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 PaperForms144@SEC.gov.
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.
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.
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.
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!
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,
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 CompensationStandards.com webcast: “Tying ‘ESG’ to Executive Pay.”
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.
With ongoing economic uncertainty, many companies are thinking about and taking steps to address liquidity and capital resources. John blogged last week about Corp Fin’s Covid-19 disclosure guidance and this Davis Polk memo takes a look at factors public companies and their underwriters should consider when thinking about a possible securities offering during a blackout period. Self-imposed blackout periods are in place at many companies due to the rapidly developing COVID-19 pandemic and insider knowledge of potential impacts to a company. Care must always be taken when thinking about disclosures with a securities offering but in light of current circumstances, disclosure considerations are heightened now.
As noted in the memo, there is no legal prohibition on the sale of securities during a blackout period, but it can be tricky. Even with a blackout period in place, for companies thinking about a securities offering, the memo says it’s possible to do so when:
– management has enough information about the current (or recently ended) quarter to predict with a fair degree of confidence what the company’s reported results are likely to be
– management has a good track record judging its anticipated results at similar points in the information-gathering and reporting cycle
– management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release. In certain circumstances, such as those relating to the impact of the COVID-19 crisis, management may not be able to predict the company’s results beyond the current quarter, with a high degree of confidence. In those scenarios, a company may decide to withdraw previously issued guidance and not issue new guidance. Nevertheless, withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance
– management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made
The memo provides tips on what to say if management’s expectations aren’t in line with market expectations and considerations for updating risks, trends and uncertainties, selective disclosure issues, reputational and legal risks.
Section 16: Temporary Relief from Form ID Notarization Requirement
The SEC adopted a temporary rule yesterday that should make it easier for compliance personnel to obtain EDGAR codes for new directors and Section 16 officers during the covid-19 pandemic. The rule allows filers to obtain codes by submitting a manually signed authenticating document, without the notarization required by Rule 10(b) of Regulation S-T, so long as the submitted document includes a notation that the filer was unable to obtain the required notarization due to circumstances relating to COVID-19. A filer who receives EDGAR codes under the temporary rule must obtain a notarized, manually signed copy of the Form ID and submit a PDF copy as correspondence, vie EDGAR, within 90 days of receiving the codes. The relief is available through July 1, 2020.
See yesterday’s blog regarding the “manual signature” requirement.
Our April Eminders is Posted!
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Yesterday, Corp Fin issued 2 new CDIs addressing the interplay of Form 12b-25 and Corp Fin’s modified Covid-19 exemptive order that it issued last week providing SEC filing relief for companies affected by the Covid-19 crisis. Here they are:
Question 135.12
Question: A registrant expects that due to COVID-19 it will be unable to file a report of the type covered by Rule 12b-5 on timely basis without incurring an unreasonable effort or expense. It is uncertain as to its ability to file the required report within the applicable 12b-25(b)(2)(ii) period. Should the registrant instead furnish a report on Form 8-K or 6-K, as applicable, relying on the COVID-19 Order (Release No. 34-88465 (March 25, 2020))?
Answer: As a condition to its use, the COVID-19 Order requires, among other things, that the registrant furnish certain specified statements by the later of March 16, 2020 or the original due date of the required report. If the registrant only files a Form 12b-25 by the original due date of the required report, it will have not met the condition of the COVID-19 Order to provide the statements called for by the original filing deadline on a furnished Form 8-K or Form 6-K. Unless this condition is met, the 45 day relief period provided in COVID-19 Order will not be available. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]
Question 135.13
Question: Can a registrant that filed a Form 12b-25 subsequently rely on the COVID-19 Order (Release No. 34-88465 (March 25, 2020)), to extend the filing deadline for the subject report?
Answer: The COVID-19 Order is conditioned on a registrant having furnished a Form 8-K or Form 6-K by the later of March 16, 2020 or the original due date of the report. A Form 12b-25 filing does not extend the original due date of a report. Therefore, unless a registrant that filed a Form 12b-25 also furnished a Form 8-K or Form 6-K by March 16, 2020 or the original due date of the report, it would not be able to rely on the COVID-19 Order.
