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US Securities and Corporate Governance

COVID-19

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SEC Staff Announces Temporary Procedures for Supplemental Materials and Rule 83 Confidential Treatment Requests

In light of health and safety concerns related to the pandemic, the SEC staff recently announced the availability of a temporary secure file transfer process for the submission of supplemental materials pursuant to Rule 418 under the Securities Act of 1933 or Rule 12b-4 under the Securities Exchange Act of 1934 and information subject to Rule 83 confidential treatment requests (“CTRs”).

From time to time companies provide supplemental materials to the SEC staff, typically when responding to SEC comments.  Rule 418 provides broad authority to the SEC and its staff to request information concerning a company, its registration statement, the distribution of its securities and market or underwriter activities. Rule 12b-4 provides similar authority with respect to registration statements and periodic or other reports. Both rules require the SEC to return supplemental materials upon request, provided the request is made at the time they are furnished to the staff and return of the materials is consistent with the protection of investors and FOIA.  Rule 418 also requires that the materials not have been filed in electronic format.

SEC Rule 83 provides a procedure by which persons submitting information may include a CTR for portions of that information where no other confidential treatment process applies. Typically, this is utilized when companies provide responses to SEC staff comments.  Rule 83 generally requires the submission of the information covered by the CTR separately from that for which confidential treatment is not requested, appropriately marked as confidential, and accompanied by

Troubles Mount for Embattled Eastman Kodak

A proposed class action has been filed against Eastman Kodak alleging securities fraud in connection with certain events surrounding the government’s possible $765 million pharmaceutical development loan to Kodak.  The plaintiff seeks to represent a class of shareholders who may have purchased Kodak stock between July 27 – when early word of a possible government-Kodak initiative was released – and August 7 – when the company announced the formation of an independent committee of the board of directors to conduct an internal investigation of the events surrounding the possible government loan.

Between those dates, the company released a flurry of information, Senator Elizabeth Warren sent a letter to the SEC seeking an SEC investigation, the U.S. government tweeted that the loan would be halted pending resolution of wrongdoing allegations and there was extraordinary stock activity.  During that time, Kodak stock rose as high as $60 per share, up from about $2 per share the prior week.

The troubles seem to stem from an advisory sent by Kodak to media outlets in Rochester, New York, Kodak’s hometown, on Monday, July 27.  According to media reports, local reporters tweeted information on July 27 about an initiative between Kodak and the U.S. government in response to the coronavirus pandemic.  Those were followed by posted news stories on the websites of the local ABC and CBS affiliates.  Some of those tweets and stories were deleted when Kodak reached out to advise them that the advisory information was only for “background” and not publication. 

Q2 Reporting Trends: Few Jump on EBITDAC Bandwagon

Based on Q2 reporting to date, few companies opted to present non-GAAP financial measures using the new metric term “EBITDAC” (earnings before interest, tax, depreciation, amortization – and COVID-19).  That is not surprising, given the concerns raised by credit rating agencies, the CFA Institute and U.S. creditors, among others, about the potential for EBITDAC to distort and misrepresent companies’ earnings.

Instead, many companies appeared to heed SEC advice, including CF Disclosure Guidance: Topic No. 9A, as described in our June 24, 2020 post, and CF Disclosure Guidance: Topic No. 9 as described in our April 2, 2020 post .  In addition to including discussions of COVID-19 business impacts in earnings releases, many included such discussions in MD&A in the Q2 Form 10-Q filed with the SEC.  Rather than disclosing the impact of COVID-19 as a non-GAAP financial measure, many presented traditional operating or statistical metrics while separately quantifying the effect of the pandemic, such as “Operating expenses increased 25% compared to the second quarter of 2019, 15% of which was due to COVID-19 supplies, cleaning and other incremental costs.”

While few companies used the EBITDAC label as noted above, some appeared to be using the concept without the label.  For example, some adjusted their adjusted EBITDA for COVID-19 expenses or presented gross margin without COVID-19 impacts.  Such COVID-19 adjustments may be more likely to draw SEC scrutiny during ordinary periodic filing reviews, especially when viewed in hindsight.  The staff has taken the position that “presenting a

Analysis of PPP Borrowers: Who Returned Funds?

