Canada: COVID-19 : perspectives de première ligne et considérations pratiques pour les sociétés ouvertes

La pandémie de COVID-19 perturbe les activités commerciales et occasionne aux sociétés ouvertes de nouveaux problèmes de gouvernance et de conformité. Dans cet article, nous nous intéressons aux effets directs de la pandémie sur les sociétés ouvertes canadiennes et aux considérations pratiques qui peuvent les guider au cours de cette période sans précédent. Stikeman Elliott accompagne activement ses clients dans une grande variété de secteurs. Le cabinet offre des conseils pratiques pour aider les décideurs à protéger les intérêts des actionnaires, à se conformer à leurs obligations et à limiter les risques.  

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As the COVID-19 pandemic disrupts business operations, it also brings about new governance and compliance challenges for public companies. In this article, we discuss front line perspectives and practical considerations that may guide Canadian public companies through this uncharted period. Stikeman Elliott is actively engaged with its clients across a broad range of industries, providing practical advice to help key decision makers protect interests of shareholders, remain in compliance and mitigate risk. 

Filing Deadlines

As the impact of the global COVID-19 pandemic continues to evolve, Canadian issuers may find themselves in a position where they are unable to meet annual and/or quarterly financial statement filing deadlines, particularly as social distancing measures for staff and service providers (e.g., audit teams) disrupt normal course audit or review plans and timelines. As previously discussed, last week the Canadian Securities Administrators (CSA) announced blanket relief for market participants, including reporting issuers, extending the filing deadline by 45-days for many continuous disclosure documents that are due prior to June 1, 2020.  These include financial statements, management's discussion and analysis (MD&A), management reports of fund performance, annual information forms, technical reports and certain other filings.

What to Consider:

• Can the issuer make requisite filings before the applicable filing deadline(s) considering all relevant factors? This includes availability of resources in your finance team as well as your auditor. While most auditors have work-from-home contingency plans, we understand there may be delays given the challenges associated with managing remote audits, e.g. providing supporting documentation.
• Before taking advantage of the blanket relief, consider how extended filing deadlines may impact ongoing contractual obligations, and in particular existing credit facilities, to ensure that any late filings won't trigger an event of default. If a waiver is required, engage early with your lenders.
• A delayed filing may also impact the type of disclosure required to be included in financial statements, MD&A and other disclosure documents, including, for example, subsequent event disclosure.
• A delayed filing may also extend an issuer's blackout periods, which typically lift after disclosure of results, and consequently impact when insiders may be able to trade in the company's securities.

Risk Factor Disclosure

For almost all issuers, the COVID-19 pandemic and its impact on operations, performance and future prospects will present a material risk necessitating disclosure. Canadian securities legislation requires reporting issuers to disclose in their MD&A, AIF and prospectus filings the material risks affecting their business and, where practicable, the potential financial impacts of such risks.

What to Consider:

• Issuers should consider the use of COVID-19 risk factors to protect against future claims of insufficient disclosure, particularly given the broad and pervasive impacts of COVID-19 on the global economy and the speed at which such impacts are evolving.
• Specific assessment of the real risks to the issuer's business is required. Issuers should ask themselves how the COVID-19 pandemic could impact the issuer's business, even in "worst case" scenarios given the current level of uncertainty. There is no "one size fits all" disclosure model for risk factors and issuers should avoid boilerplate disclosure.

Guidance, Outlook and Material Changes

As the pandemic continues, reporting issuers who have previously issued guidance or other forward-looking type information will be increasingly at risk of falling short of achieving their prior forecasts.  Issuers have an ongoing obligation to monitor previously provided guidance and provide an update (or retraction) if, at any time, circumstances are such that the issuer no longer has a reasonable basis for the guidance or the material assumptions required to support the guidance are no longer reasonable. Material changes in the issuers business or affairs must also be disclosed in a timely manner.

What to Consider:

• As quarterly MD&A filings become due, issuers must consider whether any business impacts of the pandemic are reasonably likely to cause actual results to differ materially from the guidance previously provided and include a discussion of the circumstances and events, as well as their expected impact, in the issuer's MD&A.
• Most issuers will likely look to retract previously issued guidance rather than attempt to forecast new guidance (or update old guidance) during unprecedented circumstances. Updated guidance in this unprecedented period may be inherently difficult to forecast and may only present "downside" risk to the issuer and management's credibility.

Virtual Shareholder Meetings

While we had predicted an uptick in virtual shareholder meetings for this proxy season, in light of current directives to exercise social distancing and to avoid large gatherings, virtual shareholder meetings are by necessity gaining popularity in Canada. As we have previously discussed, the Canadian Securities Administrators (CSA) have also expressed support and published guidance for issuers looking to embrace virtual platforms this proxy season.

What to Consider:

• Do the issuer's incorporating statute and constating documents allow for virtual-only meetings? Not all corporate statutes permit virtual-only meetings, with some jurisdictions not expressly permitting such meetings and others restricting their use. While in certain cases it may be advisable to obtain a court order to sanction a virtual-only meeting, we believe this should not be necessary in most circumstances provided the bylaws are permissive, including under the CBCA and statutes with similar language.
• In light of evolving guidance and restrictions imposed on day-to-day life, issuers who do not currently anticipate holding a virtual-only meeting should include language in their proxy materials indicating that there is the possibility of changes being announced to the date, time, location and format of the meeting due to COVID-19.

Insider Trading

The rapidly evolving environment and consequent impact on an issuer's business may be difficult to assess in real time.  Both direct or indirect impacts may comprise material information which, until disclosed, will prohibit any securities transactions by those in a "special relationship" with the company.  Special considerations should also be given to sharing of that information internally and with business partners and whether the "necessary course of business" exemption applies given prohibition against "tipping".

