By Soyoung Ho
SEC Chairman Jay Clayton and William Hinman, the top official in the Division of Corporation Finance, recently issued a statement urging public companies to provide forward-looking information to investors. They believe that during a pandemic, investors find future projections about companies’ businesses to be useful, more so than historical data.
The April 8, 2020, statement came as companies were starting to conduct quarterly earnings calls with Wall Street analysts, but securities lawyers say companies are finding it challenging to provide useful and relevant disclosures today.
This is because nobody knows what the business will look like in the future, emphasizing the fluidity and uncertainty of the current environment, said Jeffrey Selman, a partner at Crowell & Moring LLP in San Francisco.
Financial information in the reports has been mainly historical. Analysts use the information, including management’s commentary on trends and future expectations of financial condition and risks, to assess the company’s value and estimate future financial performance.
In order to slow the transmission of COVID-19—the respiratory illness caused by a novel coronavirus—authorities around the world have instituted some form of stay-at-home order, leading to a screeching halt to much of economic activities. Certain industries such as the travel industry have been hit particularly hard. The unemployment rate has been spiking as companies both large and small have been laying off employees with businesses drying up overnight. While a few states are moving to lift some restrictions, it is unclear what businesses will be like before things go back to normal, which could be years away.
“And so, there is some trickiness in trying to think through what forward disclosures to make,” Selman said.
Dave Brown, a partner with Alston & Bird LLP in Washington, agreed.
“Given the impact of the COVID-19 pandemic and the ever-changing landscape, providing ‘meaningful information’ will likely require companies to provide more current or forward-looking information than historical Q1 2020 numbers,” Brown said. “This may be particularly challenging for companies that report earnings before the first month of the second quarter is over. Companies may not be in a position to give more up to date numbers if they report earnings the last week of April and may result in more qualitative forward-looking disclosures…. If companies do not provide this information, they should be prepared for focused, difficult questions from investors on these subjects in their earnings calls.”
In addition, corporate lawyers also emphasized about risks companies face because of the litigious environment in the U.S. even as the SEC said it would not second guess companies’ best effort to provide fulsome disclosures. The commission has also encouraged companies to use the forward-looking statement safe harbor. This means that companies have some liability protections when they use the safe harbor. Companies usually put a disclaimer that any forward-looking statement is true at the time the information was written.
“Companies typically approach forward-looking information with caution given the prevalence of shareholders litigation and a very challenging and unpredictable environment,” said Brown with Alston & Bird.
Ryan Wilkins, chair of corporate and securities law practice group with Stradling Yocca Carlson & Rauth, P.C. in Newport Beach, California, also said he is not as worried about the SEC.
“I believe they are unlikely to seek enforcement against issuers for statements relating to COVID-19,” Wilkins said. “I do worry a little bit about private litigation, the securities actions going forward. But you can buy yourself a lot of protection through well-drafted cautionary language.”
However, the liability worries may be more prevalent among companies that decide to raise capital at this time, he said.
“I think that for companies that are just in the normal disclosure cycle, I don’t think they are going to be subject to tremendously greater amount of risk,” he added. “I think the companies decide that they are going to go out and issue securities at this time or companies that are allowing officers and directors to trade in securities this time. I think there will be questions later about what those companies or what those officers and directors actually knew about the company that might not have been disclosed at the time.”
In the meantime, Crowell & Moring’s Selman urged companies to have good systems in place “to be able to see in somewhat real time what may or may not be happening to their business from a positive or negative point and are able to sort of make future projections based on that current real-time information and then appropriately note the risk that you believe are out there.”
This article originally appeared in the April 23, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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