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February 7, 2020
The news reports related to the spread of the coronavirus (temporary name of 2019-nCoV (“CV”)) and current and potential economic impacts from it may raise securities law disclosure issues for some companies. Those issues include analysis about what disclosure is required by securities laws in Annual Reports, Form 10-Ks, earnings releases in Form 8-Ks and public and private securities offering documents. While the human impact is significant and not to be minimized, this Securities Alert focuses on some of the factors to consider to determine if and when securities law disclosure obligations related to CV are triggered.
The response to CV, including countries closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as the general concern and uncertainty, have begun to impact every industry. This Securities Alert discusses the following:
SEC Disclosure Obligations When Outcomes are Uncertain
Continuing its modernization and simplification of Regulation S-K as mandated by the JOBS and FAST Acts, the SEC, on January 30, 2020, proposed amendments to certain financial disclosure requirements of Regulation S-K, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The proposed amendments are intended to eliminate overlapping or unnecessary disclosure requirements, to revise requirements in light of advancements in technology (such as the availability of past financial statements and disclosure documents on EDGAR) and to further promote the “principles-based” nature of MD&A disclosure. In addition to the numerous personal implications of the CV outbreak, companies should keep in mind this principles-based approach when considering the disclosure obligations that may be implicated.
There are many uncertainties around CV's likely financial impact on gross earnings, net earnings and other business matters. The ESG (environmental, social and governance) factors are also hard to quantify at this time. Nevertheless, if the forward-looking disclosure of CV relates to a “known trend or uncertainty, then the following chart outlines the decision-making process related to SEC disclosure obligations.
Forward Looking Disclosures Decision Tree:
Is the “Known Trend” Likely to Come to Fruition?
(1989 FR 36 Release – Describe and Quantify Causal Factors)
|Not reasonably Likely to Come to Fruition||Just Don't Know...||Is Reasonably Likely to Come to Fruition|
|No Disclosure||Must Assume "Yes" and Disclose if Material||Assess and Disclose if Material|
As the chart above indicates, where boards and executives are uncertain of the outcome, and the outcome could be material, then disclosures must be made. That is particularly difficult at the early stage of a health situation such as CV.
The impact of CV may have repercussions on a number of disclosure areas, including liquidity and capital resources, sources and uses of funds, gross and net revenues in the short, medium and long term, and other economic and non-economic, personal and ESG considerations. Enhanced or additional risk factor disclosure related to CV pursuant to Regulation S-K Item 105 may be needed if it is or becomes one of the most significant factors that make an investment in the company or any offering speculative or risky. Since SEC disclosure is increasingly principles-based, even if there is not a rule specifically dealing with a situation that a company may find itself in related to CV, the principles of full and fair disclosure apply. Companies should be mindful that their planning for uncertainties that may arise as a result of CV and their response to events as they unfold may be material to an investment decision, and should plan accordingly.
Consider other situations where disclosure of material nonpublic information may be necessary, such as if senior management or boards become impaired and are unable to serve or whether a “material adverse change” in “prospects” has occurred or is reasonably likely to occur. Business interruption insurance policies may be triggered. “Act of God” provisions may be applicable. Contract disputes may occur over CV related matters. Professionals should review and update insider trading policies, blackout periods and trading activity monitoring in light of new information related to CV. Mergers and acquisitions activity may increase due to temporary dips in targets stock prices, while other deals may be temporarily stalled while the impact from CV is assessed. Filings and other deadlines may be inadvertently missed and there may be gaps in government services in various parts of the world at various times. We are anticipating that disputes and litigation related to CV and its aftermath may increase, and companies should consider many factors, not just more immediate concerns, when evaluating whether CV related disclosure is required under the securities laws.
It is noteworthy that in the SEC’s proposal issued on January 30, 2020 to update MD&A, in Item 303(a)(3)(ii), companies would be required to disclose known events that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues.
Interestingly, the proposed amendments would for the first time provide guidance about the use of metrics. Metrics may be important related to CV and its likely trajectory and impact. According to the SEC Release regarding the proposed amendments:
The guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also reminds companies of the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics.
The complete SEC Release regarding the proposed amendments is available here. It is inevitable that some companies will have to grapple with how to handle complex SEC disclosure obligations related to CV, even if the impact is temporary or short term.
Selected Disclosure Considerations by Industry
We have prepared specific factors to consider and guidance for various industries related to SEC disclosures for the impacts of CV. Please contact your regular Nelson Mullins attorney or the author of this Securities Alert to discuss our industry guidance for your company. Impacted industries may include, without limitation:
ESG considerations are always important, and have a heightened relevance at a time when CV and its ramifications are unknown. Some considerations include:
Role of Boards of Directors and Senior Management
If the CV situation continues to escalate, it is and will be a time for each person to show leadership and fortitude in small and sometimes large ways. Directors, trustees and management as well as those in equivalent positions can work to better inform themselves and exercise good judgement and gravitas. Strong legal counsel can be extremely helpful on this journey and help avoid unnecessary legal and other problems down the road.
Enhanced Labor and Employment Law, Data Privacy and Cybersecurity Considerations
In some jurisdictions, including New York State and New York City, an employee who contracts the flu or a serious virus may be considered disabled and entitled to additional protections under relevant employment law. In those jurisdictions, the employer may be obligated to engage in the interactive process to accommodate the employee by providing additional leave or other accommodations beyond any statutory sick leave entitlement or company policy. Some other considerations include:
Some of these considerations related to CV outlined above may trigger disclosure updates under the securities laws. Please consult your regular Nelson Mullins lawyer or the author of this Securities Alert for specific guidance on labor and employment law, data privacy (including HIPPPA, CCPA and GDPR) and cybersecurity matters related to CV and any economic repercussions from it.
The CV situation may be a relatively contained situation or become more serious. When it is too early to tell, but the impact will be material (or is reasonably likely to be material) if the uncertain event occurs, then the securities law disclosure obligations may be triggered. At this point, it may be difficult to ascertain what disclosure is appropriate, but many companies have already added disclosure about CV and its likely impact on their business to their earnings releases and other disclosure documents. Checking other similarly situated companies’ disclosure as well as periodic advice from regulators may provide additional guidance. Your regular Nelson Mullins attorneys and the author of this Securities Alert are here to advise you on SEC disclosure guidance and your other corporate and litigation needs related to CV and its impact.
If you have questions or would like more information, please contact Adele Hogan at 646.428.2634 or firstname.lastname@example.org.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.