Under the CARES Act, the U.S. Treasury and Small Business Administration established the Paycheck Protection Program, a forgivable loan program for small businesses.  While public companies were eligible to participate, on April 23, 2020, the U.S. Treasury published new guidance suggesting public company participants who could not demonstrate sufficient need could be subject to scrutiny unless they return the funds. We previously wrote about a framework for borrowers to analyze their certification risks.

Most public company recipients of Paycheck Protection Program loans have elected not to return the funds.  Based on a review of SEC filings and published SBA data, this post on Bryan Cave Leighton Paisner’s banking blog, BankBCLP.com, analyzes the statistics to see who returned Paycheck Protection Program loans.  Among the findings, 88% of public borrowers that received PPP loans elected to retain their PPP proceeds and 75% of borrowers approved for PPP loans of between $5 and $10 million did the same.

Read more here.

Repeating COVID-19 Risk Factor Updates in Your Second (and Third) Quarter 10-Qs

As previously noted, the SEC issued supplemental disclosure guidance near the end of the second quarter which, among other things, set forth dozens of questions for companies to consider as they assess and disclose the evolving impact of COVID-19 on their operations, liquidity and capital resources.

Many public companies with a December 31 fiscal year end included updated risk factors in their first quarter 10-Q filings, reflecting the uncertainties and adjusted risk profile in light of COVID-19.  Disclosure practices varied, with some companies including a small number of risk factors (or even a single risk factor) that updated previously disclosed risks in a global manner.  Other companies updated a small subset or suite of risk factors affected by COVID-19, and some may have updated all of their risk factor disclosure from the previous Form 10-K.

As companies assess their risk factor disclosure for the second (and third) quarters, it is important to consider that Item 1A of Part II of Form 10-Q requires disclosure of “any material changes from risk factors as previously disclosed in the registrant’s Form 10-K in response to Item 1A to Part 1 of Form 10-K.”  In other words, as a technical matter, companies don’t get the benefit in later quarters of relying on updates in previous 10-Q filings in the same fiscal year.  (Compare this requirement with, for example, the instruction to Part II, Item 1 as to Legal Proceedings, where disclosure in subsequent Form 10-Q filings in the same fiscal year are

80% of U.S. S&P 500 Companies Fail to Provide Guidance in Last Three Months

As U.S. public companies prepare to kick off the Q2 2020 financial reporting season, a clear trend is emerging, with 80% of S&P 500 companies refusing to provide earnings guidance during the last three months, according to a recent Bloomberg article.  That translates to more than 400 companies who failed to provide guidance to investors, with nearly all stating that they lack visibility because of COVID-19, based on a recent Seeking Alpha report.

For those companies that have issued guidance, Factset.com recently reported that during Q2 2020, 27 S&P 500 companies issued negative EPS guidance and 22 S&P 500 companies issued positive EPS guidance. Only 49 S&P 500 companies issued EPS guidance for Q2, which was well below the 5-year average of 106 for a quarter.

While the numbers and percentages reported above differ slightly, the trend toward withholding guidance is clear and understandable in the current environment.  The health and economic effects of COVID-19 remain uncertain and depend on the duration of the crisis.  Absent a vaccine for the virus, companies – particularly those in the consumer discretionary sector – grapple with how to profitably run a business where social distancing and avoidance of large crowds are the new norms.

On the other hand, the conservative position of failing to provide guidance seems at odds with investors’ desire for greater transparency and more insight into the range of potential outcomes and the ability of companies to manage through different scenarios during this period of pandemic and

Key themes emerge from SEC Investor Roundtable

On June 30, 2020, Jay Clayton, SEC chair, and Bill Hinman, Director of Corporation Finance, hosted an investor roundtable seeking input from investors on how to improve disclosures during this period of COVID-19.  The participants included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chairman of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chairman and Co-Founder of BlackRock.

