COVID-19: SEC extends filing relief for public companies and provides further disclosure guidance
On March 25, 2020, the U.S. Securities and Exchange Commission (the “SEC”) extended its filing relief for public companies, funds and investment advisers affected by COVID-19. The SEC’s Division of Corporation Finance has also issued Disclosure Guidance Topic No. 9, which sets out a list of questions companies should consider as well as guidance with respect to the disclosure of non-GAAP financial measures.
- For public companies, the SEC’s order extends its earlier conditional relief granting an extra 45 days to file periodic reports, annual reports and proxy statements to cover reports due between March 1 and July 1, 2020.
- For investment advisers, the SEC’s order extends its earlier conditional relief granting an extra 45 days to file Forms ADV and PF to cover filings due by June 30, 2020.
- For investment funds, the SEC’s order extends its earlier conditional relief from in-person board meeting requirements and filing of Form N-23C-2 to August 15, 2020, and its earlier conditional relief granting an extra 45 days to file Forms N-CEN and N-PORT and transmit reports to investors to cover filings and reports due by June 30, 2020.
Public Company Relief
The SEC’s order provides public companies with a 45-day extension to file certain U.S. Securities Exchange Act of 1934 (the “Exchange Act”) reports that would otherwise have been due between March 1 and July 1, 2020, extending the original order that provided relief for filings due between March 1 and April 30, 2020. Primarily, this relief applies to annual reports (such as Forms 20-F and 10-K), periodic reports (such as Forms 6-K, 8-K and 10-Q) and proxy statements.
To rely on the relief, a registrant must meet the following conditions:
Be unable to meet a filing deadline due to circumstances related to COVID-19;
Furnish to the SEC a Form 6-K or 8-K (for each filing that is delayed) by the later of March 16, 2020 or the report’s original filing deadline providing:
- A statement that it is relying on the SEC’s order;
- A brief description of the reasons why it could not file 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 report cannot be filed on time relates to the inability of any person other than the registrant to furnish any required opinion, report or certification, the Form 8-K or Form 6-K must include as an exhibit a statement signed by that person stating the specific reasons for the delay;
The report, schedule or form is filed no later than 45 days after the original due date; and
In any report, schedule or form filed relying on the relief, disclose that the registrant is relying on the SEC’s order and state the reasons why it could not file the report, schedule or form on a timely basis.
Also, for the purposes of Form S-3 or Form F-3 eligibility (and consequently, for well-known seasoned issuer status), a company relying on the SEC’s order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report. The SEC will be taking the same approach for the purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c).
The SEC is also providing relief from its proxy rules that require companies to furnish proxy statements, annual reports, and other soliciting materials (the “Soliciting Materials”) to security holders, if:
The security holder has a mailing address located in an area where, as a result of COVID-19, the common carrier has suspended delivery service of the type or class customarily used by the registrant or other person making the solicitation; and
The registrant or other person making a solicitation has made a good faith effort to furnish the Soliciting Materials to the security holder.
The SEC staff has also issued CF Disclosure Guidance: Topic No. 9, which provides the SEC staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to the COVID-19 and related business and market disruptions. The guidance provides a list of questions for companies to consider, guidance with respect to reporting earnings and financial results (including with respect to non-GAAP financial measures), and a reminder to refrain from trading prior to the dissemination of material non-public information.
Questions to consider
The guidance provides the following non-exhaustive list of questions companies should consider when drafting their disclosure:
- Financial conditions and results of operations
How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
- Capital and financial resources, including liquidity
How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
- Assets on balance sheet
How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
Do you anticipate 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 that have had or are reasonably likely to have a material impact on your financial statements?
- Internal controls over financial reporting
Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
- Business continuity plans
Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
- Demand for products and services
Do you expect COVID-19 to materially affect the demand for your products or services?
- Supply chain
Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
- Human capital resources
Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
- Effect of travel restrictions
Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
Reporting earnings and financial results
The SEC staff has also provided guidance to companies that choose to release earnings estimates and other preliminary financial information in advance of finalizing the required financial reporting.
In particular, the guidance notes that companies must still follow the SEC’s rules governing non-GAAP financial measures. Thus, to the extent 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.
However, the guidance states that the SEC staff would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP financial information that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results, in circumstances where the relevant GAAP financial measure is not yet available because COVID-19-related adjustments could not be completed on time.
For example, if a company intends to disclose on an earnings call its earnings before interest, taxes, depreciation and amortization (EBITDA), it could reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The provisional amount or range should reflect a reasonable estimate of COVID-19-related charges not yet finalized, such as impairment charges.
The company should limit the non-GAAP financial measures in its presentation to those measures it uses to report financial results to the board of directors and should explain, 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.
No trading prior to dissemination of material non-public information
The guidance cautions companies, directors and officers, and other corporate insiders who are aware of a risk related to COVID-19 that would be material to investors to refrain from trading in the company’s securities until such information is disclosed to the public.
It also reminds companies that when disclosing material information related to the impacts of COVID-19, they must take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public. Companies should consider whether they need to revisit, refresh or update previous disclosure to the extent that it has become materially inaccurate.
This note supplements the wide array of Linklaters’ COVID-19-related resources which are available here. If you have questions relating to your matters or how to mitigate the impact of COVID-19 on your business, either in the Americas or globally, please let us know.