Monthly Archives: April 2020

April 16, 2020

Business Roundtable “Principles for Reopening the Economy”

Yesterday’s NYT DealBook high-lighted notable business leaders who are advising President Trump on reopening the economy.  The column notes many of those business leaders are members of, or represent industry groups that are members of, the Business Roundtable and the BRT recently published its “principles for reopening the economy.”

Last summer, Broc blogged about the BRT statement on shareholder primacy and a commitment to all stakeholders and that statement still generates a lot of press and commentary today.  I’m not sure the BRT will get as much press this time around as it did last summer but the BRT principles are encouraging as they provide a framework for planning and preparing a coordinated response to the current crisis.

The BRT principles’ bottom line is that reopening the economy requires careful planning, that should begin now and activity restrictions should be lifted gradually as guided by public health officials.  As the effects of Covid-19 persist, without taking sides on to restrict or not to restrict, hopefully the BRT principles and framework help give some order to a recovery process that mitigates health, safety and economic problems as each seem at risk of escalating even further if not handled appropriately.

BRT endorsed the following principles:

Safety first – A recovery strategy must give Americans confidence that they can safely return to work and public spaces

Coordination – BRT encourages state and federal coordination for protecting public health and safety

The BRT says that it will be preparing a more detailed document outlining approaches to a safe recovery and revitalization and it will focus on the following issues:

– Federal guidelines helping to define public health criteria used to inform local decisions about lifting activity restrictions as well as guidelines that outline appropriate safety measures.

– Access to critical resources and supplies like testing and virus monitoring, supplies, therapeutics and vaccines.

– Vital worker and community needs including safe schools, childcare, transportation and restoration of comprehensive healthcare services.

BRT included 5 exhibits outlining its framework to address these issues.  The exhibits show how federal guidelines and states can coordinate their approach to lifting restrictions, considerations that should be taken into account for determining when and where to lift restrictions, how federal guidelines should define risk levels that guide the level of activity restrictions, examples of measures state and local authorities can take to implement federal guidelines and how the measures vary by federally defined risk levels.

Covid-19 Oversight: Does the Board need a Special Committee?

No doubt most boards are dealing with unprecedented challenges related to the Covid-19 pandemic.  Some boards might currently have a risk committee positioned to provide oversight of Covid-19 related issues while others might not.  As directors are likely stretched for time just like everyone else – some boards are reportedly holding weekly or bi-weekly calls – a recent blog from Hunton Andrews Kurth takes a look at whether the board should create a special committee to oversee the company’s Covid-19 response.

A lot of factors will play into whether a company should designate a special committee to oversee the company’s pandemic response, including the structure of current board committees, director availability, director experience/expertise, existing committee oversight responsibilities, among other things.  Here’s an excerpt from the blog:

Establishment of a Special Oversight Committee may give the board and the company a better opportunity to get the benefit of board members who collectively are best suited to exercise oversight in this unique set of circumstances. Such a committee could be composed of those board members who are in the best position to participate in conference calls frequently and on short notice.

Use of a Special Committee also would enable the board to select a group of committee members whose combined experience and expertise best qualify them to address the special challenges that the pandemic presents for the company.

In addition, the combination of more frequent board meetings and the establishment of such a committee would provide an excellent framework for providing high quality company oversight as well as a demonstrable record of such oversight, which record may be important in years to come as corporations deal with the fallout of the pandemic.

March-April Issue of “The Corporate Counsel”

We recently mailed the March-April issue of “The Corporate Counsel” print newsletter (try a no-risk trial).  The topics include:

1. A Disclosure Framework for the Coronavirus

– The SEC Weighs In

2. Coronavirus Disclosure Considerations

3. Executives in Trouble: Is Disclosure of Uncharged Conduct Required?

– Other Potential Disclosure Considerations

4. “Test the Waters for All” Means WKSIs, Too!

– What WKSIs Can Do Under Rule 163
– The “Test the Waters” Rule 163B Alternative
– Mix & Match? Rule 163B is Non-Exclusive
– Conclusion: WKSIs Should Keep Rule 163B in Mind

– Lynn Jokela

April 15, 2020

Initial Investor Responses to the Covid-19 Pandemic

Rhonda Brauer has provided a couple of guest blogs, here’s her most recent post.  We’re grateful for her work this time that takes a look at where investors are turning their attention during the Covid-19 pandemic:

Recently, we have seen a number of investor-organized responses to the COVID-19 pandemic, which will likely refine investor agendas as we move forward.

As Lynn recently blogged, there will likely be increased calls for tying ESG metrics to executive pay and for more sensitivity to and limits on pay given the harsh impact on the larger workforce.  Two notable additional examples of investor focus are:

First, a global coalition of institutional investors – public pensions, asset managers and faith-based funds – recently called on companies to step up to support their workers, communities, and businesses, as well as the markets, to help respond to the crisis.  The coalition, organized by Domini Impact Investments, the Interfaith Center on Corporate Responsibility (ICCR) and the New York City Comptroller’s Office, has grown to over 250 investors representing over $6 trillion in assets under management, with more investors still signing on.  Companies are asked, among other things, to:

  1. Provide paid leave for all their workers,
  2. Prioritize health & safety for their workers and communities,
  3. Maintain employment for their workers, to enable an eventual resumption of operations more quickly,
  4. Maintain supplier & customer relationships to help stabilize the economy, protect communities, and ensure stable supply chains, and
  5. Exercise financial prudence & responsibility, particularly in such areas as share repurchases and executive compensation.

