With every passing day of the COVID-19 crisis, there is a flood of information for the public to absorb. Public companies are actively monitoring and assessing the potential financial and operational impact of the pandemic on their businesses. And public company boards are receiving frequent reporting from senior management on the rapidly evolving situation. Against this backdrop, each public company is considering how best to communicate with its investors and when it may be legally required to do so.
Assessments of whether disclosure is legally required—which are generally based on whether the information is reasonably expected to move the market price of an issuer's securities—are particularly challenging in a market that is experiencing dramatic fluctuations in stock prices on a daily basis.
Disclosure beyond what may legally be required is generally good for investors. However, if thoughtful consideration is not given to the type of information being disclosed, companies may create expectations from investors as to future disclosure, and could prematurely signal that certain events are more significant to the company than may actually be the case.
Although there may be a desire to get information into the market quickly now more than ever, it is important for companies to carefully consider their disclosure obligations and make reasoned and informed judgments about communications to the market. To ensure that planned disclosures of material information benefit from all relevant input and are communicated appropriately to the market, in a consistent manner, and to be able to respond to possible criticisms of disclosure decisions, companies should ensure that they adhere to the review and approval processes set out in their established disclosure policies.
While every issuer will have its own unique circumstances, here's our take on some of the key disclosure issues that we expect our clients will face:
- disclosing the impact of COVID-19 on the business
- guidance in the wake of COVID-19
- COVID-19 and selective disclosure concerns
- disclosure of COVID-19 test results and symptoms
Disclosing the impact of COVID-19 on the business
Most Canadian companies are experiencing operational impacts from COVID-19, as governmental restrictions drive the closure of non-essential businesses, and those businesses that continue to operate contend with constrained workforce flexibility, limitations on their activities and, in many cases, significantly reduced business volumes.
Given the rapidly developing circumstances of the COVID-19 pandemic and the governmental and public response, companies have largely been reactive, and have faced challenges in addressing what is normally a key part of any communications about corporate developments—how has the business been affected, what is the expected impact, and what will be the company's next steps?
The continuing uncertainty around the duration of the pandemic and associated public health measures makes it difficult to answer those questions. Immediate and longer-term economic impacts of the pandemic are still uncertain, as companies adapt their business strategies and as government relief programs and economic stimulus packages are developed.
In light of this uncertainty, companies should consider adopting a conservative approach to public disclosure that is grounded in their current understanding of the material business impacts that have been experienced, supplemented by a clear identification of the risks and uncertainties that will affect the business in the near term.
Practically speaking, companies will be dealing with more unknowns, including related to fundamental aspects of their business, than they have in the past—it is entirely appropriate for the disclosure to acknowledge this, including through a more restrained approach to corporate outlook or financial guidance.
Companies are generally not required to interpret the effect of external political, economic and social developments on their affairs. However, if an external development has a direct effect on the business and affairs of a company that is both material and uncharacteristic of or disproportionate to the effect generally experienced by industry or business peers, then a company should disclose the particular impact it experiences. If the effect of the external event has caused a change to the company's business or operations that is material, that material change must be disclosed. Even if the full extent of that change isn't known or cannot be evaluated or quantified, material information of this kind must be disclosed promptly to satisfy legal requirements.
From customer- to investor-focused press releases
In the past few weeks, many companies have experienced rapid—and incremental—changes in their businesses, as public health measures have progressively become more stringent across multiple geographies where they may operate. This has prompted the widespread issuance of what might be described as "customer-facing" press releases—companies announcing reduced hours or service levels, changes in operations or service delivery, or the temporary closure of certain locations, principally driven at informing customers or other service users.
Other companies, some of which have been forced to indefinitely close or substantially curtail their business operations, have issued "investor-facing" press releases and material change reports in light of the clear prospective market impact of these developments.
As mandated business closures and other operational impacts have become the "new normal"— and companies have increased visibility on financial/operating metrics that quantify declines in their business (notably as they begin preparation of their quarterly financial statements) —companies should consider investor-focused market update press releases addressing the current market conditions that they are experiencing, how those conditions are impacting the business (qualitatively, and quantitatively if that is possible in the circumstances), and any trends that have developed or are anticipated to impact the business in the near term.
