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.”
It came together quickly, some might say not fast enough but last Friday, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law. It is believed to be the largest emergency stimulus package in U.S. history and it will have a significant impact on businesses and employees. There’s a lot in it – for those looking for a shorter version (the bill is 880 pages), here’s a section-by-section summary and this Skadden memo provides an overview. This Cleary memo summarizes 10 key aspects to the bill:
1. Assistance for affected industries – $500 billion in loans, loan guarantees and other investments for industries affected by COVID-19, $454 billion for eligible businesses, states and municipalities and $46 billion for aviation businesses and national security-critical businesses
For aviation businesses and national security-critical businesses, Treasury must receive warrants, equity or senior debt from the borrower. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions apply. Airlines can be required to continue service of existing routes to the extent reasonable and practicable.
– See John’s blog from Friday for a nuance of the stock buybacks provision relating to airline companies
For borrowers receiving relief from the $454 billion bucket, the Federal Reserve may make loans or purchase obligations or other interests directly from issuers or in the secondary market. Restrictions on share repurchases, capital distributions on common stock and executive compensation apply to direct loans to eligible businesses, unless waived by Treasury, and workforce reduction restrictions apply with respect to the mid-sized business program.
2. Airline grants to support aviation workers – $32 billion, Treasury may make direct grants to the aviation industry that must be exclusively used for wages, salaries and benefits
Again, Treasury has authority to require warrants, equity or debt. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions, and airline service requirements, apply.
3. SBA assistance for small businesses – $349 billion Paycheck Protection Program – SBA will provide guarantees for loans to small businesses generally less than 500 employees, aimed at covering payroll and necessities like rent and utilities and include loan forgiveness provisions that are available if certain conditions are met
4. Financial sector liability guarantees – among other things, this includes a guarantee program for the U.S. money market mutual fund industry and bank debt guarantee authority
5. Financial institution regulatory relief –among other things, this includes lending limit waivers, community bank relief, regulatory capital relief for SBA lending and accounting relief for financial institutions
6. Tax relief – among other things, this includes an employee retention tax credit, deferral of certain employer payroll taxes, increased ability to deduct net operating losses, an increase in the business interest allowable deduction from 30% of adjusted taxable income to up to 50%
– Also tucked in this section is a waiver of the federal excise tax on any distilled spirits used for making hand sanitizer – doubtful we’ll hear complaints about this business tax break
7. Mortgage & real estate related relief – among other things, this includes foreclosure moratorium and forbearance of multifamily residential mortgage loan payments on federally backed loans
8. Potential relief for the hotel & restaurant industry
9. Employee benefits & tax-qualified retirement savings plans – among other things, this includes ability for individual withdrawals on a tax favorable basis from eligible retirement plans and an increase in dollar cap on loans from qualified employer plans
10. Family & medical leave – revisions to the Families First Coronavirus Response Act
The CARES Act also includes targeted funding for the health care system and other important provisions like unemployment -this McDermott memo delves into provisions related to the health care sector.
With the COVID-19 crisis unfolding daily, the measures taken by Congress, albeit imperfect, will hopefully stem some of the economic effects. There will likely be several rounds of “fix-it” sessions as constituents representing both sides of the aisle have particular wish lists that can be taken up moving forward because as many have noted, if the crisis persists for even longer, there may be calls for additional economic relief.
To help you find resources addressing various CARES Act provisions, we’re posting memos specifically related to the CARES Act in our “COVID-19” Practice Area.
CECL Delayed Effectiveness
The FASB standard for current expected credit losses (CECL) took a double-blow on Friday and is delayed after all. The CECL standard was supposed to take effect in January 2020, but as this Compliance Week blog reports, it’s delayed.
The CARES Act wedged CECL in on page 543 and allows banks to delay compliance until the earlier of December 31, 2020 or the date the coronavirus national emergency ends.
At the same time, the FDIC and Office of the Comptroller of the Currency issued a joint statement allowing banking organizations to mitigate the effects of CECL in their regulatory capital for up to two years. The interim final rule, which takes immediate effect but is not mandatory for banks wishing to stay the course, applies to organizations required to adopt CECL by its Jan. 1 effective date this year and is an addition to a three-year transition period already in place.
Rationale for slipping this provision in the CARES Act seems to be that since the standard requires banks to look forward while taking into consideration past experience and current conditions to predict which loans will be losers, given the current economic climate, that might prove problematic. As noted in this Accounting Today blog, this is likely welcome news to some banks as it eliminates a difficult task and reduces additional volatility – although some banks will likely comply with CECL anyway since they’ve been preparing for it over the last year. Critics will likely make some noise about this CARES Act provision since the FASB drafted the standard in the aftermath of the 2008 financial crisis to help illuminate impending losses and given current economic conditions, this is something many likely want to see now.
Importance of Board Culture
An opinion piece in Bank Director discusses board culture and how it’s often an underappreciated factor in determining board effectiveness. Asserting that board culture is more enduring than personality, some of the values the author mentions that shape the board’s culture include:
– Independence: do board members feel empowered to ask questions, probe and examine?
– Transparency: is all relevant information being shared with the board? Boards and management need to be reviewing the same information to facilitate effective oversight
– Access to information: boards need access to any information that is essential for their oversight responsibilities
– Alignment around objectives: all directors need to be aligned in their understanding and support of a company’s objectives and be focused on achieving them
One way boards can help ensure effectiveness is by evaluating their own culture in addition to the company’s culture. This report from Anti-Fraud Collaboration includes questions boards can use to help assess culture. The report also suggests steps the board can take improve oversight of company culture and it includes an outline of suggested oversight responsibilities for the board and each committee. The report suggests creating a culture dashboard and it lists metrics from different corporate functional areas that can help companies monitor trends.
