAP measures, the SEC states that if a GAAP financial measure is not available at the time of an earnings release because the measure may be impacted by COVID-19-related adjustments that require additional information and analysis to complete, the SEC will not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that include either provisional amounts based on a reasonable estimate or a range of reasonably estimable GAAP results. In addition, the company should explain, to the extent practicable, why the line item or accounting is incomplete and what additional information or analysis may be needed to complete the accounting. The SEC states that if a company presents such a non-GAAP measure reconciled to a provisional amount or an estimated range in reliance on the SEC’s position, the company should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to its board of directors. In filings where GAAP financial statements are required (such as Forms 10-K or 10-Q), companies must reconcile non-GAAP measures to GAAP results and must not include provisional amounts or a range of estimated results. The guidance also reminds companies that the rules and guidance pertaining to the presentation of non-GAAP measures continue to apply.
CF Disclosure Guidance: Topic No. 9 can be found here.
Companies can obtain additional guidance from the SEC in a number of ways, which are outlined in the SEC’s guidance, and Jones Walker is available to assist. We have found the SEC staff to be very responsive to our requests, particularly in light of the fact that many of them are working remotely.