Bloomberg Law
May 11, 2020, 9:25 AM

ANALYSIS: Crisis Magnifies Need for More Corporate Disclosure

Peter Rasmussen
Peter Rasmussen
Legal Analyst

The coronavirus pandemic has profoundly changed the way companies do business in just a few short weeks. The upheaval in business operations will also have a significant impact on how companies disclose information to their investors, to the markets, and to regulators. Companies should heed the advice of regulators in making their disclosures, as an SEC enforcement action is the last thing any issuer needs during a time of economic upheaval.

In a joint public statement issued April 8, SEC Chairman Jay Clayton and SEC Corporation Finance Director William Hinman urged public companies “to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning.” Chairman Clayton and Director Hinman recognized that in the short term, “earnings statements and calls will not be routine.”

Forward-Looking Statements

According to the SEC officials, in this unusual circumstance, companies may need to rethink their traditional disclosure approach. “Historical information may be substantially less relevant,” they said, as “investors and analysts are thirsting to know where companies stand today and, importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis.”

Clayton and Hinman recognized that companies are often hesitant to provide forward-looking disclosures beyond what is required by SEC rules, including specific estimates, due to the risk of liability in the event those forward-looking estimates prove to be incorrect.

Due to this uncertainty, the SEC officials urged companies to utilize the safe harbors for forward-looking statements found in Section 27A of the Securities Act and Section 21E of the Exchange Act. They stated that, given the unique circumstances companies face during the pandemic, “we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”

Periodic Reports and Company Updates

I have previously discussed the disclosure of coronavirus impacts in Form 10-K risk factors. Companies that have not filed their annual report should fully disclose the risks they face with the pandemic, and should not merely add the coronavirus outbreak to a list of potential exposures.

Companies that have already filed their Form 10-K annual reports should review the information disclosed in the risk factor section and in Management’s Discussion and Analysis to determine if that information is still complete and accurate in light of the spread of coronavirus and the contraction of the economy. Issuers may update their disclosures through a Form 8-K filing, or if due soon, their quarterly reports on Form 10-Q.

The CEO Is Sick! Do We Have to Disclose That?

The coronavirus is an equal opportunity pathogen, and the C-suite is certainly not immune from the pandemic.

The answer to the question of whether companies must disclose if senior executives become ill is a simple, definitive “It depends.” There is no general disclosure obligation concerning the health conditions of senior executives under SEC rules or state corporate law, and these individuals have a strong privacy interest in keeping their medical issues away from public scrutiny. SEC disclosure rules will come into play, however, if due to the virus, senior executive officers leave the company or become incapacitated to the point that they are unable to perform their duties.

The current disclosure form, Form 8-K, provides in Item 5.02(b) that companies must file a report in the event of the resignation, retirement, or termination of specified senior officials. In addition, under Item 5.02(c), companies must file a Form 8-K report upon the appointment of new senior executives. SEC rules require companies to file the form with the Commission within four business days of the triggering event.

Under a Compliance and Disclosure Interpretation (C&DI) issued by the Division of Corporation Finance in 2008, the officer in question need not leave the company in order to trigger the disclosure requirement. In its response to Question 117.03, the staff stated that “termination” includes demotions and reassignment of responsibilities. In Section 217 of the C&DI, the staff addresses the question of the temporary absence of the principal financial officer. According to the staff, if the principal financial officer temporarily turns his or her duties over to another person, the company must file a Form 8-K under Item 5.02(b) to disclose the details of the substitution. The company must file another Form 8-K report if the original principal financial officer returns to the position.

Reading the Form 8-K requirements and the staff interpretations together, it appears that issuers should disclose, in a current report, whenever one of the specified executive officers leaves the company or becomes temporarily incapacitated due to the virus. Companies should then file a follow-up Form 8-K report if the executive resumes the functions of the office after a temporary absence.

Other Form 8-K Disclosure Items

The coronavirus pandemic could trigger current reporting requirements under several other Form 8-K provisions. A partial list of these triggers includes events such as changes to major contracts, bankruptcies and receiverships, executive compensation arrangements, and asset disposition costs or asset impairments. Companies must also be mindful of the Regulation FD prohibition of the selective disclosure of information, and should be prepared to use Form 8-K to remedy any such improper disclosures in a timely fashion.

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