Public Companies/Securities Exchange FAQ
This FAQ addresses concerns of U.S. issuers with regard to timely filing reports due under the Securities Exchange Act of 1934, holding annual shareholder meetings and their responsibilities and disclosure obligations in light of COVID-19 and the response thereto.
We have an Exchange Act filing due and are unable to make a timely filing due to issues regarding COVID-19. What can we do?
In early March, 2020, the SEC provided conditional regulatory relief for certain Exchange Act reporting obligations, which permit eligible public companies unable to timely file their periodic reports as a result of the coronavirus an additional 45 days to file disclosure reports otherwise due between March 1 and April 30, 2020. To be entitled to conditional relief, reporting companies must file a Form 8-K by the report’s original filing deadline stating:
- Why the company is relying on the order;
- Why the company could not timely file the necessary material;
- An estimate of when the material is expected to be filed; and
- If appropriate, a risk factor explaining the impact of the coronavirus on the company’s business.
This relief applies to any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable.
Should we hold our annual meeting?
Public companies are generally required to hold annual meetings of security holders under state law.
As federal, state, and local government restrictions on large gatherings become more prevalent and the number of companies instituting policies to enforce social distancing increases, public companies may need to reconsider policies around annual shareholder meetings. A solution may be for companies to hold virtual meetings rather than physical meetings.
If you are considering a virtual annual meeting, note the ability to hold a virtual meeting is subject to state law and your own governance documents. Further, there are a number of practical matters to consider when making such a change. Note, however, the traditional resistance to virtual annual meetings by proxy advisory firms and certain institutional and activist investors is expected to be tempered if the move to a virtual annual meeting is communicated as a temporary measure in response to COVID-19.
We have already filed proxy materials for our annual meeting. Due to the COVID-19 outbreak, we are reconsidering holding our annual meeting as planned and considering either changing its location, or holding a virtual annual meeting. Can we?
When public companies with securities registered under Exchange Act Section 12 solicit proxy authority from their shareholders in connection with an annual meeting, they are required to comply with the federal proxy rules, which require, among other things, the delivery of proxy materials.
The SEC has provided relief to public companies that have already filed and distributed proxy materials for an in-person annual meeting. Instead of requiring companies to file an amendment to their proxy statement announcing the change in location, companies can notify shareholders of a change in the date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if it:
- Issues a press release announcing such change;
- Files the announcement as definitive additional soliciting material on EDGAR; and
- Takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.
We are required to deliver proxy materials to all of our shareholders, but delivery service has been suspended in some areas. What do we do?
The SEC also granted relief from the requirement to furnish proxy statements, annual reports, and other soliciting materials if a security holder has a mailing address located in an area where, due to the coronavirus, the common carrier has suspended delivery service and the company or other person making a solicitation has made a good-faith effort to furnish the materials to the security holder.
How should management advise the Board of Directors regarding their responsibilities in helping the company cope with the COVID-19 outbreak?
To the extent there is a national consensus on corporate governance in the United States, it derives from Delaware corporate law and could be stated like this:
The board of directors delegates to the CEO (and through the CEO to the senior management typically selected by the CEO) the authority and responsibility for operating the company’s business. Effective directors exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy and risk. In doing so, directors of Delaware corporations are subject to the fiduciary duties of care and loyalty (which include the subsidiary duties of good faith, oversight and disclosure). The Duty of Care requires informed, deliberative decision-making based on all material information reasonably available. The Duty of Loyalty requires acting (including deciding not to act) on a disinterested and independent basis, in good faith, with an honest belief that the action is in the best interests of the company and its stockholders.
Where a matter could have a material impact on a company’s results of operation and financial performance, management is well-advised to keep the board of directors fully informed of the impact of COVID-19 on the company’s operations. Further in this regard, note there is an affirmative obligation in SEC regulations that requires companies to disclose the role of the board of directors in the risk oversight of the company and provide information about the role of the board and senior management in managing material risks.
What should we be thinking about in terms of addressing COVID-19 in Management’s Discussion and Analysis (MD&A)?
Under Item 303 of Regulation S-K, a reporting company must provide information it “believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.” Companies must also disclose known trends, events, or uncertainties reasonably likely to have a material impact on the company’s business.
COVID-19, itself and the federal, state, and local government response to it, has the potential to affect the U.S. economy for both the short- and long-term. Management should carefully consider primary and secondary effects of COVID-19 on its business operations, supply chain, customer habits, and the U.S. and global economy. In a statement on Jan. 30, 2020, SEC Chairman Jay Clayton noted his view that “the effects of COVID-19 and [a company’s] response could, depending on a number of factors, be material to an investment decision.”
How should we approach risk factor disclosure with respect to COVID-19?
Public companies, other than smaller reporting companies, are required to provide risk factor disclosure in their annual reports on Form 10-K, and update those risk factors for any material changes thereto in their quarterly reports on Form 10-Q. Risk factor disclosures in a company’s most recent annual report on Form 10-K may need to be updated to address the coronavirus outbreak in subsequently filed Form 10-Qs.
The content of risk factor disclosure is governed by Item 105 of Regulation S-K. Among other things, Reg. S-K requires risk factor disclosure to be “concise and organized logically and presented in a manner that explains with specificity how the risk identified applies to the company rather than a risk that ‘could apply generically to any registrant.’”
Everyone is calling us about how we are responding to the COVID-19 outbreak. Has the SEC provided any relief regarding investor communications and Regulation FD?
No. In its March 4, 2020, statement announcing the conditional reporting relief discussed above, the SEC noted that when companies “do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly.” Under Regulation FD, when a reporting company discloses material nonpublic information, the company must make a public disclosure of that information. Thus, companies must be cautious about the information they provide to investors in informal communications or otherwise and consider whether public disclosure of these discussions is required under Regulation FD.
With the wild gyrations of the stock market, certain insiders are looking to protect their financial position by selling some stock. Is this okay?
Be careful. The SEC stated that “where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.” Accordingly, companies should be proactive in considering, and implementing as necessary, appropriate restrictions on trading during the COVID-19 pandemic. Further in this regard, note that any judicial determination of whether a trade was made while in possession of material nonpublic information concerning the effects of COVID-19 on the company’s business and results of operation will be made long after the actual trade, when facts anywhere in the company’s possession will be attributed to all insiders.
Will any forward-looking statements we make about COVID-19 and its effects on our business operations by protected by the safe harbor?
Maybe. The SEC noted that companies electing to make forward-looking statements regarding known trends or uncertainties surrounding the coronavirus and its effects on their business and results of operations could avail themselves of the safe harbor under Section 21E of the Securities Exchange Act of 1934. Under Section 21E, a material forward-looking statement is not actionable if it either is (1) “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” or (2) is made without actual knowledge of its falsity. Companies can eliminate their liability for inaccurate forward-looking statements by including safe harbor language that identifies the factors that could cause forward-looking statements to be inaccurate.
However, we note the Section 21E safe harbor has not been consistently applied by courts. Consequently, public companies should take care to tailor closely their risk factors and the forward-looking statements they support to their business and results of operations.