What to Consider:

• Boards, management and employees should be reminded of the prohibitions on insider trading and tipping. In light of high volatility and uncertainty in the stock market driving trading prices, there may be an increased risk that an issuer, its management and directors, among others, are in possession of material non-public information even while not in a regular black-out period. Insiders should therefore carefully evaluate any potential trading activity during this time.
• Many issuers maintain regular black-out periods and quiet periods restricting trading by insiders or discussions with market participants. These periods often expire on the release of the issuers' annual or quarterly financial statements. As noted above, a delay in the release of financial results will generally extend those windows.

NCIBs and ASPPs

Low share prices may also impact an issuer's prior plans with respect to purchasing its own shares through the use of a normal course issuer bid (NCIB).  While it may be an attractive use of cash, issuers will need to balance this opportunity with the needs to preserve cash in light of the potential uncertainties facing the business as the impact of COVID-19 continues to unfold. Notwithstanding the potential benefits of an NCIB, Canadian corporate legislation generally prohibits the buyback of shares if there are reasonable grounds for believing that either (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of the corporation's assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. Directors of the company are personally liable for losses resulting from a breach of these solvency tests. In addition, purchases of securities by an issuer under an NCIB during a period where the issuer has knowledge of material non-public information relating to it or its material subsidiaries are prohibited under the insider trading restrictions and applicable stock exchange rules, unless the NCIB is set up through an automatic securities purchase plan or ASPP. 

What to Consider:

• Is the issuer in possession of any material non-public information? As discussed above, the impact of the COVID-19 pandemic coupled with extended filing deadlines may result in a greater risk that an issuer is holding on to material non-public information which, absent an ASPP, would prohibit the issuer from purchasing securities pursuant to an NCIB.
• Can the issuer satisfy the solvency tests following the purchase of any securities pursuant to the NCIB, particularly in light of declining economic conditions and strains on liquidity as a result of COVID-19?
• Issuers may also want to consider the impact of COVID-19 on dividend reinvestment plans (DRIPs) and insider-implemented automatic disposition plans (ASDPs).

Executive Compensation and Long-Term Incentive Plans

The impact of COVID-19 may affect calculation of performance-based incentives as well as applicable vesting and/or termination provisions of existing compensation plans.

What to Consider:

• Taking into account potential declines in share prices, does the issuer have a sufficient number of securities reserved for issuance under its long-term incentive plans to properly compensate management for the foreseeable future without having to obtain further shareholder approval?
• Are previously set performance targets appropriate or still applicable in the current climate? In many cases the shift in the global economy spurred by the COVID-19 pandemic may make existing performance goals difficult if not impossible to achieve in the near term. If amendments to performance metrics are considered, they may require disclosure in upcoming proxy materials. Other amendments to incentive plans may also require shareholder approval under applicable stock exchange rules.
• Many employers may be considering temporary or permanent lay-offs in the face of reduced activity. Issuers should review their incentive plans to consider how termination is treated under the plans and whether awards continue to vest during temporary layoffs.

Dividend Payments

Issuers facing liquidity concerns as a result of the COVID-19 pandemic may have to choose between their dividend program and cash preservation in light of short- and longer-term uncertainties facing the business. An issuer's board should also consider whether the issuer could face liquidity constraints that would require amendment or suspension of any dividend programs in the best interests of the company.

What to Consider:

• Canadian corporate law generally prohibits the declaration or payment of a dividend if there are reasonable grounds for believing that the corporation is, or would after the payment, be unable to pay its liabilities as they become due or the realizable value of the corporation's assets would be less than the aggregate of its liabilities and stated capital of all classes. Outside of these solvency requirements, a dividend, once declared on a share, constitutes a debt of the corporation to the shareholder and cannot be revoked.
• Will the issuer satisfy the solvency requirements of corporate law in order to declare and pay a dividend? Directors should give proper consideration to the solvency requirements during times of economic downturn, particularly taking into account potential further business impacts that may occur between declaring and paying a dividend. If the issuer does not foresee being able to satisfy the solvency requirements at both declaration and payment, the board should consider suspending the dividend program. The impact of not paying a previously announced dividend will need to be considered in advance and discussed with the market regulator, as the shares will have been trading with expectation of the dividend being paid.

Corporate Governance and Directors' Duties 

Under corporate law, directors and officers are subject to a duty of care and fiduciary and oversight duties which require that they promote the corporation's interests and act with the care, skill and diligence of a reasonably prudent person. Global crises do not change these baseline duties and boards and management should continue to act in the best interests of the company, considering relevant stakeholders.

What to Consider:

• Does the board have frequent access to reliable information to have an accurate understanding of the potential risks and challenges associated with the COVID-19 pandemic?
• Given the quickly evolving nature of the current COVID-19 pandemic, is the board and management meeting on a sufficiently frequent basis to continuously assess the ongoing and changing risks to the company?
• Are formal business continuity plans and procedures sufficient to address the assessed business risks or do they need to be adjusted as new information becomes available? Issuers should review board and committee mandates to confirm which body(ies) will have oversight and support management's efforts in assessing and acting on the risks that are emerging. Changes to contingency plans should also be considered, including redundancy built in for key employees given the potential for sudden absences due to the employee or a family member being impacted by the virus.
• Other areas of risk may include challenges associated with remote-working and cybersecurity. Boards should consider whether remote-working capabilities are sufficient, including network, back-up and security protocols. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.