On March 25, 2020, the Division of Corporate Finance of the Securities and Exchange Commission published guidance on disclosure obligations of companies with respect to COVID-19 and related disruptions. The SEC recognizes that the full impact of COVID-19 on any company or industry may be difficult to predict, but such effects may still be material to stockholders, and so it provided some detail on the obligations of companies to report such items.
In its guidance, the SEC alludes to the fact that such disclosures may be required in the following sections: (1) Management's Discussion and Analysis; (2) Business; (3) Risk Factors; (4) Legal Proceedings; (5) Controls and Procedures; and (6) Financial Statements. Though filings referencing COVID-19 are still limited among reporting companies, we have seen issuers report in all of these sections, particularly the following:
- Management's Discussion and Analysis – broadly mentioned as a recent event, with potential or expected impacts to business
- Financial Statements & Auditors Reports – reported in a subsequent events footnote to the financial statements
- Risk Factors – both specifically its risk as a pandemic as well as part of a general risk regarding the potential of an economic downturn
- Forward Looking Statements Disclosure – as an item which could cause results to differ from those anticipated
Of course, for any company, the risk and related disclosure will be a unique facts and circumstances analysis. However, some examples serve as guidance. The SEC provides an exhaustive list of considerations that each company should consider in drafting its public disclosures, including the effect on capital, changes required due to remote work arrangements or changes in behavior, changes in customer demand, and effect on supply chain.
Health services providers, specifically, are focusing on the following:
- Effects of treating patients with COVID-19 on the ability to provide services to other patients
- Expectations for elective procedures, and whether such procedures will be deferred or cancelled, and the effect on short and long-term patient volume
- Disruptions in the production or procurement of devices, PPE, pharmaceuticals, and other supplies
Finally, we are seeing a number of reporting companies specifically addressing uncertainty as a risk. There is an understanding by the SEC and the market that many of the risks and effects of COVID-19 are not known and may not be known for some time. Proper disclosure can and should disclose the fact that there is uncertainty in future impacts.
We will continue to provide updates regarding the SEC's guidance.
This article is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the COVID-19 pandemic, but which are not referenced in this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.