Companies should also carefully consider what prior disclosures about corporate strategy or business plans (which may have only been recently articulated in the annual information form or MD&A that pre-dated the emergence of COVID-19 in Canada) need to be reframed or qualified in the current economic climate. These market updates may also address prior guidance or outlook (see Guidance in the wake of COVID-19, below).
MD&A disclosure and filing considerations
Companies must also include any updating disclosure in their next quarterly MD&A about the company's overall performance, its operations and its financial condition, including industry and economic factors affecting performance, risks and uncertainties expected to affect future performance, and an analysis of liquidity. Companies should also revisit their risk factor disclosure to ensure that the impacts of COVID-19 are appropriately reflected, and any new risks or contingencies facing the business are identified.
Even for those companies that have issued press releases regarding key corporate developments (and specific material changes or material facts) arising from the COVID-19 pandemic, it is unlikely that they will have fully addressed the required elements of this MD&A disclosure, either at all or in the same level of detail as will be required.
Accordingly, it will be important for companies to devote additional time and resources to their continuous disclosure filings for the quarter. There will almost certainly be significant, substantive new disclosure that has to be developed, requiring input and review from many constituencies in the company.
The need for disclosure updates may also drive decision-making about certain corporate initiatives—as the company needs to determine "what are we going to say about this"? As these updates are developed, companies should be aware that their disclosure judgments may be questioned in hindsight if there are meaningful disconnects between their public disclosure record and the messaging included in enhanced internal management or board reporting on COVID-19 impacts and associated business planning. Companies should anticipate significant audit committee and board participation in the review and discussion of upcoming public disclosures and adjust their timetables for the preparation of public filings accordingly.
Companies that plan to rely on the recently-announced 45-day extension of the deadline for their annual and first quarter continuous disclosure filings are reminded that they will be required to issue a news release that discloses, among other things, any "material business developments" since the date of the company's last financial statement filing, or confirmation that there have been no such material business developments (see our publication "COVID-19: Canadian securities regulators and TSX extend deadlines, TSX increases NCIB purchase limits").
The CSA has not provided guidance as to what kinds of corporate events or circumstances would constitute material business developments requiring press release disclosure1. However, we believe that issuers should consider this press release as an opportunity to provide a market update regarding the impact of COVID-19, as described above, pending the release of the annual or interim filings.
Guidance in the wake of COVID-19
In general, Canadian public companies do not have an obligation to update previously issued financial outlook disclosure—a term which includes earnings guidance—unless they have indicated that they will do so.
Guidance that was issued in compliance with Canadian disclosure rules will have been accompanied by appropriate cautionary language identifying the material risk factors which could give rise to material variation from the outlook, and will have included a clear statement that the guidance was given as at a specific date. It is likely that the economic environment unfolding due to the COVID-19 pandemic and the governmental and public response could not reasonably have been foreseen at the time the most previously issued earnings guidance was prepared.
Companies that have issued guidance must assess the implications of having that public disclosure on the record. If the company believes that previous guidance may be missed in a material fashion, care should be taken not to make statements or provide disclosure which may lead investors to conclude that the guidance remains the company's position.
Companies that have guidance outstanding and also have a basis to believe that that their results will materially miss the guidance should consider issuing a press release and material change report to withdraw or revise that guidance. This can be done in advance of the company's next MD&A. Taking this step ahead of the scheduled MD&A would diminish the risk of selective disclosure issues in the interim and allow the company to address the issue in a straightforward manner in response to questions from investors, other market participants and the media.
Given rapidly changing circumstances, in most cases simple withdrawal of the guidance, rather than an effort at revision, will be the more prudent course. Disclosing revised guidance in the current circumstances may be difficult for most issuers given uncertainties over the severity of the impact and duration of the pandemic or may lead investors to assume that the disclosing company should continue to provide revised guidance as events impacting its financial performance unfold. If a company does provide revised guidance, it should do so with the necessary qualifications and reference to appropriate risk factors (including revised and expanded risk factors as appropriate) and clarify that the company does not undertake to provide further future revisions.