Companies should expect further calls from investors and investor-led organizations, such as PRI, to prioritize COVID-19-related issues in their ESG policies and engagements.

Second, as we begin to understand where the funds are flowing from the $2 trillion CARES Act rescue package, it seems inevitable that investors will increase focus on transparency in corporate political spending.  Among others, Bruce Freed, president and co-founder of the Center for Political Accountability, has already asked, “Will we ever know whether undisclosed political contributions influenced which companies benefited most from the legislation?”  He pointed to the relationship between One Nation, a 501(c)(4) group, and the Senate Leadership Fund (a so-called “527 Super-PAC”), closely associated with Senate Majority Leader Mitch McConnell, and evidence — through political spending reports and voluntary disclosures — of corporate money flowing through One Nation to this Fund.  Such relationships, he said, feed fears that contributions could improperly influence who benefits from legislation.  Freed believes that “it’s critically important that an increasing number of publicly owned companies … embrace… corporate political disclosure.”

Companies should be prepared for even more shareholder resolutions on political disclosures and more investor pressure to disclose all of their political spending, particularly those corporate funds channeled into so-called “dark money” vehicles:  trade associations and 501(c)(4)s (organizations originally designed to promote social welfare and cause-related activities, to help educate the public), as well as the 527 Super-PACs that enable corporations to advocate indirectly for and against political candidates.

Additional Insight on Investor Stewardship & Covid-19

SquareWell Partners recently issued a report providing additional insight from asset managers about how they will fulfill their stewardship responsibilities given the continued uncertainty resulting from the Covid-19 pandemic.  The report summarizes information based on feedback from 20 asset managers representing about $7.2 trillion in managed assets.  They want to know more about what the board’s doing…here’s some of what they said:

– Most investors are prepared to deal with the current disruption and defer to regulatory guidance about the format for annual meetings – with a preference that companies revert back to a hybrid meeting format after the uncertainty subsides

– Investors expect communication from companies about the impact of recent events either through public disclosures or direct contact with management teams and would appreciate more information about how the board is overseeing the situation

– In terms of executive pay, investors expect boards to focus on more critical business issues and investors aren’t going to place additional importance on pay but note that there will be societal pressure to demonstrate restraint and manage reputational risk

California AG: No Delay in Enforcing CCPA

A few weeks ago, I blogged about the latest round of changes to the California Consumer Privacy Act.  Some had requested a delay in enforcement of the CCPA due to ongoing need to focus on Covid-19 related concerns.  This blog from Taft says that the California Attorney General provided an answer to the delayed enforcement request, and in short it’s “No”.  As noted in the blog, there is some question about the exact start date for enforcing the CCPA – although it sounds like practitioners should plan on July 1.

– Lynn Jokela

April 14, 2020

Initial Disclosures About Earnings Guidance Amid Covid-19

Last week, John blogged about what companies are going to do about guidance when issuing first quarter earnings.  As a follow-on to that, Bass Berry & Sims surveyed initial disclosures in earnings releases for off-calendar year-end companies furnished on or after March 16, 2020 to see how companies handled earnings guidance in light of Covid-19.  The findings say a majority of companies withdrew or suspended guidance.  Here’s an excerpt:

67% (22 companies) either withdrew their existing guidance (in full or in part) or suspended their practice of providing quarterly guidance

The companies that provided either updated guidance or new quarterly guidance generally did so with a significantly greater gap between the high and low range of their guidance compared to prior disclosures

The survey highlights what the firm has been hearing from its clients—the unfolding COVID-19 pandemic and the resulting economic turmoil make it difficult to predict what the future will look like.  As reflected in the survey results above, there will be many public companies that elect to suspend or withdraw guidance as a result of the tremendous economic uncertainty arising from COVID-19, but approaches will differ, and there will continue to be some public companies (albeit, potentially, a minority) that elect to continue to provide guidance during these uncertain times.  Ultimately, the determination of whether to continue to provide guidance will require judgment and be very fact-specific (depending on, among other things, the industry of the public company and how COVID-19 has impacted such industry).

The blog discussing survey findings also includes links to notable disclosures – one being a company that made projections based on three recovery scenarios along with qualitative and quantitative assumptions about what such recoveries would look like for three of the company’s four operating segments.

