On April 8, 2020, in advance of the upcoming earnings season for many public companies, Securities and Exchange Commission (SEC) Chairman Jay Clayton and Director of the SEC's Division of Corporation Finance William Hinman issued a joint statement with respect to public company disclosures in the context of the ongoing COVID-19 pandemic.
Key items and takeaways are:
- The joint statement noted that investors are "thirsting" for information regarding where companies stand today and how they have adjusted, and expect to adjust in the future, to most effectively work through the COVID-19 health crisis.
- Chairman Clayton and Director Hinman urged companies to provide as much information as is practicable regarding their current operating and financial status and their future plans under various COVID-19-related mitigation conditions. In particular, detailed discussions of current liquidity positions and expected financial resource needs, the impacts on operations beyond the income statement and the balance sheet effects, including as a result of company efforts to protect worker health and well-being and customer safety, and financial assistance under the CARES Act or other similar COVID-19related federal and state programs (if material) are areas companies should consider when crafting disclosures.
- Chairman Clayton and Director Hinman recognized the difficulties involved in making forward-looking disclosures of the type requested, and that such estimates are unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company. However, they encouraged companies not to resort to boilerplate or generic disclosures, and instead to rise to the challenge and provide as much forward-looking information as is practicable. We have observed that companies have begun to provide certain forward-looking information, but we expect that companies will be constrained in furnishing detailed information, given the level of uncertainty and variables.
Chairman Clayton and Director Hinman emphasized the SEC's three-part mission to maintain market integrity, facilitate capital formation, and protect investors in light of the economic uncertainty caused by COVID-19. The joint statement noted that the collective national effort to mitigate the health risks of the COVID-19 pandemic has caused a deep contraction in vast areas of the U.S. economy, with many workers and businesses facing profound challenges, and that executing a strategy of effectively addressing the health risks of COVID-19 will require coordination among all stakeholders, including market participants and government regulators. Chairman Clayton and Director Hinman also stated that there is an emerging consensus that, as more tools are developed to fight COVID-19, economic activity can be incrementally fostered, noting as well that future actions taken to minimize the health risks of COVID-19 will require "course corrections" that may be significant.
Chairman Clayton and Director Hinman provided the following observations and requests to public companies:
Company-Specific Operational and Financial Status and Plans for Addressing the Effects of COVID-19
Chairman Clayton and Director Hinman noted that this quarter, "earning statements and calls will not be routine." They further noted that, in the current environment, historical information may be substantially less relevant and that providing detailed information regarding future operating conditions and financial resources will be of greater importance to investors. Investors and analysts are thirsting to know how companies have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis. Chairman Clayton and Director Hinman noted that the SEC staff has encouraged earnings and related disclosures that are as timely, accurate, and robust as practicable under the circumstances, and referred to the Division of Corporation Finance's guidance published on March 25, 2020. For more information, please see Venable's prior client alert on this topic.
Companies Requested to Provide as Much Information as Is Practicable Regarding Their Current Status and Plans for Addressing the Effects of COVID-19
In light of these circumstances, Chairman Clayton and Director Hinman urged public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. In particular, they stated that detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to investors and markets. They also noted that actions that companies take to protect employees' health and well-being and customer safety may be material to investors.
Challenge of Forward-Looking Disclosures
Chairman Clayton and Director Hinman recognized that providing detailed forward-looking information regarding the operational and financial effects of COVID-19 may present difficulties, given the evolving landscape, including changes to social distancing guidelines and other mitigation requirements. They also recognized that estimates of the type requested are unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company. They encouraged companies and their advisers to make all reasonable efforts to convey meaningful information that provides investors with company-specific information that allows investors to see the key operational and financial considerations and challenges the company faces through the eyes of management.
Chairman Clayton and Director Hinman stated that the request that companies strive to provide, and update and supplement, as much forward-looking information as is practicable is driven by three primary considerations: (1) the information will benefit investors, (2) market digestion of the information will benefit the company, and (3) the broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to the nation's collective effort to fight and recover from COVID-19. The third point is aimed not at investors in a given company, but toward promoting greater transparency to enable broader cooperation among all stakeholders in society and the economy in the fight against COVID-19. In the view of Chairman Clayton and Director Hinman, when a company articulates its strategy publicly, it gives investors and the public a heightened level of confidence and understanding. This increased confidence and understanding reduces risk aversion and facilitates action. This type of positive dynamic plays out across the economy in countless ways and further demonstrates the need for, and the power of, a coordinated, dynamic, and forward-looking public-private strategy for fighting COVID-19.
Safe Harbors Protections for Forward-Looking Statements
The joint statement encourages companies to avail themselves of the safe harbors for forward-looking statements and states that they would not expect to second-guess good faith attempts by companies to provide appropriate forward-looking information.
We have observed that companies have begun to provide certain forward-looking information, but we expect that companies will be constrained in furnishing detailed information given the level of uncertainty and material variables. Notably, certain forward-looking information is required by Management's Discussion and Analysis and risk factors disclosures, and it is not clear that companies will be able to provide, or wish to provide given the potential litigation risk, the detailed forward-looking information that Chairman Clayton and Director Hinman have requested.