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US Securities and Corporate Governance

COVID-19

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Updating U.S. Form 10-Q Risk Factors During the COVID-19 Pandemic – New Risks and Risks That Aren’t Just Hypothetical Anymore

As more companies prepare to file Form 10-Qs, they should give special attention to risk factors – particularly to consider whether new risks have emerged or hypothetical ones have become real.  The Form calls for disclosure of any material changes from risk factors included in the last 10-K.  However, the COVID-19 pandemic presents unique challenges to responding to other requirements as well, such as instructions to address “known trends and uncertainties” in MD&A or to provide “such further information . . . as may be necessary to make the required statements, in the light of the circumstances under which they were made not misleading” in Rule 12b-20.  Careful consideration of risk factors can help complete the picture for investors. Although companies need only disclose what is known or reasonably available, it can be challenging to comfortably determine what elements of the current state of affairs will, with hindsight, be viewed as both “known” and material to investors.

In order to prepare their disclosures, companies should

  • utilize appropriate disclosure controls and procedures, and seek input from relevant constituencies, including operating units, HR, IT, the law department and finance, to determine the scope and depth of impacts
  • if a designated individual or team is addressing the company’s COVID-response, be sure they are included
  • review each of the 10-K risk factors to evaluate which ones might need to be updated or supplemented or whether new ones should be added
  • confer with IR and senior management to assess the state of existing knowledge

SEC Approves Additional NYSE Continued Listing Compliance Relief

— New NYSE Relief Proposal Tracks SEC-Approved Nasdaq Temporary Rule

The SEC approved yet another temporary measure related to the continued listing rules of the New York Stock Exchange on April 21, 2020.  This time, the NYSE sought and received immediate effectiveness of a proposed rule change to assist listed companies who may fall out of compliance with the $50 million market capitalization and $1.00 price continued listing requirements by providing a tolling period through June 30, 2020.  The NYSE originally sought SEC approval to suspend these requirements until June 30, 2020, citing the unprecedented market declines resulting from the ongoing COVID-19 pandemic, but the proposal was rejected.

Companies that fail to maintain either of these NYSE continued listing standards are typically notified by the Exchange of their noncompliance and then must promptly issue a press release and file any required Form 8-K.  Listed companies have up to 18 months to regain compliance with the $50 million market capitalization requirement and up to 6 months to regain compliance with the $1.00 trading price standard under the existing rules.   Under the temporary rule, the Exchange will continue to notify listed companies of any noncompliance, companies will still be required to issue a press release and file the required Form 8-K, but the cure periods will be tolled until June 30, 2020, meaning that the 18-month or 6-month cure period will be calculated as beginning on July 1, 2020.

The Exchange still intends to attach a “.BC” indicator to those noncompliant

Is it safe to open our trading window in the midst of a pandemic?

Toward the end of the first quarter of 2020, many public companies imposed a blackout period, during which directors and specific employees deemed insiders could not trade the company’s stock. The obvious purpose of these blackout periods is to prevent insiders from trading at a time when they are likely to have material nonpublic information about the soon to be completed quarter.  This year, insiders were also likely to have material nonpublic information about the early impact of the coronavirus on their business, including demand, supply chain, cancelled orders and the costs of complying with stay-at-home orders.  In an earlier alert, we noted that trading while in possession of early visibility into the impact of the coronavirus on the business could be deemed insider trading, and that the SEC expressed concerns about trading under these circumstances.