Covid-19 & Earnings Calls: Logistical Considerations

Social distancing and stay-at-home orders resulting from Covid-19 will make this quarter’s earnings calls different for many companies – for most it will be difficult, if not impossible, to gather executives in one place for the call.  Companies will likely need to put more effort into earnings call prep sessions with additional time devoted to logistical considerations to help ensure the calls go smoothly.  With earnings kicking off this week, one resource that might help is this ICR blog that offers practical considerations and tips.  Some of the considerations include:

– Pre-record opening, prepared remarks – some companies likely already pre-record opening, prepared remarks, but if not, it’s suggested that companies do so

– Evaluate whether technology like video capabilities will be helpful for Q&A

– Evaluate whether to hold a live Q&A session, ICR suggests companies do so, but if not:

    • Consider posting anticipated Q&As on the company website next to webcast link or earnings release
    • Have management speak to questions and provide key messages related to those questions as part of the call
    • Let listeners know that the company won’t be holding an interactive Q&A session at the beginning of the prepared remarks and that topics the company believes will be of further interest will be posted to its website

– Most conference call providers will have limited operators available right now, which could cause long wait times likely frustrating investors dialing in to the call.  ICR provides options to help reduce risk of delays, one being not to include dial-in information in the advisory release and including only the webcast link.  With this option, companies would email the dial-in information separately to sell-side analysts that would allow them to ask questions during the call.

– In any event, ICR recommends avoiding “internet-based” phones due to increased internet activity that can reduce call quality.  Most analysts will be working remotely, so consider sending the release or presentation in an email ahead of the call.

– Last, consider reporting later than usual to give the company more insight into critical areas that investors will focus on, the blog also outlines considerations for current quarter reporting, including the current state of operations, financial liquidity/balance sheet/capital allocation and guidance.

Covid-19: Anticipated Enforcement Trends

As the Covid-19 crisis continues, it’s still early to know how enforcement activity will really play out, but this Gibson Dunn memo reviews early enforcement activity, as well as previous post-disaster enforcement activity, as possible indicators for areas where regulator activity might pick up.

The SEC has reminded us more than once that it remains “laser-focused” on enforcement efforts – Chairman Clayton and Corp Fin Director Hinman, included mention of this in their joint statement last week and the recent statement from the Co-Directors of the Enforcement Division serves as another reminder.  The SEC’s website for individual investors,, also recently sent an Alert warning investors to be aware of current investment frauds, including Covid-19 related scams.  So what should companies be on the lookout for?

If past activity serves as an indicator, the memo says distributions from government assistance programs like the CARES Act will dominate much of the enforcement agenda for the next decade.  The memo also covers enforcement actions in the U.K., EU and Asia.

Areas where the memo says increased enforcement activity is likely: insider-trading, state-level focus on consumer protection and price-gauging and expansion of state regulatory powers, and False Claims Act enforcement.  With increased government spending, the memo says its important for companies to document communications with, and decisions by, government contractors to help reduce False Claims Act exposure after the crisis.

And, if a company receives an internal whistleblower report, the memo reminds companies to respond thoroughly.  This Gibson Dunn memo addresses whistleblower claims in particular, and says companies should anticipate an onslaught of whistleblower claims.  The memo reviews steps companies can take to prepare and reiterates the importance of making sure a whistleblower action plan reflects current operations and to then stick to the action plan by following it to a tee.

– Lynn Jokela

April 13, 2020

Chief Justice Strine Makes Another “New Deal” Pitch

When Delaware Chief Justice Leo Strine retired last fall, Liz blogged about his proposal that would recommit to “New Deal” concepts focused on workers’ rights and a reformed shareholder voting/proposal process.  Last Friday, Chief Justice Strine, along with Dorothy Lund of the University of Southern California Gould School of Law, published an essay in DealBook that again calls for a “21st-century New Deal.”

The essay echoes Chief Justice Strine’s earlier comments, but the current pandemic offers a new backdrop for delivering the pitch. Here’s an excerpt:

Recently, the Business Roundtable and leading institutional investors have responded to growing inequality and economic insecurity by calling for greater respect toward all corporate stakeholders, not just stockholders. But what does it say about whether rhetoric is enough that, in the national emergency we are facing, American workers and taxpayers, not institutional investors or top corporate managers, are bearing the brunt of the harm? We are again paying the price for a corporate governance system that lacks focus on financial soundness, sustainable wealth creation and the fair treatment of workers.

Instead of just rhetoric, consider regulatory action to encourage corporations and institutional investors to make the best interests of American workers, consumers, communities and the environment an end goal of corporate governance, as important as serving stockholders. Public and large private companies receiving bailouts or pandemic-related subsidies could be required to become public benefit corporations under state law, and others could be given positive incentives to do the same. Institutional investors and socially important companies could be required to disclose to the public how much weight they give to issues like worker pay and safety, environmental responsibility and maintaining a strong balance sheet.

The essay emphasizes the need to invest in infrastructure, innovation and worker training and says progressive approaches like a financial transaction tax, a graduated capital gains tax and an end to the carried interest loophole for hedge funds can pay for these essential investments fairly. These measures are integral to corporate governance reform because they encourage sustainable investing and put a damper on imprudent speculation.

Covid-19 & Stakeholder Interest Impact on the Future of Buybacks

As the economic fallout from the Covid-19 pandemic continues, many are wondering when or if buybacks will pick up again.  This MarketsInsider article cites Sanford Bernstein analysts as saying buybacks may not return for several years.

