The Situation: The SEC Chairman and the Director of the Division of Corporation Finance have called on public companies to provide investors with as much information as practicable, including robust forward-looking information, regarding the impact of the novel coronavirus (COVID-19) pandemic on their financial condition and operations.
The Issues: Despite the availability of statutory safe harbors for forward-looking statements, forward-looking disclosure raises enforcement and litigation risks that companies should be mindful of in considering the Chairman and Director's request.
Looking Ahead: Companies should carefully consider, with the assistance of legal counsel, the costs and benefits of providing enhanced forward-looking information and should proceed cautiously in light of the attendant risks.
Many public companies are grappling with difficult challenges regarding the content of upcoming earnings releases and related conference calls as well as required periodic reports, all of which are being prepared against the backdrop of an unprecedented—and still evolving—public health crisis, extraordinary mitigation responses, and acute market disruptions. Our recent White Paper provided guidance for public companies preparing disclosure during this significant market disruption.
Following recent actions by the U.S. Securities and Exchange Commission ("SEC") focused on market integrity, including a statement from the Enforcement Division's Co-Directors, the SEC Chairman and the Director of its Division of Corporation Finance issued a joint statement on April 8, 2020, reiterating the importance of public company disclosure during the COVID-19 pandemic and urging reporting companies to provide investors with as much information as is practicable regarding their current operating status and their future operating plans. The focus of the statement, which posits that ongoing disruptions may render historical information (ordinarily the lion's share of public company disclosure) for the recently-ended quarter substantially less relevant than for prior quarters, is a call for robust forward-looking disclosure.
Among other things, the statement requests disclosure relating to: current liquidity positions and expected financial resource needs; the impact on operations of actions and policies to protect worker health and well-being and customer safety and plans for addressing the effects under various pandemic mitigation conditions; and the nature, amount, and effects of financial assistance under federal and state programs, including the CARES Act, likely to have a material effect upon financial condition or results of operations.
Notwithstanding the benefits attributed to enhanced forward-looking disclosure, there are also attendant risks, particularly in rapidly evolving circumstances characterized by layers of uncertainty. To encourage companies to go beyond the requirements under SEC rules (e.g., mandatory 10-Q MD&A disclosure about certain known trends and uncertainties), the statement reminds companies of the safe harbor for forward-looking statements in the Private Securities Litigation Reform Act ("PSLRA safe harbor") and reassures them that the SEC does not expect to second guess good faith attempts to provide appropriately framed forward-looking information.
While the Chairman and Division Director gave these reassurances, companies should proceed cautiously from an Enforcement perspective. First, the PSLRA safe harbor for forward-looking statements applies only to private actions, and is not a safe harbor from SEC Enforcement investigations or actions. Second, what an issuer views as a "good faith attempt" at an "appropriately framed" forward-looking statement, may not be seen the same way by a skeptical Enforcement staff member in an investigation that can easily be two years after the statement was originally made. Last, and most importantly, nothing in the Chairman and Division Director's statement changes the law. As noted in our Alert regarding the co-Directors of Enforcement's recent statement on market integrity, the Directors admonished companies to be "mindful of ... established disclosure controls," which we believe signals there will be no leeway for alleged antifraud violations.
Of course, these reassurances also do not bind the plaintiffs' bar or the courts in any private securities litigation. Whatever enforcement approach the SEC adopts in light of the COVID-19 pandemic, companies can be assured that the plaintiffs' bar will not hesitate to challenge forward-looking statements in the event of a later stock-price drop. As before the COVID-19 pandemic, stock-drop complaints will continue to attack forward-looking statements with the benefit of 20/20 hindsight, notwithstanding the PSLRA safe harbor. Stock-drop plaintiffs will allege that cautionary statements were not "meaningful"—and forward-looking statements thus not protected by the PSLRA safe harbor—because the risks they described already had materialized, or because they did not describe the precise risk that eventually came to fruition. While companies can point to the SEC statement to argue that courts should take an accommodating view to forward-looking statements in light of these extraordinary times, there can be no assurance that courts will do so; to the contrary, it is likely that courts will continue to take an inconsistent approach to applying the PSLRA safe harbor, as they have ever since the statute was adopted.
Nevertheless, companies are under unique pressures from investors and analysts to provide specific and meaningful operational and financial updates and the SEC statement is likely to amplify these. Companies that elect or feel compelled to accommodate calls for enhanced forward-looking disclosure should consult closely with legal counsel to mitigate litigation risks, including through crafting of disclosure that frames the forward-looking information with the critical assumptions on which it is based and within the context of an array of carefully considered risks.
FOUR KEY TAKEAWAYS
- Although the joint statement indicates that the SEC does not expect to second guess good faith attempts to provide appropriately framed forward-looking information, companies should proceed cautiously.
- The PSLRA safe harbor does not apply to SEC Enforcement investigations and actions, which may occur years after the extraordinary circumstances have passed, at which time forward-looking statements may be viewed skeptically.
- In the event of a later stock-price drop, private securities litigants will continue to challenge forward-looking statements with the benefit of 20/20 hindsight and courts have taken, and likely will continue to take, an inconsistent approach to applying the PSLRA safe harbor.
- Companies that feel compelled to provide enhanced forward-looking disclosure in light of investor and analyst pressure should consult closely with legal counsel to mitigate the attendant risks.
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.
