Relief from periodic reporting deadlines
On March 4, 2020, the Securities and Exchange Commission (the SEC) issued an order providing conditional regulatory relief for certain publicly traded company filing obligations under federal securities laws.
Subject to certain conditions, publicly traded companies may be granted an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Public companies looking to avail themselves of this relief must file a current report on Form 8-K (or Form 6-K, as applicable) by the later of March 16 or the original reporting deadline, summarizing why such relief is necessary under the circumstances. If the reason the report cannot be filed on a timely basis relates to the inability of a third party to furnish any required opinion, report or certification, the Form 8-K (or Form 6-K, as applicable) must also include as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification. The SEC also stated that it may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.
Jay Clayton, chairman of the SEC, also reminded all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.
Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.
The SEC’s press release and order can be found at sec.gov.
The consensus from health organizations worldwide on implementing social distancing and avoiding group meetings will have a practical impact on annual shareholder meetings. As such, on March 13, 2020, the SEC announced it is providing regulatory flexibility to companies seeking to change the date and location of their annual meetings and/or employ new technologies, such as “virtual” shareholder meetings that would avoid the need for in-person shareholder attendance. The ability to hold virtual meetings is subject to an issuer’s corporate governance documents and applicable state law. Under the SEC’s guidance, affected parties can announce in filings made with the SEC changes in the meeting date or location or the use of virtual meetings, without incurring the cost of additional physical mailing of proxy materials. The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that shareholder proponents face due to COVID-19. Companies should continue to monitor the situation and communicate with their proxy service providers regarding the procedures for implementing a virtual shareholder meeting in the event it becomes necessary or advisable to move in this direction.
The full release can be found at sec.gov.
NYSE and Nasdaq issues and considerations
There are two immediate and obvious concerns for companies as stock prices continue an unprecedented streak of volatility: (1) potential delisting for falling below the minimum requirements and (2) the ability to raise capital through equity issuances.
The continued listing requirements of the New York Stock Exchange (the NYSE) and Nasdaq require companies to maintain a minimum share price and market capitalization. As stock prices decline in a period of extreme volatility, public companies may no longer be able to comply with these continued listing requirements. Although this could change if market conditions continue to deteriorate, there has been no indication from either of the exchanges that they would be willing to waive the minimum listing requirements (unlike in 2008/2009 in response to the financial crisis). Companies are encouraged to reach out to their respective exchanges and engage counsel to prepare to take action and explore options, including conducting a reverse stock split. Companies should also review their existing financing arrangements and consider the implications of a potential delisting and consents that would be needed to avoid a default or event of default and permit the company to take actions necessary to amend the Company’s organizational documents to facility a reverse stock split.
Given the turbulence and volatility in the capital markets, capital raising may be very challenging for the next several weeks and possibly longer. Liquidity needs should be carefully reviewed in light of potential delays in capital raising efforts in the public markets. In addition, companies considering a public offering must be sure that their offering documents identify all risks associated with COVID-19. Raising capital through private placements may be a viable alternative, but companies should be aware of the limitations imposed by the New York Stock Exchange and Nasdaq shareholder approval rules.
Revising guidance and other disclosure issues
Public companies that have issued annual or quarterly guidance should be acutely focused on whether revisions to such guidance may be necessary given the impact of COVID-19. The impact of COVID-19 on production and supply chains will likely have both an immediate and delayed effect on inventory and revenue for many companies. Companies that have provided a financial outlook, dividend guidance or other projections for 2020 should determine whether such guidance remains reliable and whether to update published guidance if necessary. Companies should also carefully review their forward-looking statement safe-harbor disclosure to ensure that they have included risks associated with COVID-19.
Companies should also carefully review the risk factors included in their SEC reports to ensure that they are addressing all risks related to the coronavirus outbreak (e.g., customers and suppliers whose businesses have been negatively affected by the virus, quarantine of employees, closure of manufacturing facilities, travel restrictions, reduced consumer spending, and uncertainty around the duration of the impact of coronavirus).
Accessing liquidity under new and existing credit facilities; reviewing financial covenants and debt document amendments
As companies assess the financial impact of COVID-19 on their liquidity and cash flows, they should consider drawing under available revolver capacity while they can, particularly if a breach of upcoming financial covenant tests could occur. Companies should be mindful of representations and warranties that must be true upon each revolver drawing and carefully review them to confirm that the impact of COVID-19 has not rendered any representations or warranties untrue in any material respect. Companies should closely review the potential impacts on their financial covenant compliance and consider if a conversation with their lenders is needed. Even in covenant-lite structures where a COVID-19 related drop in earnings may not create a near-term financial covenant default, the loss in earnings may have negative impacts on Company’s ability to operate and implement its business model well into 2021. Companies should review existing definitions (such as “Consolidated EBITDA”, “Consolidated Net Income” and similar terms) in their credit documents and consider using the flexibility prevalent in many credit documents to maximize add-backs and managing the timing of cost-savings and restructuring initiatives and minimize the impact on their covenants. Careful analysis of the exact wording is important and, it may be wise to involve, advisors and auditors in order to appropriately classify the applicable line items and determine if such add-backs are permissible under applicable accounting standards and plan for a communications with lenders and strategies for requesting waivers and amendments to credit documents.
Share repurchase programs
With share prices at historical lows, many companies with available cash on their balance sheets are considering stock buyback programs. While the economics of such programs may be appealing, companies are encouraged to engage counsel to analyze the legal issues of implementing such a program at this time. Some issues include whether (1) there is adequate disclosure and guidance in the market, (2) there are any restrictions on such buybacks in the company’s debt documents and (3) the company could be subjecting itself to certain criticisms by entering the market to repurchase its stock at this time.
SEC operations and contingency plans
The SEC remains open and fully operational as of the time of publishing and focused on the following items:
- maintaining the continuity of SEC operations;
- monitoring market functions and system risks;
- providing prompt, targeted regulatory relief and guidance to issuers, exchanges and other registrants impacted by COVID-19, including in connection with the execution of their business continuity plans; and
- maintaining its enforcement and investor protection efforts.
A link to the full SEC coronavirus response release can be found at sec.gov.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you many face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVIDfirstname.lastname@example.org
Client Alert 2020-101