The US Securities and Exchange Commission announced on the morning of March 25 the extension of filing periods covered by previously enacted conditional reporting relief for certain public company filing obligations, and provided current views regarding disclosure considerations and other securities law matters related to the coronavirus (COVID-19) crisis.
This LawFlash addresses guidance issued prior to 12:00 pm Eastern Time on March 25. We will update this LawFlash to address relief and guidance published later on March 25 and in the days to come as additional relief and guidance is published.
SEC Encourages Disclosure
The fundamental goal of the US Securities and Exchange Commission (SEC) guidance is to ensure that investors are kept apprised of how the COVID-19 pandemic is impacting companies.
SEC Chairman Jay Clayton stated that while health and safety continues to be the SEC’s first priority, the SEC “encourage[s] public companies to provide current and forward-looking information to their investors.” He also reminded companies that they can avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act) for forward-looking statements.
Extension of Filing Relief
The SEC issued an order (Exemptive Order) extending to July 1, 2020, its earlier order providing public companies with a 45-day extension of the deadline to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020 (the “relief period” which under the prior order ended on April 30). Affected disclosure reports include, among others Forms 10-K, 10-Q, and 8-K otherwise due during the relief period.
In order to take advantage of the Exemptive Order, companies must satisfy certain conditions. Among other things, companies must (1) be unable to meet the filing deadline due to circumstances related to COVID-19, and (2) file, by the original filing deadline for the delayed report, a Form 8-K stating
- that the company is relying on the Exemptive Order;
- a brief description of the reasons why the company could not file such report, schedule, or form on a timely basis;
- the estimated date by which the report, schedule, or form is expected to be filed;
- a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
- if the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, the Form 8-K shall have attached as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report, or certification on or before the date such report must be filed.
In addition, when the delayed report is filed, the company must disclose that it relied on the Exemptive Order and state the reasons why it could not file the report on a timely basis.
Securities Act Form Eligibility and Other Matters Relating to Delayed Reports
The SEC also indicated that the staff (the Staff) of the Division of Corporation Finance (Corp Fin) will take the following positions with respect to certain obligations under the Securities Act of 1933, as amended (Securities Act) and the Exchange Act:
- For purposes of eligibility to use Form S-3 or Form F-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 or Form F-3 eligibility), a company relying on the Exemptive Order will be considered current and timely in its Exchange Act filing requirements during the extended filing period if it was current and timely as of March 1, 2020, and it files any report due during the relief period within 45 days of the filing deadline for the report.
- For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the Exemptive Order will be considered current in its Exchange Act filing requirements during the extended filing period if it was current as of March 1, 2020, and it files any report due during the relief period within 45 days of the filing deadline for the report.
- Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the Exemptive Order will be considered to have a due date 45 days after the filing deadline for the report. As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.
Staff Disclosure Guidance
Corp Fin published CF Disclosure Guidance: Topic No. 9 “Coronavirus (COVID-19)” (Guidance) to provide Corp Fin’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions, formalizing guidance that registrants have been informally receiving from the Staff during the course of routine reviews of their filings.
While recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies, and that the actual impact of COVID-19 will depend on many factors beyond a company’s control and knowledge, the Guidance encourages timely reporting regarding matters such as the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties, any of which can be material to investment and voting decisions.
The Guidance contains a non-exhaustive list of topics that companies assessing COVID-19-related effects and their disclosure obligations may wish to consider, including the following:
- Current and expected impact of COVID-19 on financial condition and results of operations
- Current and expected impact of COVID-19 on capital and financial resources, such as overall liquidity position and outlook; cost of or access to capital and funding sources, such as revolving credit facilities or other sources; sources or uses of cash; and any material uncertainty about the ongoing ability to meet financial covenants
- Expectation of how COVID-19 may affect assets on balance sheet
- Anticipation of 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, etc.
- Whether, and if so how, COVID-19-related circumstances such as remote work arrangements have adversely affected the ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures, and what challenges are anticipated in the ability to maintain these systems and controls
- Any challenges in implementing business continuity plans or material expenditures that may be required to do so
- Whether COVID-19 is expected to materially affect the demand for products or services
- Whether COVID-19 is likely to have a material adverse impact of COVID-19 on supply chain or methods used to distribute products or services
- Whether company operations will be materially impacted by any constraints or other impacts on human capital resources and productivity
- Whether travel restrictions and border closures are expected to have a material impact on the ability to operate and achievement of business goals.
In assessing disclosure, companies are encouraged to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management. The Guidance also includes a brief statement that these forward-looking disclosures can be made in a way to avail companies of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act (commonly known as the PSLRA forward-looking statement safe harbors).
Also, importantly, companies are urged to proactively revise and update disclosures as facts and circumstances change.
Impact on Reporting Earnings and Financial Results
The upcoming end of the first calendar quarter of 2020 will raise increased questions on earnings releases and the communication of financial results, especially in advance of reporting final results for the completed period.
The Guidance addresses certain considerations regarding how to report the evolving impact of COVID-19 on financial results in light of unexpected nonrecurring charges and expenses, with the recognition that the impact of COVID-19 on businesses may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve.
Of particular note are the Staff’s comments regarding the presentation of non-GAAP financial measures, as well as the SEC’s recent guidance with respect to performance metrics disclosure, including as to the following:
- Where a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations
- Where a GAAP financial measure is not available at the time of the earnings release, Corp Fin will not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results, so long as:
- Where this approach is used, the non-GAAP financial measure must not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures.
- While this approach is acceptable for earnings releases and other presentations not filed with the SEC, where GAAP financial statements are required, such as in filings on Form 10-K or 10-Q, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.
- The approach of reconciling to provisional amount(s) or an estimated range is limited to those non-GAAP financial measures the company is using to report financial results to the Board of Directors.
- The company explains, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
- As to performance metrics, if a company is considering using or presenting metrics related to COVID-19, or changing the method by which it calculates a metric as a result of COVID-19, the company must consider the principles explained in the SEC’s January 30, 2020, guidance related to metrics (Release No. 33-10751, Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations).
Coronavirus COVID-19 Task Force
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Thomas J. Cartwright
Timothy J. Corbett
Thomas P. Giblin, Jr.
Christopher T. Jensen
Howard A. Kenny
David W. Pollak
Kimberly M. Reisler
Justin W. Chairman
James W. McKenzie
Joanne R. Soslow
David C. Schwartz
Joo Khin Ng*
David A. Sirignano
George G. Yearsich
*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP