SEC Provides Disclosure Guidance for Public Companies Impacted by COVID-19

This client alert provides an overview of recent disclosure guidance provided by the Securities and Exchange Commission for public companies impacted by the outbreak of COVID-19 – essentially all public companies to greater or lesser degree have been impacted and must carefully evaluate their upcoming disclosures. For additional updates, please subscribe to our SEC Pulse blog.

Among other relief, on March 25, 2020, the SEC’s Division of Corporation Finance issued guidance that reminded companies of their disclosure obligations, and on April 8, 2020, the Chair of the SEC and the Director of the SEC’s Division of Corporation Finance put out an unusual joint statement emphasizing the importance of disclosures about the potential impacts of COVID-19, particularly in light of upcoming earnings releases and analyst and investor calls. Combined, these releases provide a road map to what the SEC believes is most important for public companies to tell their stakeholders and others during the current crisis. They "urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning." Disclosures should respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as collective efforts to fight COVID-19 progress. Beyond just updating risk factor disclosure (which is essential for all companies to continuously evaluate), public companies should consider disclosing the impact of COVID-19 on:

• financial condition and results of operations, plus future operating results and near-and-long-term financial condition;
• capital and financial resources, including overall liquidity position and outlook (and if a material liquidity deficiency has been identified, what course of action the company has taken or proposes to take to remedy the deficiency);
• cost of or access to capital and funding sources, such as revolving credit facilities or other sources, and access to cash;
• material uncertainty about the ongoing ability to meet the covenants of credit agreements;
• the ability to service 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;
• expected incurrence of any material COVID-19-related contingencies, impairments, 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 the company’s financial statements;
• the ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures, and any changes in controls that occurred during the current period that materially affect or are reasonably likely to materially affect the company’s internal control over financial reporting;
• implementing business continuity plans or required material expenditures to do so;
• demand for products or services;
• supply chain or the methods used to distribute products or services;
• human capital resources and productivity; and
• the ability to operate and achieve business goals due to travel restrictions and border closures.

The SEC’s joint statement also stresses the need for forward-looking information about the possible consequences to each company. Notably, the statement observes that, "Historical information may be relatively less significant." Providing forward-looking statements as the COVID-19 pandemic continues to disrupt economic activity is difficult, but the SEC promises not to second guess companies’ good faith efforts for doing so. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19, can take steps to avail themselves of the normal safe harbor for this information. However, while the SEC tried to be reassuring about the use of forward-looking statements, securities class action law firms have already filed at least two law suits alleging misleading COVID-19 related disclosures, so companies will have a fine line to walk.

The March guidance further reminds companies that where a company has become aware of a risk related to COVID-19 that would be material to its investors, it should refrain from engaging in securities transactions with the public and discourage 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. When companies do disclose material information related to the impacts of COVID-19, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous risk factors and other disclosure to the extent that the information becomes materially inaccurate.

The March 25 guidance also covers companies’ obligations with respect to the presentation of non-GAAP financial measures, noting that to the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The guidance acknowledges that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the press release states that the Division of Corporation Finance would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

We recommend as each public company considers its upcoming public disclosures to review this statement in detail and try to respond to the expectations and requests that it contains.

If you would like further information regarding the above referenced SEC statement or guidance or regarding disclosures about the impact of COVID-19, please contact the lawyer at Sullivan & Worcester with whom you regularly consult, or any of the lawyers listed above.

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Sullivan has developed a rapid response team of attorneys to help our clients and our communities cope with the impact of the COVID-19 pandemic and understand the implications of the CARES Act and other actions taken by state governments and the federal government. Please refer to Sullivan’s resource center at www.sullivanlaw.com/COVID19 for more information and for access to Sullivan’s library of related advisories.

Please know that Sullivan is focusing substantial efforts to provide assistance to businesses and individuals affected by COVID‑19 and benefited by the CARES Act. If you have questions about how to move forward and navigate the novel legal issues raised by COVID‑19 and/or the CARES Act, please contact your primary Sullivan attorney or send a message to CARES@sullivanlaw.com.