Companies accepting help from CARES Act stimulus programs will be restricted from buying back their stock and others want or need to conserve cash.  But, the article high-lights what might be the “most intriguing factor fueling buybacks’ demise is the social stigma against them.”  As noted in the article, buybacks and dividends could “become ‘socially unacceptable’ as calls increase to shift focus from shareholders to stakeholders.”  The article says we should anticipate a broad decline in buyback activity but it won’t all disappear.

Public pressure to keep stakeholder interests top of mind is also high-lighted in this NY Times article recognizing that companies are receiving criticism for cutting jobs rather than investor payouts.  Chief Justice Strine and Professor Lund in their DealBook essay also recognize that families are encouraged to save for a rainy day but many companies didn’t do the same and instead used cash for dividends and stock buybacks.  Given nearly all companies are dealing with this unprecedented crisis, time will tell whether the economic effects from the pandemic coupled with focus on stakeholder interests have struck a lasting damaging blow to buyback programs.

Corp Fin Provides Temporary Relief for Form 144 Paper Filings 

Yes, Forms 144 are still required but you can email them, for a while.  Friday afternoon, Corp Fin issued an announcement providing temporary relief for Form 144 paper filings in light of the ongoing health and safety concerns from Covid-19.  The relief allows Forms 144 filed in paper under Rules 101(b)(4) or 101(c)(6) of Reg S-T to be submitted by email provided a PDF of the complete Form 144 is attached to the email.  Filers choosing to do so should direct the email to

The relief is available for those who submit Forms 144 from April 10, 2020 through June 30, 2020.

For those worried about a manual signature on Forms 144 submitted via email, the Staff won’t recommend enforcement action if the filer includes a typed form of signature.  If you can’t get a manual signature on the Forms 144, besides providing a typed form of signature, you’ll want to ensure:

– the signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic submission and provides such document, as promptly as practicable, upon request by Division or other Commission staff;

– such document indicates the date and time when the signature was executed; and

– the filer or submitter (with the exception of natural persons) establishes and maintains policies and procedures governing this process.

For those wanting to continue with regular mail, the announcement says you can still do so, there just may be processing delays.

– Lynn Jokela

April 10, 2020

“Live From My Living Room!” Stay-at-Home Orders No Match for Legal Webcasters

Have you ever watched a community access cable show? “Wayne’s World” will always be the definitive parody of these programs, but some of them are very creative. For instance, my local community access channel used to air something called “The Half Hour Show,” which involved two guys sitting in lawn chairs parked at a different local spot each week. The camera was placed behind them, so you never saw their faces. They just sat in their lawn chairs and watched the world go by for 30 minutes without saying a word. It was a post-modern masterpiece – and people loved it!

Another one of my community access favorites was a program in which some guy pointed a camera at his TV and showed a Madden video game simulation of the upcoming week’s Cleveland Browns game. I liked that show because unlike in real life, the Browns sometimes won.

Shows like these demonstrate that you don’t need a big budget or slick production values to provide quality programming – and it turns out that some of our fellow home-bound colleagues have taken that message to heart. In fact, we’ve heard from a couple of firms whose lawyers who are hosting educational video webcasts from their homes.

As you might expect, these webcasts focus on the corporate & securities law issues raised by the Covid-19 crisis, and offer a user-friendly alternative to the avalanche of client memos on these topics that everyone’s been receiving. Here’s a series of informative Covid-19 FAQ videos straight from the home offices of Perkins Coie’s Jason Day & his colleagues, and here’s the first in a series of Covid-19 videocasts from Fenwick & West’s corporate group. Technically, Fenwick’s videos originate from its “public tech company virtual situation room” – but it looks a lot like the living rooms of members of the corporate group.

Both sets of videos are well worth checking out, although I do think they could use some lawn chairs.

Covid-19 Crisis Disclosure: What About Earnings Guidance?

One of the many issues that companies are grappling with as a result of the Covid-19 crisis is what to do about earnings guidance. This Bass Berry blog addresses that issue, along with other high-level considerations for first quarter earnings releases.  Here’s an excerpt:

For companies that previously issued 2020 guidance which remains in place, a gating issue is the extent to which the registrant believes that it can continue to project (with a reasonable basis) its 2020 forecasted results, taking into account the COVID-19 pandemic (which pandemic itself has a broad range of best-case and worse-case reasonable scenarios from a public health and economic perspective).

The issue of whether a registrant has a reasonable basis to potentially continue guidance will differ by industry, with companies in certain industries whose business (at least in the short term) has been so fundamentally harmed by the COVID-19 pandemic likely concluding that there is no practical ability to continue to provide guidance until there is greater macroeconomic certainty, while companies in other industries may have a closer judgment call.

Overall, we expect that a significant number of registrants, across a wide range of industries, will elect to withdraw guidance based on a determination that the uncertainties associated with COVID-19 are so significant that it is not practicable and/or advisable to continue to provide guidance.

The blog says that the negative market reaction typically associated with withdrawing guidance “may be more muted” in the current release cycle, if for no other reason than so many companies are likely to do it. The blog also suggests that companies opting to continue to provide guidance provide a broader range due to the uncertainties associated with the outcome of the crisis, and accompany that guidance with extensive caveats and detailed disclosure of assumptions about how the Covid-19 crisis will play out.

