As the COVID-19 pandemic evolves, companies are experiencing a host of adverse consequences and gaining insight into additional potential risks of the pandemic to their businesses. At the same time, general uncertainty continues to prevail about the severity, duration and long-term impacts of the pandemic.
As a result, public companies must evaluate the need for COVID-19-related disclosures, including known or reasonably likely effects of, and the types of risks presented by, COVID-19 and related business and market disruptions. The Securities and Exchange Commission’s Division of Corporation Finance recently provided guidance in CF Disclosure Guidance: Topic No. 9 (March 25, 2020), which highlights the staff’s view that disclosure of COVID-19-related effects may be necessary or appropriate, including in a company’s risk factor disclosures.
This client alert provides practical tips for companies that are considering updates to their risk factor disclosures as the COVID-19 pandemic continues to develop, whether in connection with their upcoming Form 10-Q or in another SEC filing such as a Form 8-K filed in connection with a securities offering. The below examples demonstrate drafting approaches that companies should keep in mind as they update their risk factors.
- Update to reflect risks that are no longer hypothetical.
When a company has already been negatively impacted by the pandemic, that negative impact should not be presented as a “hypothetical risk” – that is, a risk that something could happen in the future. Rather, disclosure should reflect that the company has experienced or is experiencing adverse effects if that is the case, including circumstances that have materialized:
ORIGINAL DISCLOSURE: The coronavirus pandemic could adversely impact our operations, supply chains and distribution systems and demand for our products and services.
UPDATED DISCLOSURE: The coronavirus pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services.
ORIGINAL DISCLOSURE: If we do not successfully operate our distribution centers and supply chain, we may be unable to satisfy customer orders, which could harm our reputation and our customer relationships and could materially adversely affect our business, financial condition and operating results.
UPDATED DISCLOSURE: As a result of COVID-19, we have been unable to satisfy certain customer orders for our products. As a result, our customers have experienced delays in receiving our products . There is uncertainty around the duration and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.
- Update to reflect changes in management’s expectations.
If management currently expects that there will be future adverse effects as a result of the pandemic, such expectation should be expressed rather than a belief that the company may experience future adverse effects, even if management cannot currently predict the extent and nature of the impact:
ORIGINAL DISCLOSURE: While we believe the coronavirus may have a negative impact on our financial results, the impact is difficult to assess at this time.
UPDATED DISCLOSURE: While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at this time.
- Update general COVID-19 risks with specific risks that have evolved due to the passage of time.
As the pandemic evolves, its effects have become more evident and response measures have taken a more defined shape. Prior general disclosures regarding potential response measures or restrictions in addition to general disclosures regarding potential impacts should be updated with relevant and specific information:
ORIGINAL DISCLOSURE: Responsive actions related to COVID-19 may adversely affect our business, financial condition, liquidity, and cash flow. It is impossible to predict the extent of any such impact as the circumstances rapidly evolve.
UPDATED DISCLOSURE: Public health officials have recommended and mandated precautions to mitigate the spread of COVID-19, including prohibitions on congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, we have temporarily closed certain of our stores and distribution locations over the past several months. Our results will be adversely impacted by these store closures and other actions taken to contain or treat the impact of COVID-19, and the extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted.
- Update specific risks with further developments to reflect the current state of affairs.
Where companies have identified specific potential impacts of COVID-19 in prior disclosures, such disclosures should be re-examined and brought up-to-date to reflect further developments with respect to the company’s realization of such risks and expected consequences:
ORIGINAL DISCLOSURE: We may face difficulties enrolling or retaining patients in our clinical trial if patients are affected by the virus or are unable to travel to our clinical trial sites. If enrollment at clinical trial sites is delayed or suspended, we could experience delays in the completion of our trials, which could result in a material adverse impact on our clinical trial plans and timelines.
UPDATED DISCLOSURE: We have experienced, and expect to continue to experience, enrollment at a slower pace at certain of our clinical trial sites than initially expected. In addition, certain of our clinical trial sites have suspended enrollment due to facility closures, quarantine, travel restrictions and other governmental restrictions. As a result, we expect the results from our clinical trial to be delayed, which we expect will have a material adverse impact on our clinical trial plans and timelines.
While the above examples of disclosure updates are in line with general disclosure principles that extend more broadly than the COVID-19 context, it is particularly important to pay close attention to COVID-19 disclosures as circumstances are rapidly evolving. Against the backdrop of uncertainty and unpredictability with respect to the impact of the pandemic, public companies should ensure that any COVID-19-related impacts that have been experienced, in addition to management’s current expectations with respect to the future potential impacts of COVID-19, are reflected accurately in the company’s risk factor disclosures.
A company’s disclosures must address its specific facts and circumstances, which requires analysis and tailoring of the disclosure, even when starting with a good precedent model. Any questions about a company’s risk factor disclosures may be directed to the contributors listed below or to your regular WilmerHale client team.