On the other hand, a registrant that relies on the COVID Order for a report will be considered to have a due date 45 days after the original filing deadline for the report. As such, the registrant would be permitted to subsequently rely on Rule 12b-25 if it is unable to file the report on or before the extended due date. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]
Heightened Insider Trading Risk
With the ongoing Covid-19 pandemic, there is heightened risk for insider trading as more people might have access to material non-public information (MNPI). We’ve blogged before about the need to maintain confidentiality of MNPI and with nearly everyone working remotely, this seems especially important now. The SEC has made clear that it’s focused on securities fraud during the current crisis. Last week, the Co-Directors of the SEC’s Division of Enforcement issued a statement about the impact of Covid-19 on market integrity. Here’s an excerpt:
In these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.
In this interview transcript on CNBC, SEC Chairman Clayton reiterated this message saying “anyone who is privy to private information about a company or about markets needs to be cautious about how they use that private information. That’s sort of fundamental to our securities laws and that applies to government employees, public officials, etc. And the STOCK Act codifies that.”
These recent statements come on the heels of reports about Congressional trades right before the market downturn, which are now reportedly being investigated by the DOJ and SEC. But if companies haven’t already done so, now would be a good time to review who has access to inside information and compliance procedures to see whether extra steps are necessary to minimize insider trading risk.
Transcript: “The Coronavirus: What Should Your Company Do Now?”
We have posted the transcript from our recent webcast: “The Coronavirus: What Should Your Company Do Now?”
As is often said – beauty is in the eye of the beholder – some might say the same about ESG ratings, then again maybe not – it wasn’t too long ago that Liz blogged about how ESG ratings and funds were causing so much confusion – and frustration. The idea of a rating sounds great – evaluate a bunch of company-specific factors and calculate a rating so investors can evaluate companies based on their particular ESG interests and areas of focus. But, it’s not that simple because, among other things, we don’t have standard disclosure and reporting frameworks in place, raters use varying methodologies, investors use them differently, etc.
A recent BNY Mellon report based on a survey of 335 investor relations professionals says that only a small percentage of survey respondents agree with ESG rating providers’ analyses of their company. In 2019, slightly over half of survey respondents had communicated with an ESG rating provider in the past 12 months, which was up from 34% in 2017.
BNY Mellon’s report says that IR departments are increasingly monitoring their company’s ESG ratings, even more so at companies with higher market caps as they presumably have more staff. One reason companies might want to monitor ESG ratings is that investors often raise ESG questions during engagement meetings so it’s helpful to know which ratings your investors track and understand those raters’ methodologies. The BNY Mellon report summarizes the increase in investor ESG questions by topic and industry sector so you can see the types of questions you might hear this year.
I’ve heard suggestions that one way ESG ratings might be more useful would be if the ratings assessed the evolution of a company over time and its trajectory toward sustainability rather than comparing firms, even in the same industry.
For now, the usefulness of ESG ratings as stand-alone information seems questionable as one rater might rate a company high and another might rate the same company low. If anything, companies can find usefulness in the ratings to prepare for investor engagement meetings by understanding which ratings investors are tracking and the related rating methodologies.
Glass Lewis Approach to Governance During Pandemic
Not long ago, I blogged over on our “Proxy Season Blog” about Glass Lewis’s updated policy on virtual-only shareholder meetings. Glass Lewis recently posted another blog – this one about its approach to governance during the coronavirus pandemic. In its governance blog, Glass Lewis touches on compensation and balance sheets – which is the area where it expects to see most near term concerns and issues, board composition and effectiveness, activism and M&A, oil & gas, shareholder proposals & ESG, how Glass Lewis uses discretion and how a company’s disclosure can impact Glass Lewis’s use of discretion. Here’s some of the proxy advisor’s commentary on board composition amid the pandemic:
For boards, we see particular risk in the lack of age and gender diversity among company directors.
Much like shareholder concerns with overcommitment this lack of diversity presents a systematic risk to portfolios, given directors typically sit on several boards and one sick or deceased director can have a compound effect on the capacity of other directors at those companies, which then spreads to the other companies those directors sit on, and so on.
Ultimately, the ability of boards and management to successfully navigate the crisis and outperform their competitors will highlight the stark differences in the effectiveness of boards, directors and their governance structures. In our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.
Transcript: “Conduct of the Annual Meeting”
We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