Risk Factors: Tips on Covid-19 Updating

If you’re preparing your first Covid-19 crisis SEC filing, I recommend that you take a peek at this WilmerHale memo on updating risk factor disclosure to address the pandemic. It’s short, specific and practical.

John Jenkins

April 9, 2020

SEC Chair & Corp Fin Director Issue Joint Statement on Covid-19 Disclosure

Yesterday, SEC Chair Jay Clayton and Corp Fin Director Bill Hinman issued a joint statement urging 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” in light of the impact of the Covid-19 pandemic. The statement covers a lot of ground, but this excerpt is probably the key takeaway for companies preparing for their upcoming Q1 earnings releases & analyst calls:

Speaking for ourselves, and recognizing the challenges inherent in our request, we urge our public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. Detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to our investors and markets.

Beyond the income statement and the balance sheet effects, we recognize that COVID-19 may significantly impact operations, including as a result of company efforts to protect worker health and well-being and customer safety. The impact of company actions and policies in this area may be of material interest to investors, and we encourage disclosures that address that interest.

In addition, companies and financial institutions may be receiving financial assistance under the CARES Act or other similar COVID-19 related federal and state programs. Such assistance may take various forms and is intended to mitigate COVID-19 effects for companies and their workers. If these or other types of financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance.

Throughout the statement, Clayton & Hinman repeatedly encourage companies to make forward-looking statements about a wide variety of topics related to their Covid-19 responses:

This quarter, earnings statements and calls will not be routine. In many cases, historical information may be substantially less relevant. Investors and analysts are thirsting to know where companies stand today and, importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis.

For a lot of companies, the call for voluntary forward-looking disclosure about these and other matters is likely to be a big ask – even with assurances that “good faith attempts to provide appropriately framed forward-looking information” won’t be second guessed by the SEC. Their businesses have just been hit by the financial equivalent of a nuclear bomb. My guess is that most of them are going to have a tough enough time just trying to work through the forward-looking “known trends” disclosure they’re required to make in MD&A.

We’d all like some clarity about how companies “expect to adjust their operational and financial affairs to most effectively work through the Covid-19 health crisis.” In fact, I’d wager that nobody would like to know the answer to that question more than the boards and management teams who are trying to figure it out for their own companies. But, in the short term, I doubt that many companies will be able to provide a lot of meaningful disclosure in this area – and I’m not at all sure that it’s in their best interests to try.

Corp Fin Updates Annual Meeting Guidance (And I Get Scooped by Lynn)

I want to republish something that Lynn blogged yesterday over on the “Proxy Season Blog” – and there’s a backstory to this one.  For some reason, the announcement of Corp Fin’s tweak to its annual meeting guidance didn’t arrive in our inboxes until after I published yesterday’s blog.  Lynn was sharp-eyed enough to catch the story from other sources and break the news in her blog while I was busy eating a pop-tart or something. I’m sure she’ll lord this over me until my dying day, because that’s exactly what I’d do to her if the shoe was on the other foot.  Anyway, here’s what she had to say:

Yesterday, Corp Fin issued an announcement providing updated guidance for conducting shareholder meetings in light of COVID-19 concerns. We blogged about Corp Fin’s original guidance back when it was issued in mid-March. Yesterday’s announcement addresses delays in printing and mailing of full-set proxy materials – allowing limited relief to companies that shift to furnishing proxy materials via the notice-only method of delivery. Corp Fin’s announcement also clarifies that its previous guidance regarding changes to the date, time and location of annual meetings also applies to special meetings.

The announcement says Corp Fin’s update about furnishing proxy materials stems from the impact of COVID-19 on some proxy service providers and transfer agents. The Staff understands some companies are concerned about being able to send notice of electronic availability of proxy materials at least 40 calendar days before the meeting so it’s allowing flexibility as long as shareholders receive proxy materials sufficiently in advance of the meeting and the company announces the change. Here’s an excerpt from the guidance:

The staff encourages issuers affected by printing and mailing delays caused by COVID-19 to use all reasonable efforts to achieve this goal without putting the health or safety of anyone involved at risk. In some cases, this may mean delaying a meeting in accordance with state law requirements and the procedures described above, if necessary, in order to provide materials on a timely basis. In circumstances where delays are unavoidable due to COVID-19 related difficulties, the staff would not object to an issuer using the “notice-only” delivery option in a manner that, while not meeting all aspects of the notice and timing requirements of Rule 14a-16, will nonetheless provide shareholders with proxy materials sufficiently in advance of the meeting to review these materials and exercise their voting rights under state law in an informed manner and so long as the issuer announces the change in the delivery method by following the steps described above for announcing a change in the meeting date, time, or location. Affected issuers and intermediaries also should continue to use their best efforts to send paper copies of proxy materials and annual reports to requesting shareholders, even if such deliveries would be delayed.

Issuers and other affected parties are encouraged to contact the staff to discuss any other concerns resulting from any late filings caused by delays in the printing and mailing of proxy materials.

