|Footnotes for this article are available at the end of this page.
As public companies coordinate their response to the economic crisis caused by the coronavirus (COVID-19) pandemic, management should not lose sight of their obligation to continue to comply with SEC and stock exchange rules. The SEC is assisting companies with direction in a number of different forms including orders, rule changes and modifications, interpretative guidance and statements from senior SEC officials. Most recently, on April 8, 2020, Chairman Jay Clayton and William Hinman, Director, Division of Corporate Finance, issued a joint public statement providing their thoughts on the importance of disclosure during the pandemic (the “Joint Statement”).1 The following discussion highlights the changes to existing rules and guidance and provides commentary on other disclosure issues presented by the pandemic.
SEC Extension of Certain Filing Deadlines
On March 4, 2020, the SEC issued an order2 (the “Initial Order”) in response to the effects of the pandemic. The Initial Order provided a 45-day filing extension to companies that have been negatively impacted by the COVID-19 pandemic and unable to timely comply with their filing obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Due to the evolution and increased severity of the pandemic’s potential effects on these companies, the SEC issued a new order on March 25, 20203 (the “Modified Order”). The Modified Order supersedes the Initial Order and applies the extension to certain Exchange Act reports that would have otherwise had a filing deadline between March 1 and July 1, 2020. Thus, impacted calendar year-end companies can take advantage of the extension for their first quarter 10-Qs that would otherwise be due May 11 (for accelerated and large accelerated filers) or May 15 (for non-accelerated filers).
Schedule 13D and Section 16 (Forms 3, 4 and 5) filing deadlines remain unchanged. Any delayed filing must be made within 45 days after the original due date. For a company to delay a filing, the delay must result from COVID-19, and it must provide, by the original “due date,” a Form 8-K (or, where applicable, a 6-K) with an explanation of why the company was unable to meet its original deadline.
The Form 8-K (or 6-K) must include the following:
- A statement that the company is relying on the Modified Order.
- A quick summary as to why the company could not meet its original filing deadline.
- The estimated date by which the company will be able to file the applicable report, form or schedule.
- A risk factor analysis explaining the material impact of the COVID-19 pandemic on the company’s business (if applicable).
- If a report cannot be filed because a person other than the registrant cannot timely provide an opinion, report or certification required to accompany the filing (e.g., an auditor), an exhibit signed by such person disclosing why such person was unable to provide the opinion, report or certification.
Interplay with Rule 12b-25
SEC Staff has issued Compliance and Disclosure Interpretations (“CDIs”) which clarify how the order interacts with 12b-25.4 The main points are as follows:
- Form 12b-25 doesn’t change the deadline. A company that filed a Form 12b-25 but failed to file an 8-K pursuant to the Modified Order before the original deadline for the deferred filing cannot use the order. The reason is that filing a Form 12b-25 does not extend the actual “due date” for the delayed filing. To obtain the extra 45 days, an issuer must file the interim report required by the order before the original due date.
- No need to also file 12b-25. A company that files an interim report to rely upon the Modified Order by the original due date does not need to also file a Form 12b-25, so long as the delayed report is filed by the 45-day deadline created by the Modified Order.
- Form 12b-25 can be used at the end of the 45-day extension. The Staff deems the Modified Order to actually change the due date of the delayed filing. Thus, if the 45 days pass and the company is still unable to file its report, it may then use Rule 12b-25.
The relief does not address filings under the Securities Act of 1933, as amended (the “Securities Act”). Although filings delayed pursuant to the order will not be deemed “delinquent,” companies relying upon the Modified Order will nonetheless need to carefully consider the impact of their filing delay upon any pending or contemplated offering, and the Securities Act financial statement requirements, including for shelf registration statements.
Earnings Release, Fiscal Guidance and Regulation FD Considerations
Companies that choose to extend their filing deadlines for Exchange Act reports may nevertheless intend to issue earnings estimates or other financial results to report quarter-ended March 31 results even though such releases are not required. An 8-K (Item 2.02) must still be filed upon the public dissemination of financial information to the extent it applies to a completed period.
Whether a periodic report filing is delayed or not, the Joint Statement encourages companies to provide as much information as possible regarding the company’s current status and plans to address COVID-19 related effects on operations and financial results. The Joint Statement acknowledges disseminating earnings statements and conducting earnings calls during this period present unique disclosure challenges. Historical financial information will be generally less helpful to investors than current updates on how a company’s operations have been affected by the economic crises and how they expect to modify operations moving forward. Specific disclosure regarding liquidity and access to capital will be of particular interest to investors. Companies that have applied or intend to apply for financial assistance under the CARES Act or other similar federal and state programs should provide information on how this assistance will affect future financial results to the extent practicable.
To the extent companies are presenting forward-looking information based on assumptions and expectations, it can be presented in a way to ensure such disclosure falls within the safe harbors provided in Section 27A of the Securities Act and Section 21E of the Exchange Act. The Joint Statement acknowledges the difficulty in providing forward-looking information in this unstable economic environment, and the SEC will generally not second guess a company’s good faith attempt to provide forward-looking information in accordance with the safe harbors.