If a company's guidance remains outstanding at the time of the next MD&A, it will need to disclose in the MD&A any material differences between its actual results for the period and the previously disclosed guidance, together with an explanation of the reasons for the variance. A similar analysis must be provided for any other material forward-looking information that is not withdrawn, along with a discussion of events or circumstances that occurred in the period and that are expected to impact actual results over the remainder of the forecast or projection period.
Selective disclosure concerns
The media attention surrounding the COVID-19 pandemic, and its impact on businesses and employees (particularly in public-facing companies like airlines, retailers, food service and hospitality) is driving significant inbound inquiries for many companies, in addition to outreach from investors and analysts seeking updates on the business.
Commercial decisions made by companies in these unprecedented conditions—whether applications for government support, negotiations with creditors or other counterparties, requests to landlords for rent abatement, or changes to working hours, wage levels or layoffs—can quickly become widely covered news stories. This level of interest is likely to increase as the economic and social impacts of the COVID-19 pandemic become more pronounced, and companies with December 31 fiscal year ends enter blackout periods after their first quarter.
For this reason, it is critical for companies to carefully follow their established policies and procedures around public disclosure, including the preparation and review of public statements or other communication materials, media contact and engagement with analysts.
Notably, companies need to ensure that material information about the company is disseminated by way of press release, and that it is not inadvertently or selectively disclosed on a preferential basis to the media or other market participants, including through social media. The risk of selective disclosure will be greater where a company has not yet provided any form of market update or material information press release disclosure in response to the COVID-19 pandemic.
Concerns can also arise where a company representative selectively provides a more detailed financial analysis of actual or anticipated business impacts, or corporate outlook, relative to what is currently in the public domain. Companies should ensure that their market updates and other press releases, as well as presentations and other investor-facing materials that they prepare, are generally available on a corporate website—providing a baseline for subsequent communications with the media and analysts.
Companies should also take care to ensure that communication restrictions around their blackout periods are adhered to—in the current circumstances, a strict "no comment/no engagement" policy may not be workable; however, any proposed verbal or written communications should be carefully scripted and reviewed to avoid selective disclosures.
Companies should also be mindful of insider trading restrictions and the requirements of their trading policies, and consider implementing either a general or targeted special blackout period if they believe they possess material information that has not yet been publicly disseminated.
Disclosing COVID-19 test results and symptoms
News of high-profile public figures around the globe testing positive for COVID-19 are naturally leading companies to consider their own public communication plan should a member of the senior management team test positive or develop COVID-19 symptoms.
Canadian market practice has historically been to not announce health issues affecting members of the executive team absent the occurrence of a formal transfer of responsibilities, an extended leave or a resignation. This approach has been grounded in the view that it would be inappropriate to disclose a manageable health condition that is not adversely impacting the executive's duties, and that such information (while potentially newsworthy) would not be material.
Given that health authorities suggest that most individuals encounter only mild symptoms when they test positive for COVID-19, public disclosure would seem unwarranted if the individual was simply confined at home but still able to perform his or her duties. However, if the executive is considered the public face of the company, is uniquely integral to its strategy or operations or is hospitalized, public disclosure of how their health status is affecting their ability to perform their functions at the company may well be the right decision.
Given the unprecedented nature of the COVID-19 pandemic and the examples set by many other high-profile political and business leaders around the world, we expect that many companies may feel compelled to be as transparent as possible about any member of the senior executive team who tests positive or becomes symptomatic. Even if such disclosure is not legally required, many companies may prefer to put out their own statement rather than respond to rumours. Of course, companies must take privacy considerations into account and should consult with any affected member of the executive team prior to making any public disclosure.
Footnote
1. On April 3, the CSA published Staff Notice 51-360 with responses to a number of frequently asked questions regarding the blanket relief. The CSA reminded issuers that determinations of whether a development constitutes a material business development is contextual, may vary from issuer to issuer and encouraged issuers to reference existing securities rules and policies for guidance, including Section 4.2(1) of National Policy 51-201 Disclosure Standards.
