SEC provides additional filing relief and disclosure guidance in light of COVID-19

On March 25, 2020, in light of the ongoing impact of the coronavirus disease 2019 (COVID-19) pandemic, the US Securities and Exchange Commission (SEC) provided additional relief for public companies with upcoming filing deadlines. In addition, its Division of Corporation Finance issued disclosure guidance regarding the impact of the COVID-19 pandemic.

Relief on upcoming filing deadlines

As we previously summarized, on March 4, 2020, the SEC entered an order providing a 45-day extension to companies that, due to the COVID-19 pandemic, are unable to meet deadlines on filings that would have otherwise been due between March 1, 2020 and April 30, 2020. The new SEC order extends this relief to filings that would have otherwise been due on or before July 1, 2020.

The new order supersedes the prior order, leaving intact its framework with a few variations.  These changes include that the new order:

• Expressly covers “any amendment” to filings due during this period.  This should answer questions as to whether, for example, the order covers amendments to Form 10-K to add Part III information within 120-days of fiscal year end (if not included in the proxy statement), or to a Form 8-K to add target and pro forma financial statements within 71 days of the due date of the Form 8-K for the closing of the acquisition of a “significant” target.
• Expressly clarifies that, to rely on the order, the filer must furnish to the SEC a Form 8-K or a Form 6-K as to “each filing” that is delayed.
• Revises the requirement that the Form 8-K or Form 6-K contain “a risk factor” to clarify that this should be “company specific” and may require multiple risk factors.  This seems intended to avoid generic, boilerplate risk factors in accordance with long-standing SEC guidance as well as its recent proposal to modernize risk factor disclosure (which we previously summarized here).

The SEC’s press release accompanying the new order also reiterated its position (expressed in the prior press release accompanying the original order) that companies complying with the order will be considered “current and timely” for purposes of Form S-3 and Form F-3 eligibility (and Well-Known Seasoned Insurer (WKSI) status), “current” for purposes of Form S-8 eligibility, and to have “current public information” for purposes of Rule 144(c).

Disclosure guidance regarding COVID-19

Also on March 25, 2020, the SEC’s Division of Corporation Finance issued Disclosure Guidance Topic No. 9, providing its views regarding disclosure and other securities law obligations that companies should consider with respect to the COVID-19 pandemic and related business and market disruptions. We have previously summarized several of these considerations. 

Notably, the Division’s guidance provides an illustrative list of questions companies should consider when preparing disclosure documents.  The list is copied in full below:

• How has COVID-19 impacted your financial condition and results of operations?  In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?  Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
• 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?
• How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?  For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
• Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
• Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?  If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?  What challenges do you anticipate in your ability to maintain these systems and controls?
• Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?  Do you face any material resource constraints in implementing these plans?
• Do you expect COVID-19 to materially affect the demand for your products or services?
• Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services?  Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
• Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
• Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

This list is not exhaustive. The guidance also encourages company-tailored disclosure that allows investors to evaluate the current and expected impact of the COVID-19 pandemic through the “eyes of management,” and it reminds companies that they may avail themselves of the safe harbors for “forward-looking statements.”

The guidance discusses the use of non-Generally Accepted Accounting Principles (GAAP) financial measures in earnings releases when the most directly comparable GAAP financial measure is not available at the time because COVID-19 pandemic related adjustments may require additional information and analysis to complete.  The staff stated that, in these circumstances, it would not object to the company reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amounts based on a reasonable estimate, or to a range of reasonably estimable GAAP results.  The company should explain, to the extent practicable, why the line item is incomplete and what additional information or analysis may be needed to complete the accounting. 

This position does not apply to non-GAAP financial measures disclosed in a filing required to contain GAAP financial statements, since the required reconciliation is possible in these circumstances.  Non-GAAP financial measures reconciled to provisional amounts or an estimated range should be limited to those used to report financial results to the company’s board of directors.  A company presenting a non-GAAP financial measure or key performance metric to adjust for or explain the impact of the COVID-19 pandemic should also provide an explanation of why management finds the measure or metric useful and how it helps investors assess the impact of the COVID-19 pandemic on the company’s financial position and results of operations.  Similarly, if a company is presenting a new metric related to the COVID-19 pandemic, or changing the method of calculating an existing metric, the SEC reminded companies to refer to its recent guidance on performance metrics disclosure, which may be found here.

The guidance also discusses how the COVID-19 pandemic considerations can create issues for companies relating to:

• Obligations to take reasonable steps to prevent insiders from trading while in possession of material nonpublic information and under Regulation Fair Disclosure (Reg FD) to avoid selective disclosure.
• Possible needs to “revisit, refresh, or update” prior disclosures that becomes materially inaccurate.
• Accounting, audit and financial reporting challenges, such as impairment of goodwill or other assets. 

Conclusion

If you have any questions about public company disclosures, or other matters related to the COVID-19pandemic, please reach out to your DLA Piper relationship attorney or a member of our Public Company and Corporate Governance group.

Please also visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.

This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.