The discussion was wide-ranging, but several themes emerged:

  • While swift government action from the Federal Reserve and the CARES Act appears to have helped stabilize the economy and markets, investors expressed concern that the macro-economic picture remains very uncertain, particularly as certain government programs expire.
  • Investors want to see greater transparency as to how the company expects to perform in the near term, including with respect to such matters as cash flow, working capital and covenant compliance as well as key assumptions. For example, is the company’s ability to restore production dependent on schools reopening so that parents can return to work?  Or does the company’s supply chain depend on European travel being restored?
  • Glenn Hutchins noted that fewer than 10% of the S&P 500 have maintained earnings guidance. As a result, investors seek greater insight into the range of potential outcomes and the ability of companies to manage through different scenarios as well as a greater understanding if companies have “tools for adaptability” and an ability to adjust to changes in an uncertain environment. He cited the joint statement

SEC extends temporary COVID-19 relief for some submissions

June 30, 2020

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In light of health, transportation and logistical issues raised by COVID-19, the SEC staff recently extended previously announced relief for several types of submissions.

  • Form 144 paper filings and certain forms (other than 144s) that are permitted to be filed in paper (such as annual or other reports by foreign private issuers on Form 6-K, Form 11-K and certain other specified forms) may be submitted via email in lieu of mailing or physical delivery if the complete Form 144 or other document is attached as a PDF sent to PaperForms144@sec.gov or CorporationFinancePaperForms@SEC.gov, respectively.
    • If a manual signature cannot be provided with the email, the SEC staff has announced that it will not recommend enforcement action if a typed signature is included instead and: (i) a manually signed page or other document acknowledging or otherwise adopting his or her signature in the filing is retained by the signatory and is provided upon request by the SEC staff; (ii) the signature page indicates the date and time when signed; and (iii) appropriate policies and procedures are established relating to this process.
    • Filers may continue to submit these documents to the SEC mailroom but there may be delays in processing.
  • The signature requirement for Edgar filings may create challenges for public companies and other filers to have such filings executed before the time of the electronic filing due to circumstances arising from COVID-19. While the SEC staff expects filers to comply with requirements to

COVID-19 Business Risk Management: Addressing Supply Chain Risks

As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  We previously blogged about a series of ongoing posts from our restructuring and special situations team relating to general and customer counter-party risk management during this time.  Most recently, the team provided its assessment of managing supply chain risks.

Our special situations team explores the need for vigilance with respect to the health and resilience of a company’s supply chain, especially for critical suppliers and those for which replacements are limited or nonexistent.  The team discusses some of the insolvency law issues attendant to suppliers and supply agreements; it also provides several risk mitigation strategies to help ensure continuity of supply and reasonableness of ongoing counter-party terms and conditions.  The team recommends companies engage in a fulsome assessment of all suppliers; consider supply chain diversification; and establish contingency plans for any suppliers who seem at risk.   The importance of knowing a company’s leverage and using it appropriately is discussed, as are practical issues pertaining to supplier possession of a company’s inventory or equipment.

While a company cannot control all of what is happening to its customers and suppliers, it can be fully cognizant of its counter-party risk assessments and implement strategies where appropriate to mitigate those risks.  When it comes time to report results for the quarter and the year, companies who have taken the time to take

SEC Issues More COVID-19 Disclosure Guidance as Quarter End Approaches

On June 23, 2019, both the Division of Corporation Finance and the Office of the Chief Accountant issued additional statements to public companies and their stakeholders about the importance of “high-quality” financial reporting and the need for focused analysis and disclosures in the context of the principles-based disclosure system.

The Division of Corporation Finance issued CF Disclosure Guidance Topic No. 9A, a supplement to Topic No. 9 issued near the close of the first quarter of this year (see our prior blog post on Topic No. 9 here).  The new guidance states that the Division is monitoring how companies are addressing COVID-19 related disclosures and encourages public companies to provide meaningful disclosures of the current and expected impact of COVID-19 through the eyes of management.  The key topics covered by the guidance are the effects of the pandemic on a company’s operations, liquidity and capital resources; the short and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern.

The staff acknowledges that companies are making many operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings.  The guidance says that companies need to consider whether any or all of those changes “would be material to an investment or voting decision” and disclose accordingly.  The staff takes a similar tack with respect to the

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