Introduction

This First Analysis article discusses some key ramifications of coronavirus outbreak for public companies. In addition to a host of significant general business concerns, such as those relating to liquidity and financing opportunities, revenues, supply chain and employee and community health and welfare, the novel coronavirus known as COVID-19 has raised a number of issues specific to public companies that file reports with the US Securities and Exchange Commission (SEC). These matters include the application of SEC disclosure requirements, logistics for upcoming shareholder meetings and administrative challenges in complying with SEC requirements.

Initial Guidance

SEC Disclosures and Related Requirements
To a large degree, SEC disclosure requirements are principles-based. Applying the concept of materiality to the impact of COVID-19, there are many areas where existing SEC rules, while not expressly mentioning pandemics, could require disclosure. Such disclosure considerations could arise in the context of a regularly scheduled periodic report, such as an annual or quarterly report. Or, there could be an issue that requires more immediate disclosure through a current report on Form 8-K, Form 6-K, or in a press release. Depending on the circumstance, COVID-19 disclosures also may need to be discussed in registration statements, prospectuses, proxy statements or information statements. However, as discussed further below, disclosures should be specific, not generic, and should be tailored to the particular facts and circumstances applicable to the issuer.

For additional disclosure and reporting considerations, see Periodic and Current Reporting Resource Kit and Financial Statements and Reporting Resource Kit.

Risk Factors. With the impact from COVID-19 intensifying rapidly, companies may become increasingly aware of additional ways in which the pandemic poses specific risks beyond what they may have previously disclosed. It would be useful for companies to begin drafting more detailed risk factors relating to COVID-19 for inclusion in their next SEC filing that requires risk factor disclosure. If a company determines that a particular risk or development relating to COVID-19 is sufficiently material that it should be disclosed prior to its next periodic report or registration statement filed with the SEC, such as might be the case if it is currently in the market buying or selling its securities, it may decide to disclose a new COVID-19 risk factor through a current report filing. For additional information on drafting risk factors, see Risk Factor Drafting for a Registration Statement and Top 10 Practice Tips: Risk Factors.

Forward-Looking Statements. Companies disclosing how COVID-19 may affect their future performance should consider framing their discussions to take advantage of the safe harbor for forward-looking statements set forth in Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). For example, when discussing COVID-19 matters, companies may want to include an explanation regarding the use of forward-looking statements, indicating that actual results of the impact of COVID-19 may be materially different and identifying forward-looking remarks with words such as "believes," "expects," or "hopes." Companies may also want to expressly include the impact of COVID-19 as a factor that could impact actual results in their more general discussions of forward-looking information. For additional information on forward-looking statements, see Safe Harbors for Forward-Looking Statements and Forward-Looking Statements Safe Harbor Checklist.

Management's Discussion and Analysis. Management's discussion and analysis (MD&A) must include information that a company "believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations." With COVID-19 impacting so many companies, often negatively, but in some cases providing opportunities, it is important for the MD&A to not only disclose COVID-19 as a known trend or uncertainty but also management's perspective on the type and extent of COVID-19's effect on the company, to the extent material. There are many possible questions for companies to assess for materiality in the COVID-19 context as they prepare their MD&A. For example, has the company experienced supply chain issues? Are these supply chain issues anticipated to be ongoing? How has COVID-19 affected liquidity? Has the company drawn down on bank facilities for any reason, including because it has not been able to finance in the capital markets? Has the company needed to close any locations? If the company switched its workforce to telecommuting, has there been any reduction in productivity? Is the company party to contracts with force majeure provisions that are or may be triggered by the COVID-19 pandemic, and if so, is that having a material impact on the company's business? Is the company having a dispute with its insurance carrier regarding business continuity coverage? For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations.

Financial Statement Footnotes. Companies should discuss with their accountants whether COVID-19 disclosure is needed as part of their financial statement footnotes. This could include a subsequent event footnote.

Business. To the extent a company is filing a report or registration statement with the SEC that requires a business description, the company will need to consider whether additional or revised disclosure is needed to the extent that COVID-19 has materially changed its business. For example, did the company exit any business line? Did the company close any facility? Is the company having difficulty sourcing inventory and considering alternative sources than those previously used? Are some segments of the company's business impacted more than others? Did the company lay off workers as a result of a business slowdown? Were any acquisitions or organic growth initiatives put on hold?

Litigation. Litigation arising out of COVID-19 may also require disclosure. For instance, it is possible that some companies might face class action lawsuits alleging failure to protect customers or workers from the virus.

Earnings Releases, Earnings Calls and Guidance. Because of the widespread impact of COVID-19, companies should consider addressing, to the extent material, the impact of COVID-19 in upcoming earnings releases. They should also be prepared to answer analysts' questions about the effect of COVID-19 on their earnings calls. It may be useful to script and practice answers to such questions in advance.

Although the federal securities laws do not mandate a specific duty to update prior statements, including guidance, some courts have recognized a duty to update in certain situations. Consequently, companies that have provided guidance to investors should consider updating that guidance, or advising investors to no longer rely on that guidance, to the extent their guidance has materially changed.

Regulation FD. Companies may be fielding many questions regarding COVID-19 because of its pervasive effect on the global economy. Public companies must be careful to avoid selective disclosure of material non-public information about how COVID-19 is affecting them by disseminating such information in a Regulation FD-compliant manner, such as a press release or an Item 7.01 Form 8-K. For further information on Regulation FD, see Regulation FD and Regulation FD Training Presentation Materials.

> Insider Trading; Stock Repurchases. Directors, officers and employees of public companies should not be trading in securities while in possession of material, non-public information. The COVID-19 pandemic is a rapidly evolving situation. If a company becomes aware of a COVID-19 development that may have material ramifications to the company, the company, as well as its directors, officers and employees should avoid trading in the company's securities until that development has been publicly disclosed, unless such trading is accomplished pursuant to a Rule 10b5-1 trading plan entered into while not in possession of material non-public information regarding the company. Companies may need to consider whether any special black-out period should be implemented to prevent insider trading when there is material information that has not been disclosed to the public. Given recent stock price deterioration as a result of generalized market volatility, some companies may be considering effecting stock repurchases. Careful consideration should be given to the company's quarterly blackout period, as well as to whether all information material to the company has been disclosed.

To view the full article, please click here.

Originally Published by Lexis Practice Advisor*

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.