Business Development Companies: SEC Adopts Rules Streamlining Registration Process

Yesterday, the SEC announced the adoption of rule amendments to streamline the offering process for business development companies and registered closed-end funds. In essence, the rules are intended to put these companies on the same footing as operating companies when it comes to the registration process. I know that this almost goes without saying at this point, but the vote was along partisan lines, with Commissioner Allison Herren Lee submitting a dissenting statement.

Here’s the 349-page adopting release. We’ll be posting memos in our “Business Development Companies” Practice Area.

John Jenkins

April 8, 2020

Listing Standards: NYSE & Nasdaq Respond to Covid-19 Volatility

The Covid-19 crisis has taken a big bite out of the market caps of a whole lot of NYSE & Nasdaq listed companies, and this Weil blog says that the exchanges are responding to the market’s volatility & the other strains on listed companies resulting from the crisis. Here’s the intro:

In light of U.S. and global equities markets declines resulting from the continued spread of the coronavirus (COVID-19), the New York Stock Exchange (NYSE) has temporarily suspended the application of one of its continued listing rules, which requires that listed companies maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (Market Capitalization Standard).

In addition, the Nasdaq Stock Market (Nasdaq) issued an information memorandum on March 23, 2020, indicating that Nasdaq is closely monitoring the impact of COVID-19 and the resultant market volatility of the securities of its listed companies, and providing Nasdaq-listed companies with guidance in a number of areas.

The memo says that although Nasdaq hasn’t suspended any of its listing requirements, its information memo provides guidance to listed companies in several areas. For instance, Nasdaq will consider COVID-19’s impact in its review of requests for financial viability exceptions to Rule 5635, which requires shareholder approval for the issuance of securities in certain enumerated circumstances. Nasdaq’s information memo also says that companies eligible for the 45-day filing extension provided in the SEC’s March 5 and March 20 orders won’t be deemed deficient under Rule 5620 if they take advantage of the extension.

On Monday, the SEC also approved the NYSE’s temporary waiver of Rule 312.03’s shareholder approval requirements for certain share issuances to related parties and its easing of the rule’s conditions to the “bona fide private financing” exemption to the shareholder approval requirements for private placements involving more than 20% of the outstanding shares. See this Cydney Posner blog for more details.

Paycheck Protection Program: Free Money? Don’t Bank On It

If you’re in a law firm, chances are pretty good that you’ve spent a fair amount of time during the past week getting clients up to speed on the requirements for Paycheck Protection Progam loans. For businesses that qualify and can comply with the program’s conditions, loans made under the program may indeed turn out to be “free money.”  But this Forbes article from Bruce Brumberg points out that this program isn’t a risk-free proposition:

In a business-law alert, the law firm Quarles & Brady explains the following (in this and the followed quotations I have bolded part of the text for emphasis). “The PPP application requires the applicant to make a number of certifications, including: ‘Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.’ The SBA has not provided any definition or color about the nature or extent of the required impact to operations that would make the loan request ‘necessary to support ongoing operations,’ which has both applicants and lenders skittish about making or accepting the certifications.”

In a similar client alert, the law firm Venable points out: “Borrowers must certify on the application that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ There is little guidance as to what exactly this means.”

In its commentary on the program, the law firm Ropes & Gray goes so far as to warn about possible legal exposure under the False Claims Act (FCA): “Already, news and opinion articles are addressing (and Members of Congress are saying) that there will be significant oversight over funds distributed through PPP. Private individuals have also made clear that they intend to exercise their rights under the Freedom of Information Act to identify the recipients of PPP loans with a view to identifying those who, in their view, were not the intended beneficiaries of the program.

So, while the program may provide a real lifeline for many borrowers, companies need to understand that there are uncertainties that could come back to bite them – and that, as always, a little healthy skepticism is appropriate when somebody says “we’re from the government, and we’re here to help.”

SEC’s Private Offering Proposal: Chart of Proposed Changes to Registration Alternatives

Approximately 25 years one month ago, the SEC proposed amendments to simplify & harmonize the framework for exempt offerings. If you’ve worked on private offerings, chances are you’re familiar with the very helpful “Chart of Alternatives to Registration” that Stan Keller, Jean Harris & Rich Leisner put together. Well, Stan has recently published a new chart reflecting the SEC’s proposed changes to those alternatives. Check it out!

John Jenkins

April 7, 2020

Covid-19: New CDI Address Application of Exemptive Order to Part III of 10-K

Yesterday, Corp Fin issued a new CDI addressing the application of the SEC’s conditional exemptive order extending by up to 45 days the due date for SEC filings by companies affected by the Covid-19 crisis to Part III of Form 10-K. Companies often incorporate Part III information into Form 10-K by reference to their definitive proxy materials. In order to do that, companies have file those definitive proxy materials within 120 days of their fiscal year end. If they can’t make that deadline, they need to amend their Form 10-K to include the Part III information.