Typically, public companies plan to open the trading window to permit insiders to trade within a day or two of issuing their earnings release for the quarter.  Even in these uncertain times, many public companies may be able to maintain their normal protocols.  As they consider this issue, public companies should be sure that their earnings release contains sufficient disclosure around the impact of coronavirus on the business and management’s expectations of the impact going forward.  For some companies, waiting until the Form 10-Q is filed to open the window may be advisable.  For others, including an expanded earnings release that provides more fulsome analysis to the market about the coronavirus impact and then setting out

SEC continues 2020 whistleblower award surge; hotline vigilance is key during COVID-19 pandemic

Despite the challenges of the COVID-19 pandemic, the SEC continues its surge in whistleblower awards, announcing on April 20 a $5 million award to a whistleblower who provided critical evidence of wrongdoing that benefitted the SEC’s investigation, while also suffering unique hardship because of termination soon after raising concerns internally.  A few days earlier, on April 16, the SEC announced its largest award so far in 2020, more than $27 million to a whistleblower who objected to misconduct in an organization, after repeatedly and strenuously raising concerns internally.

Jane Norberg, Chief of the SEC Office of Whistleblower, noted that the April 20 award was the seventh announced by the SEC in the last month.  “These awards demonstrate the valuable contributions whistleblowers make to the protection of markets and investors and we encourage people to come forward with information about possible securities law violations,” Norberg said in the April 20 SEC press release.

The SEC has awarded approximately $430 million to 80 individuals since 2012.  All payments are made from an investor protection fund established by Congress that is funded entirely through monetary fines and penalties paid to the SEC by companies and individuals accused of securities law violations.

This noteworthy increase in awards reminds us that despite the unique communication and remote working challenges of COVID-19, companies must continue to promote access to hotlines or other avenues for employees, and potentially others, to report concerns and must maintain robust internal compliance programs.  Audit Committees and company management,

U.S. companies weigh pros and cons of paying quarterly dividends during COVID-19 pandemic

As COVID-19 moves across the U.S. decimating revenue sources, companies in severely impacted industries, including hospitality, retail and travel, among others, rushed to announce that quarterly dividend payments would be deferred, delayed, suspended or revoked, as the case may be.  Many simultaneously announced drawdowns on credit facilities, employee furloughs or layoffs and salary reductions, presumably as justification for the dividend change.

Companies with strong cash reserves, on the other hand, so far generally appear to be moving forward with regular dividend payments.  Their decision to continue to pay dividends as they are able despite the pandemic helps project stability in the U.S. securities markets and arguably strengthens investor relations, especially among retirees who depend on dividend income.

As economic fallout from the pandemic continues and the ripple effect of stay-at-home orders begins to impact nearly all businesses in some manner, companies may want to include disclosure forewarning that the board of directors continually monitors market conditions and will continually evaluate the company’s quarterly cash dividend program, balancing it with the company’s capital and financial strength needs.

In recent ISS Guidance regarding COVID-19 issues, ISS stated that this year it will support broad discretion for boards that change customary dividend practices and consider whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce.

Glass Lewis also recently recognized the need for flexibility during the pandemic, noting the reality of

The U.S. Shows it CARES by Enacting Taxpayer-Friendly Modifications to Rules for Deducting NOLs

Section 2303 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes taxpayer-friendly modifications to the restrictions placed on the deductibility of net operating losses (“NOLs”) pursuant to the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).

One of the most significant changes was to reverse provisions of the 2017 Tax Act to allow taxpayers to carry back NOLs arising in 2018, 2019, and 2020 up to 5 years (including to years when the corporate tax rate was as high as 35% (i.e., prior to 2018)).   For parties that have engaged in M&A transactions during these years, the changes may provide opportunities to realize value from carrying back NOLs from past acquisition targets, depending on factors such as the acquisition agreement terms, the tax position of the target at and prior to the acquisition, and the extent of transaction tax deductions associated with the acquisition.

Here are a few fact patterns that may be applicable depending on the taxpayer’s particular situation and acquisition history:

  • With respect to buyers of a corporation in 2018 or later, consideration should be given to carrying back the corporation’s NOLs to obtain a refund of taxes paid, particularly if:
  • the corporation was paying federal income taxes in the years preceding the acquisition,
  • the corporation incurred significant transaction tax deductions that gave rise to NOLs, and
  • the acquisition agreement does not require refunds of taxes attributable to pre-closing periods to be paid over to

US – COVID-19: Delaware Governor modifies emergency declaration to address virtual meeting matters

The Delaware Governor modified the state’s existing emergency declaration on April 6, 2020 to, among other things, allow stockholder meetings currently noticed for a physical meeting to pivot to virtual meetings to the extent permitted by law during the state of emergency, as well provide a method of adjournment of a meeting noticed for a physical location to a virtual meeting in case of public health threats and restrictions on personal travel.

