July 30, 2020

Updating: What Do You Do With Your First Quarter Covid-19 Risk Factor?

In response to the onset of the Covid-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate & comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in this recent Bass Berry blog. Here’s an excerpt:

With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).

This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).

The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year.  This Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”

These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of Covid-19.

2020 DGCL Amendments Signed into Law

On July 16, Delaware’s Gov. John Carney signed the 2020 amendments to the DGCL into law. This S&C memo has the details. As we blogged at the time the legislation was first introduced, it addresses some of the problems that Delaware corporations experienced this year in their efforts to transition to virtual annual meetings. Here’s an excerpt:

Under the emergency conditions described in DGCL §110(a), the Amendments provide a board of directors with discretion to postpone or change the place of a stockholder meeting. Amendments to Delaware’s General Corporation Law July 22, 2020 meeting (including to hold the meeting solely by means of remote communication). Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.

The amendments also update the definition of an “emergency” under Section 110 of the DGCL & expand it beyond the Cold War “Rocket Attack U.S.A.” scenario to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”

CEO Turnover: Uneasy Lies the Head That Wears the Crown

There’s a grim joke among professional football players to the effect that the initials “NFL” stand for “Not for Long.” According to a recent Squarewell Partners study, the same can be said for those who serve as U.S. public company CEOs. Squarewell studied CEO departures at some of the world’s largest companies since the beginning of 2019, and reached some interesting conclusions. These include:

– US companies witnessed more CEO departures than the UK and Europe
– Official company disclosures suggest only 7% of CEOs were formally dismissed but we find that the actual figure of CEO dismissals should be 29%.
– 40% of dismissed Lead Executives recorded negative share price performance during their tenure.
– Only 20% of companies (that saw a CEO change) provided comprehensive disclosure surrounding their succession plans prior to their departure.
– 66% of newly appointed Lead Executives were promoted from within the organization.
– 10% of newly appointed Lead Executives were women.

John Jenkins