How do the rules surrounding the inclusion of Part III information work for companies that want to rely on the SEC’s exemptive order? That’s the issue that the new Exchange Act Forms CDI #104.18 addresses:

Question: Form 10-K allows Part III information to be incorporated by reference from a registrant’s definitive proxy or information statement, or, under certain circumstances, filed as an amendment to the Form 10-K, not later than 120 days after the end of the related fiscal year. May a registrant that is unable to file the Part III information by the 120-day deadline avail itself of the relief provided by the COVID-19 Order (Release No. 34-88465 (March 25, 2020)) for the filing of the Part III information?

Answer: Yes, as long as the 120-day deadline falls within the relief period specified in the Order and the registrant meets the conditions of the Order.

– A registrant that timely filed its annual report on Form 10-K without relying on the COVID-19 Order should furnish a Form 8-K with the disclosures required in the Order by the 120-day deadline. The registrant would then need to provide the Part III information within 45 days of the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement.

– A registrant may invoke the COVID-19 Order with respect to both the Form 10-K and the Part III information by furnishing a single Form 8-K by the original deadline for the Form 10-K that provides the disclosures required by the Order, indicates that the registrant will incorporate the Part III information by reference and provides the estimated date by which the Part III information will be filed. The Part III information must then be filed no later than 45 days following the 120-day deadline.

– A registrant that properly invoked the COVID-19 Order with respect to its Form 10-K by furnishing a Form 8-K but was silent on its ability to timely file Part III information may (1) include the Part III information in its Form 10-K filed within 45 days of the original Form 10-K deadline, or (2) furnish a second Form 8-K with the disclosures required in the Order by the original 120-day deadline and then file the Part III information no later than 45 days following the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement. [April 6, 2020]

The CDI’s bottom line appears to be that, while the hoops that particular companies have to jump through may vary, companies taking advantage of the extension will be able to apply it to the Part III deadline as well.

Virtual Meetings: Delaware Gov.’s Order Resolves Notice Issues

Due to ambiguities in statutory language, companies switching from physical to virtual annual meetings have been uncertain about whether merely following the SEC’s guidance on communicating the change would be sufficient under state corporate law, or whether a new mail or email notice was necessary.  Yesterday, Delaware Gov. John Carney issued an order in effect providing that compliance by a public company with the SEC’s guidance would be regarded as sufficient notice under Delaware law:

If, as a result of the public health threat caused by the COVID-19 pandemic or the COVID-19 outbreak in the United States, the board of directors wishes to change a meeting currently noticed for a physical location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of such Act and a press release, which shall be promptly posted on the corporation’s website after release;

The order provides a similar accommodation for adjournment of meetings originally scheduled for a physical location. Hat-tip to @DougChia for flagging the order yesterday evening.

Virtual Meetings: California’s Gov. Gives Temporary Sign-Off – But Is It Legal?

Late last month, Gov. Gavin Newsom signed an order providing similar relief for California companies. The order temporarily exempts California-charted companies from the need to obtain consent from all shareholders to a virtual meeting, and also eases notice requirements for companies that switch from physical to virtual meetings.

However, this recent blog from Keith Bishop suggests that there’s some uncertainty about whether the Gov. has the authority to issue such an order:

The fly in the ointment (see Ecclesiastes 10:1) is that the Governor may not have the statutory authority to suspend these requirements. As I pointed out in this post, the Emergency Services Act gives the Governor the authority to suspend only two types of statutes: “regulatory statutes” or “statutes prescribing the procedure for the conduct of state business”. “Regulatory statute” is not defined and no one can say with certitude that the statutes purportedly suspended by the Governor are regulatory statutes.

As a result, Keith says that corporations opt for virtual only meetings based on the Governor’s order will be assuming some risk that actions taken at those meetings may be later invalidated. He suggests that lawyers may need to take that into account if asked to render “due authorization” opinions for actions taken at those meetings,

John Jenkins

April 6, 2020

Financial Reporting: SEC Chief Accountant Addresses Covid-19 Issues

On Friday, SEC Chief Accountant Sagar Teotia issued a statement stressing the importance of high-quality financial reporting during the Covid-19 crisis. Many companies are struggling with the reporting implications of Covid-19, and the statement acknowledges that the current environment requires a number of difficult judgment calls:

We recognize that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates. Certain judgments and estimates can be challenging in an environment of uncertainty. As we have stated for a number of years, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.

Teotia’s statement highlights some of the areas that may involve significant judgments and estimates, including fair value and impairments; leases; debt modifications or restructurings; hedging; revenue recognition; income taxes; going concern; subsequent events; and adoption of new accounting standards (e.g., the new credit losses standard). It goes on to emphasize the importance of required disclosures about judgments & estimates involving these and other issues.

The statement also says that financial institutions availing themselves of certain provisions of the CARES Act that allow them to avoid compliance with FASB pronouncements on accounting for credit losses & troubled debt restructurings during the period of the Covid-19 emergency will be regarded by the SEC as being in compliance with GAAP.

Cydney Posner’s recent blog about the Chief Accountant’s statement has a sidebar pointing out that while the new credit losses standard applies to any business that extends credit to customers, only financial institutions are exempt from compliance under the CARES Act – and those other businesses are going to face some significant compliance challenges during the current crisis.

