The COVID-19 crisis continues to spread around the world and its impact has been felt in all parts of the global economy. It has also raised a host of legal issues that regulators from around the world have tried to address. Set forth below are certain U.S. and SEC developments that Canadian companies should consider as they navigate their business during the coming weeks and months.
SEC developments and guidance
During the week of March 9, 2020, the SEC moved to a full teleworking arrangement with limited exceptions. Although the SEC has indicated they intend the agency to remain fully operational during the transition, it is not easy to predict how this will ultimately impact SEC review of registration statements and other actions (e.g., issuance of effectiveness orders, no-action letters or interpretive guidance). In addition, given the rapidly developing circumstances of the pandemic, short- or long-term SEC closures or shut-downs remain possible. Accordingly, offerings in which SEC action is required (e.g., SEC review, issuance of an effectiveness order, interpretive guidance or waivers) may experience regulatory delays and could present execution risks.
For example, currently-listed issuers reporting under the multi-jurisdictional disclosure system (MJDS) for U.S./Canadian cross-listed issuers should consider:
Establishing or renewing a shelf registration statement on Form F-10 well in advance of a proposed shelf takedown, to ensure the SEC can make it effective and thereby use it for an offering with less advance preparation as markets open up
Utilizing Form F-10 for a short form prospectus offering (i.e., filing the F-10 contemporaneously with an offering in Canada), in which case the F-10 will be effective upon filing (without requiring SEC action)
Preparing for exempt/private offerings as an alternative to SEC-registered public offerings, which, in order to minimize any liquidity discount, may require granting registration rights for debt or equity securities
Re-evaluation of forecasts
Although issuers generally do not have a requirement under U.S. securities laws to update guidance as a result of events occurring after the issuance of the guidance, issuers should re-evaluate management forecasts and consider withdrawing, discontinuing or potentially updating publicly-disclosed earnings guidance. We note that given the ongoing development of the pandemic and unknown economic impact, it may be challenging for issuers to provide specific financial guidance.
Prospectus and continuous reporting disclosure
The SEC has been active in reminding reporting issuers to consider their activity in light of the COVID-19 pandemic. Issuers need to assess the impact of COVID-19 on their business, and in particular, derivative effects, such as general market conditions, the impact of closed businesses and industry-specific impacts (e.g., in travel and hospitality). If an issuer has become aware of a risk related to COVID-19 that would be material to investors, it generally should not engage in securities transactions and should prevent directors and officers from engaging in securities transactions until investors have been appropriately informed about the risk.
Risk factors – Issuers should acknowledge the COVID-19 pandemic in general economic/market conditions risk factors; issuers should also examine industry-specific risks and update disclosures as necessary. As a general matter, risk factor disclosure should not be boilerplate or generic and should be tailored to the particular risk. Further, risk factors should not be drafted from a theoretical perspective if the issuer is aware of an existing risk. In connection with COVID-19, common risk factors that have been presented in the U.S. include risks associated with lower consumer demand, interruption of operations and disruptions in the supply chains, to name a few.
MD&A and forward-looking statements – Issuers should consider discussing the COVID-19 pandemic and its effect on, and risk to, its business in its MD&A. While an MD&A is required to provide a narrative description of an issuer’s historical performance, a key element of MD&A disclosure is the forward-looking and “outlook” disclosures that place the historical results of operations in context to what management believes are material trends and uncertainties in the business. Prospectuses that incorporate by reference MD&A should consider adding cautionary language in respect of any summary financial information and/or cross-references to MD&A that appear in the prospectus.
Recent developments – Depending on the impact of COVID-19, certain issuers that have taken specific actions to address the pandemic (e.g., closure of stores) should include a “Recent Developments” disclosure to explain the impact of the pandemic on the business; in addition, issuers could also address the potential financial impact on the company (most likely in general terms).
Selective disclosure – The SEC has reminded reporting issuers to avoid selective disclosures relating to COVID-19 developments by disseminating any material information broadly and in accordance with applicable securities law and stock exchange requirements.
Due diligence with underwriters
Issuers should expect a set of questions on the impact of COVID-19 on their business in due diligence sessions with the underwriters. To prepare for such questions, issuers should make the necessary internal inquiries and analysis, and thoughtfully consider materiality of the impact (and potential impact on pricing of the offering, as well as related prospectus disclosure).
Compliance with reporting obligations
On March 4, 2020, the SEC announced that it is providing conditional regulatory relief for certain publicly-traded company filing obligations under U.S. federal securities laws. To address potential compliance issues, the SEC has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain SEC disclosure reports (including annual and periodic filings, and the filing of proxy statements) that would otherwise have been due between March 1 and April 30, 2020. This relief will not affect the filing obligations of MJDS eligible Canadian issuers which are keyed off of applicable Canadian disclosure requirements. Issuers must convey through a current report (on Form 8-K or 6-K), filed by the later of March 16, 2020 or the original filing deadline of the SEC disclosure report, a summary of why the relief is needed in their particular circumstances and include a citation to the SEC order in that report. In addition, if the failure to timely file the SEC report relates to the failure to receive a required opinion or certification (e.g., an audit opinion) from any person other than the issuer, then the current report must attach as an exhibit a statement from that person explaining the reasons for being unable to provide such opinion or certification on a timely basis. Although the SEC has granted relief for disclosure reports, issuers remain obligated to disseminate material information on an ongoing basis and may have a duty to update prior disclosures which have proven to be inaccurate or misleading.
Disclosure controls/internal controls over financial reporting
We note that during the COVID-19 pandemic, many business, legal, finance and investor relations professionals may be working remotely. Further, in light of the challenges affecting businesses it may be necessary to expand the number of employees that are involved in the issuer’s public disclosures and internal controls, particularly as it relates to assessing the material impact of the COVID-19 pandemic on the business. In this environment, issuers should consider policies and procedures necessary for publicly-traded issuers to remain in compliance with SEC rules and regulations in respect of disclosure controls and internal controls over financial reporting.
Annual shareholder meeting
On March 13, 2020, the SEC staff published guidance to assist public companies, shareholders and other market participants affected by COVID-19 with upcoming annual shareholder meetings. However, Canadian companies which qualify as foreign private issuers are not subject to the SEC’s proxy rule. Canadian issuers continue to be subject to applicable Canadian requirements.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.