The  declaration provides that if, because of COVID-19 pandemic public health threats, the board of directors wishes to change from a physical meeting location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute as to valid means of giving notice to stockholders.

In addition, if it is impracticable to convene a currently noticed stockholder meeting at the physical location because of COVID-19 public health threats, the corporation may adjourn the meeting to another date or time, to be held by remote communication, by providing notice of the date, time and means of remote communication by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute, which doesn’t address the method of adjournment under these circumstances.

While the guidance above is welcome

U.S.: SEC Chairman Urges “Prompt” Earnings Disclosure

April 6, 2020

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In remarks at a special meeting of the Investor Advisory Committee on April 2, Chairman Jay Clayton encouraged public companies to promptly provide as much information as possible about period-end earnings information, even if filings are delayed due to COVID-19.  He stated that the conditional relief afforded by the 45-day extension and the Staff’s guidance on COVID-19 disclosures should allow issuers to “provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines.”

Chairman Clayton stated that investors and markets “thirst for information as a general matter,” and that this is exacerbated in a period of economic uncertainty.  He stated plainly that an inability to file required reports on time due to COVID-19 challenges does not prevent public companies from issuing their earnings releases and filing current reports on Form 8-K.

While many companies typically release earnings and other financial results prior to filing the Form 10-Q or Form 10-K, for those issuers who cannot file timely due to the impacts of COVID-19, it may also not be possible to have sufficient certainty to go out with earnings releases.  It its earlier guidance (CF Disclosure Guidance: Topic No. 9), the staff stated that “timely, robust, and complete information is essential to functioning markets” and encouraged timely reporting if possible.  The staff also, however, acknowledged that the COVID-19 impacts might present “novel or complex accounting issues” and make it

U.S. SEC Grants Temporary Relief for Edgar Code Applicants Unable to Obtain Notarization

April 3, 2020

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The SEC recently adopted temporary relief for Edgar filers that face challenges obtaining notarization of signatures on Form ID applications, which are required to obtain Edgar access codes.

Applicants can now upload a signed copy of Form ID without the notarization by including a statement that they were unable to obtain notarization due to difficulties related to COVID-19. Within 90 days after  obtaining access to Edgar, applicants must obtain notarization of the authorized signature on a copy of the completed Form ID and upload it to their Edgar account.  Failure to do so may result in the SEC inactivating their Edgar access codes.

The relief expires after July 1, 2020.

U.S.: SEC Staff Issues COVID-19 Related Guidance

The SEC Staff has provided guidance as to disclosure and other securities law obligations (the Guidance) related to COVID- 19 and related business and market disruptions.

The Guidance provides the SEC Staff’s views on

  • disclosure related to COVID-19
  • material non-public information related to COVID-19 and
  • reporting earnings and financial results during this period, including guidance with respect to non-GAAP measures related to COVID-19.

Assessing and Disclosing the Evolving Impact of COVID-19. The SEC Staff reminds companies that 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 can be material to investment and voting decisions.

The Guidance lists a number of detailed questions management should consider relating to, among other things: a company’s financial condition and results of operations; capital and financial resources; valuation of balance sheet assets; possible material impairments; effects on operations resulting from remote work arrangements, including on controls; business continuity plans; customer demand; supply chains; human capital resources and productivity; and the effects of travel and border restrictions.

The Staff encourages companies “to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and that companies proactively revise and update disclosures as facts and circumstances change.”

Material Non-Public Information. The Guidance includes a reminder that if COVID-19 has affected a public company in a material way, or where the company has become aware

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