Many companies are contemplating COVID-19 related addbacks of non-recurring items (for example, excluding expenses unique to COVID-19 from operating results) to non-GAAP measures such as Adjusted EBITDA. These pandemic-related non-GAAP disclosures should generally be permissible so long as they comply with Regulation G and Item 10 of Regulation S-K. However, these requirements were somewhat relaxed by the Division of Corporate Finance’s recently issued guidance dated March 25, 20205 (“CF Guidance“), which provides some flexibility for certain non-GAAP reconciliations. Regulation G and Form 8-K ordinarily require reconciliation to a GAAP number, but the Guidance allows an issuer, in its earnings release and on its earnings call, to reconcile to “preliminary” GAAP results based on a reasonable estimate, or a range of reasonably estimated GAAP results, if the GAAP financial measure is not available because it will require COVID-19-related adjustments that cannot yet be definitively calculated. The Staff states that the disclosure should explain, to the extent practicable, what information or analysis is needed to complete the GAAP accounting, and why it remains incomplete. This relief does not apply to 10-Ks, 10-Qs or other filings that require GAAP financial statements. In addition, any such non-GAAP metrics must be accompanied by an explanation of why management believes such non-GAAP metrics are useful, and companies must give equal or greater prominence to comparable GAAP measures. The Staff has cautioned that companies may not present these non-GAAP financial measures solely to present a more favorable view of the company, but rather only to help investors understand how management and the board of directors are analyzing the impact of COVID-19 on the company. The Staff also stated that a company presenting non-GAAP measures that are reconciled to provisional GAAP measures should limit such measures to the same non-GAAP financial measures it uses to report financial results to the board of directors.
Public companies are no doubt receiving inquiries from investors regarding previously issued earnings guidance and whether the company expects to withdraw or guide “downward.” There is no explicit SEC rule or regulation to update or modify earnings guidance due to changed circumstances. However, some courts have imposed such a duty on companies when a reasonable investor could continue to rely on previously issued guidance that has become materially inaccurate. As a result and to avoid investor reliance on guidance based on assumptions that are no longer accurate, many companies have modified or completely withdrawn existing guidance.
Any withdrawal or update to earnings guidance is material non-public information. To the extent that a company intends to revise or otherwise withdraw previous guidance, it must do so using its normal public dissemination method. Prior to public disclosure, companies must be mindful of insider trading restrictions. The CF Guidance reminds companies that when COVID-19 has affected a company in a material way or when the company has become aware of a material risk related to COVID-19, corporate insiders must refrain from trading until such information has been publicly disclosed. Any employees with access to information regarding guidance should be prohibited from trading in company securities and the company must avoid engaging in securities transactions including offerings and stock buybacks until the information is publicly disclosed. The SEC Division of Enforcement has recently issued statements warning that it would be aggressive in its monitoring of insider trading violations due to the increased number of insiders with access to material non-public information during the pandemic. Furthermore, companies must be careful to avoid selective disclosure of guidance revisions to investors or analysts that is prohibited by Regulation FD.
8-K Disclosure Requirements
A number of Form 8-K trigger events may occur as a result of company actions to address the economic crisis. This includes material reductions or modifications to executive compensation, amendments to material contracts, material draws on a credit facility, suspension of dividends or stock buybacks, material impairments, and general business actions such as facility closures or layoffs. The economic downturn does not suspend the obligation to promptly report these trigger events on Form 8-K within four business days, and companies must consider the impact these immediate disclosures will have on the market, their customers and suppliers.
Periodic Reporting Considerations
As companies prepare their 10-Q filings for the quarter ended March 31, issuers should put increased focus on the risk factors and MD&A sections. Almost every company will need COVID-19 specific risk factors that address the possible impacts of the pandemic on operations and financial results. Risk factors should be specifically tailored to the company’s business. Addressing known and foreseeable risks particular to your company’s business will provide substantially more protection than generic risk factors that could be found in any company’s filings. Furthermore, MD&A disclosure must include a discussion of known trends and uncertainties as well as a discussion of material factors affecting the company’s liquidity. The CF guidance includes a number of questions that companies should consider when preparing disclosures. Issues the guidance raise include the pandemic’s effect on both near term and long term financial results, the impact on overall liquidity position including access to cash and the ability to meet covenants under a credit facility, ability to service debt or access the debt markets, material impairments and restructuring charges, the effects of remote working on the ability to maintain operations (including financial controls and disclosure controls), problems with implementing or expanding a business continuity plan, effects on supply chain, and the impact of travel restrictions. Each company must conduct its own assessment to give investors an understanding of how management is evaluating the current and future impact of the pandemic.
NYSE and NASDAQ Rules Impact
As a result of the significant decline in stock prices, the NYSE proposed, and the SEC approved, a suspension of the NYSE requirement that companies maintain an average global market capitalization over a consecutive 30-day period of at least $15 million.6 The suspension of the NYSE market cap standard is effective until June 30, 2020. Significantly, the SEC has also approved the NYSE proposal to temporarily ease certain aspects of Rule 312.03, which requires shareholder approval for certain issuances of equity, including issuances exceeding 20% and certain issuances to certain related persons.7 The easing of this requirement is intended to help companies more easily raise capital in private placements during this economic crisis. Nasdaq has not yet suspended any of its listing rules, but has issued an information memorandum that provides that Nasdaq will take pandemic-related impacts into account when evaluating currently pending or new requests for financial viability exceptions under the Nasdaq shareholder approval rules.8 Nasdaq also indicated it is closely monitoring COVID-19’s impact on market volatility and encourages companies to contact them if there are circumstances that may warrant exceptions to compliance with other rules.
 https://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm. See CDIs 135.12-.13.