Late Wednesday, the Senate unanimously passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. This Tax Foundation blog provides a detailed summary of the Senate bill, which is scheduled to go to the House for a final vote this morning. It’s expected to pass overwhelmingly, but passage might be delayed because one member is apparently asking the question, “what would Ayn Rand do?”
Although I suppose it’s conceivable that the House might try to tinker with the bill at the last minute, it seems unlikely that, with a Democratic majority, it would mess with one of the key conditions that the Senate bill imposes on companies seeking federal aid. As this excerpt from the blog points out, if a company wants taxpayer money, it can forget about doing stock buybacks for a while:
The bill provides $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020.
In case you’re wondering, dividends are also off the table for these companies for that same period of time. The loans also impose not terribly onerous limits on compensation and severance pay, and will be subject to oversight by Congress & a special inspector general.
Buybacks: Are Airlines Supposed to be Treated Differently?
Nobody is likely to shed any crocodile tears over companies receiving yet another federal bailout being prohibited from this type of financial engineering, but as I read through the bill, I noticed something interesting. Airlines have been the poster children for the buyback ban, and whether or not that’s the rationale, the language of the buyback restriction that applies to airlines & related entities is different than the language of the restriction that applies to companies getting money under the Treasury-backed Fed program.
Here’s the language of Section 4003(c)(3)(A)(ii)(I) (page 518) that applies to recipients of the Fed’s largesse. It requires them to agree that:
Until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
Here’s the language of Section 4003(c)(2)(E) of the bill (page 516) that applies to the airlines. It requires them to agree that:
Until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of this Act
Similar language appears in Section 4114 of the bill, which deals with payroll support for air carrier employees. I took a quick look, and it appears that while the term “affiliate” is defined for at least one part of the CARES Act, it’s undefined in this particular part. So, it seems that without further clarification, the highlighted language might well be construed to prohibit airline officers and directors from purchasing shares of their own company’s stock. As I mentioned, there are limits on comp that apply to recipients of the bailout (Section 4004), but is that what is intended?
Since it’s so sweeping & came together so fast, I’m sure that the CARES Act is full of little interpretive grenades like this one – which means that Congress hasn’t forgotten to take care of America’s lawyers as it prepares to fire its cash bazooka.
That reminds me of an old adage that I once saw on a coffee mug: “Every business has its own best season. That is why they say that June is the best month of the year for preachers. Lawyers have the other eleven.”
Undisclosed SEC Investigations & Company Performance
Francine McKenna recently posted an article on her website that discusses some SEC investigations that weren’t disclosed for quite some time after they were initiated. Although she acknowledges that companies aren’t generally obligated to disclose investigations, she cites some new research that says there’s a negative correlation between undisclosed investigations and company performance, and notes that the researchers suggest that could give insiders a trading advantage:
Undisclosed investigations, if investors knew about them, could help explain the subsequent economically meaningful declines in firm performance and increased share price volatility the researchers say occurs. Because the investigations are secret, the performance declines are slow and gradual, and are not quickly reflected in share prices. That suggests, the researchers write, that insiders who know the details of the investigation have a substantial information edge.
My own experience with SEC investigations has been that when companies are subject to them and opt not to make public disclosure, they usually close the trading window for those in the loop at some point fairly early in the process (usually when an informal investigation becomes formal, if not sooner). The research Francine cites suggests that it would prudent for any company that’s the subject of an SEC investigation that it hasn’t disclosed to take the same approach.
Yesterday, Corp Fin issued CF Disclosure Guidance Topic No. 9, which addresses disclosure & other securities law obligations relating to the Covid-19 crisis. The guidance provides a helpful list of illustrative questions that companies should ask themselves when preparing disclosure documents. Here are some questions Corp Fin thinks companies should consider when thinking about the pandemic’s impact on their liquidity & capital resources:
How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
The guidance also addresses insider trading concerns, as well as considerations for earnings releases. When it comes to earnings disclosure, Corp Fin touches on several issues, one of which is non-GAAP financial data. While reminding companies of their obligations under Reg G & Item 10 of Reg S-K, the guidance also indicates some flexibility to the Staff’s approach under current conditions:
We understand that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.
As an example, the guidance references the case of a company that intends to disclose EBITDA information on an earnings call. The Staff’s position would permit the company to reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The guidance says that if a provisional amount or range is used, it should reflect a reasonable estimate of Covid-19 related charges not yet finalized, such as impairment charges.
SEC Modifies Covid-19 Exemptive Order
Yesterday, the SEC also issued a modified exemptive order extending the time period during which, subject to certain conditions, companies with operations affected by the Covid-19 crisis may delay their SEC filings by up to 45 days from the original due date. The SEC’s original order applied to certain disclosure filings that would’ve otherwise been due between March 1 and April 30, 2020. The modified order extends that period through July 1, 2020.
The SEC’s press release accompanying the modified order also indicates that, for purposes of determining Form S-3 eligibility & WKSI status, a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report. The same approach will apply to a company’s eligibility to file an S-8 & for purposes of determining whether it is current in its reports for purposes of Rule 144(c).
RIP Judge Stanley Sporkin
Judge Stanley Sporkin, who passed away on Monday, was one of the truly towering figures in securities regulation during the latter half of the 20th Century. Here is a statement on his passing from SEC Chair Jay Clayton, and another one from the current co-directors of the SEC’s Division of Enforcement, which Sporkin built almost from scratch into an enforcement powerhouse during his tenure there in the 1970s. We offer our condolences to Judge Sporkin’s friends and family.
