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US Securities and Corporate Governance

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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

U.S. emerging trends in Form 8-K filings disclosing COVID-19-driven compensation changes

Companies filed a flurry of Form 8-K filings last week announcing voluntary executive officer compensation reductions driven by the COVID-19 pandemic.  While some companies disclosed the compensation changes under Item 7.01 or 8.01 on Form 8-K and others simply issued a press release, we saw an uptick in the number of companies making the disclosure under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with the principal executive officer, principal financial officer or named executive officer.

Among companies making the disclosure under Item 5.02(e) of Form 8-K (Ford , Nordstrom , Lands’ End and Briggs & Stratton, among others), the executives generally reduced their compensation by at least 20% (and in some cases, 50% or 100%), seemingly taking the position that salary decreases of 20% or more were generally viewed as material amendments to the executives’ compensation arrangement (in parallel to the view that salary increases of 20% or more would generally would be viewed as material), although it is difficult to predict how long the reductions will continue and the true impact on the executives’ overall compensation.

Companies relying on Item 7.01 or 8.01 or a stand-alone press release likely were comfortable that based on their specific facts and circumstances, either that the decrease was not material to the executives’ compensation arrangements or, in the case where employment agreements were in place, perhaps by analogy to SEC CDI 117.13, that

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