Corporate secretaries, general counsel and boards must stay alert to changing circumstances as they respond to the coronavirus and its potential impact on their companies, according to Alston & Bird partner David Brown.
‘They will need to be nimble in terms of disclosures and shareholder outreach’ while making sure not to be hysterical, Brown tells Corporate Secretary. He has been fielding incoming calls from clients on the coronavirus issue, with some wanting to check whether they are being too aggressive or too conservative in their approach.
Companies, faced with a rapidly evolving situation, were initially unsure about including discussion of the outbreak in the risk-factor sections of their Form 10K and Form 10Q filings, Brown notes. But he says a recent statement from the SEC on the subject has solidified awareness that people are looking at the issue, and a growing number of issuers are now making those risk disclosures.
In addition, more companies – particularly those in the travel industry – are adding references to the coronavirus in their MD&A because it now constitutes a known trend that could impact supply chains or customers, Brown adds.
Earnings guidance also raises questions, particularly for companies that reported in January before the situation deteriorated. Brown advises making sure that investor relations teams are ready to deal with potential Regulation FD issues and that officials avoid confirming their January guidance, which can be construed as republishing it.
Companies are not required to update their guidance in light of the disease and its effects, but in terms of shareholder relations it can be a difficult issue to avoid talking about – and poses the added difficulty of being a fluid situation. In the meantime, it is best to say that the existing guidance was correct as of the date it was issued, that the situation is evolving and that the company takes it seriously, is monitoring developments and will issue new guidance when it knows more, according to Brown.
Other issues corporate secretaries may want to consider, depending on the progress of the virus, is whether to switch from in-person to telephonic board meetings – taking into account the age, location and wishes of directors – and potentially whether to move to holding a virtual AGM, Brown notes.
Boards have a key role in terms of their responsibility for risk oversight. Among other things, they should ensure the company has an effective disaster recovery plan in place and consider what steps the company should be taking given the coronavirus situation, with boards often focusing on supply chains, Brown says.
They should also note that business interruption insurance may not apply in certain situations, potentially including a viral outbreak, and check to make sure the company and its audit firm will be able to compete its audit on schedule, he adds.
In a February 19 statement, SEC chair Jay Clayton, division of corporation finance director Bill Hinman, SEC chief accountant Sagar Teotia and PCAOB chair William Duhnke said recent dialogue with senior officials at the largest US audit firms included discussion of the potential impact of the coronavirus on companies, financial disclosures and audit quality, including audit firms’ access to information and company personnel.
‘This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers,’ the regulators said. ‘[But] how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.’
The regulators emphasized:
- The need to consider potential disclosure of subsequent events in the notes to financial statements, as outlined in Accounting Standards Codification 855, Subsequent Events
- The ‘general policy to grant appropriate relief from filing deadlines in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with appropriate review and attention.’
They encouraged companies to contact the agency with questions about reporting matters related to the potential effects of the coronavirus, including potential subsequent event disclosure, and to reach out if they need relief or guidance.
‘Based on these communications and its continuing monitoring of the situation, the staff will determine whether to provide additional guidance and relief as appropriate for affected parties,’ they added. ‘Relief may be made available on a case-by-case or broader basis as circumstances merit.’