PCAOB: “The Audit Ain’t Over ‘Til It’s Over”

The PCAOB also chimed in last week with a reminder to auditors that, in the current environment, they need to make sure that they keep their eyes on the ball until their audit is completed:

As part of the evaluation of whether sufficient appropriate audit evidence has been obtained, auditors are required to evaluate the appropriateness of their initial risk assessments. In light of the economic effects of the COVID-19 crisis, new risks may emerge, or the assessments of previously identified risks may need to be revisited because the expected magnitude and likelihood of misstatement has changed.

Changing incentives or increased pressures on management, especially when taken together with changes in internal controls or increased ability for management override of controls, may result in new risks of material misstatement due to fraud or changes to the auditor’s previous assessment of risks of material misstatement due to fraud. Similarly, increased pressure on, and changes in, management processes, systems, and controls may give rise to increased risk of error. Initial responses to assessed risks may not be adequate given the revised risk assessments, or planned procedures may not be practical or possible to perform under current circumstances.

The PCAOB says that auditors may need to reassess previous risk assessments for some areas of the financial statements in light of COVID-19. It also includes a laundry list of areas of the financial statements where evaluating  presentation & surrounding disclosures are going to be very difficult for auditors. It probably won’t surprise you to learn that the PCAOB’s list largely overlaps with Sagar Teotia’s list of aspects of the financial statements that involve significant judgment calls.

Transcript: “Tying ‘ESG’ to Executive Pay”

We have posted the transcript for the recent webcast: “Tying ‘ESG’ to Executive Pay.”

John Jenkins

April 3, 2020

SEC Chair Encourages Continued Disclosures Amid Pandemic

Yesterday, SEC Chairman Jay Clayton issued a public statement emphasizing that the SEC is “focused on ensuring that issuers and other registrants continue to provide material information to investors, including information related to the current and expected effects of COVID-19, as promptly as practicable.”  In another statement before a special meeting of the Investor Advisory Committee yesterday, Chairman Clayton again emphasized the need for issuers to provide disclosures about efforts to address the effects of COVID-19.  Here’s an excerpt:

Our investors and our markets thirst for information as a general matter.  This is particularly the case in times of economic shock and uncertainty.  Couple this fundamental premise with the reality that for COVID-19-related reasons issuers may not be able to file required quarter-end reports on time, and we have a challenge.  Importantly, an inability to file required reports does not prevent issuers from issuing earnings releases and filing current reports on Forms 8-K.

I believe the conditional, tailored relief crafted by the Division of Corporation Finance, coupled with their detailed guidance regarding COVID-19-related disclosure topics will allow issuers to provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines.  We encourage issuers to provide as much information as is practicable and stand ready to engage with them.

Hat tip to Cooley’s Cydney Posner who blogged about yesterday’s statements and included notes from the Investor Advisory Committee meeting.

COVID-19 Financial Reporting Considerations Guide

Last week, John blogged about Corp Fin’s COVID-19 disclosure guidance and we’ve blogged about COVID-19 disclosures involving executive health, annual meeting implications, earnings calls, etc.  This 64-page report from Deloitte outlines financial reporting considerations related to COVID-19 and an economic downturn…could be a helpful resource as companies prepare first quarter financial reports, which no doubt will require more effort as the quarter was far from a “normal” first quarter and nearly everyone is working remotely, including most service providers.

Beyond discussing key accounting & financial reporting considerations related to issues resulting from COVID-19, it also includes various industry-specific considerations.  The report lists the following topics as likely being the most pervasive and challenging accounting & reporting issues:

– Preparation of forward-looking cash flow estimates

– Recoverability and impairment of assets

– Accounting for financial assets

– Contract modifications

– Subsequent events

– Going concern

More on “Will Business Interruption Insurance Pick Up Some of the Tab?”

Not too long ago, John blogged about the long fight ahead for companies thinking of recovering for COVID-19 related losses under business interruption coverage.  Ultimately, a company’s policy language will be one factor that determines whether COVID-19 business interruption losses will be covered and many commercial property policies exclude coverage for losses resulting from a virus such as COVID-19.

This Seyfarth memo notes that business interruption coverage usually requires that losses be accompanied by direct physical loss to the property.  During the COVID-19 pandemic, many businesses are closed due to state orders so it may be difficult to get coverage under a policy providing business interruption coverage.  Some might try to argue the physical loss resulted from COVID-19 contamination but this sounds like part of the long fight John blogged about.

An interesting wrinkle is that several states are trying to expand business interruption coverage retroactively by introducing bills that would provide coverage for losses from COVID-19 under commercial property policies.  The memo says that legislators in Ohio and Massachusetts have introduced these bills and this Hunton Andrews Kurth blog reports bills have been introduced in other states. New Jersey introduced similar legislation but another Hunton Andrews Kurth blog reports the bill has been pulled to allow time for insurers time to come forward with their own plan for how to address the issue.  Some might also want to watch whether lawsuits filed by restaurant owners seeking coverage for coronavirus-related business losses move forward  – here’s a story about a lawsuit brought by Thomas Keller, the famed chef of The French Laundry and Per Se.

– Lynn Jokela