On Friday, March 20th, Thomson Reuters hosted a webinar, Legal Considerations in Responding to COVID-19. Several questions pertaining to legal implications due to the COVID-19 pandemic were received. Below are some of the most common questions the Practical Law Team received from our customers about capital markets and COVID-19. Many questions regarding the Families First Coronavirus Response Act were also received. We will be addressing those questions during our March 27th webinar, Families First Coronavirus Response Act: Answering Your Most Pressing Questions About Paid Leave and Employee Benefits.
1. Has there been any guidance on the duty of a company when an employee is known to have tested positive?
The following is limited in scope to the perspective of Capital Markets and Corporate Governance.
As of March 26, 2020, there has been no specific SEC guidance regarding disclosure of when an employee is known to have tested positive. However, in general coronavirus guidance issued on March 25, 2020, the Division of Corporation Finance noted that the cornerstone of our disclosure system is disclosure of material information that is widely disseminated. It is only with this type of disclosure that all investors can make informed decisions. The SEC has made clear that disclosure requirements can apply to a broad range of evolving business risks even in the absence of a specific line item requirement that names the particular risk presented. For more information on the March 25 SEC guidance, see Legal Update, SEC’s Division of Corporation Finance Provides Guidance for Disclosure Obligations Amid COVID-19 Concerns.
In evaluating the materiality of the information, some questions that companies should consider include:
- How many, if any, employees have tested positive.
- Who he/she/they is/are and what their position(s) at the company is/are.
- The extent of the illness.
- Whether he/she/they is/are key employees or senior executives and would be considered material to the business.
Companies should be mindful of their own specific facts and circumstances and consider the impact of employee(s) testing positive, including whether other employees (or other people) had exposure to the affected employee. For example, a company in the fast food industry that has an employee in a restaurant test positive for COVID-19 would have to shut down the restaurant and clean it. However, in many states, restaurants have been ordered to shut down by the local government, so the impact of closing and disinfecting one location could be less significant, particularly when compared to the loss of business from closing all locations.
The materiality question becomes more difficult where the employee is an executive officer or other key employee. The illness of a CEO, CFO or other senior executive with COVID-19 (or any other type of potentially serious illness) is not, by itself, necessarily a reportable event under Form 8-K. In addition, companies do not have an obligation to disclose information just because it is material. Companies must also be mindful of their obligations to maintain the privacy of their employees.
Some companies have voluntarily reported executive officer illnesses in an effort to be more responsive to stakeholders. Companies may choose to disclose under Item 8.01 of Form 8-K any events that a company deems of importance to its security holders. Other issues that may impact a company’s decision to report and method of reporting include:
- Whether information about the executive officer’s illness was accidentally or selectively disclosed (or otherwise leaked). Companies should be mindful of their Regulation FD obligations to avoid selectively disclosing information to investors or market professionals. To avoid a Regulation FD violation, companies would disclose the information under Item 7.01 of Form 8-K. For an example of disclosure, see Form 8-K dated March 23, 2020.
- If the executive resigns or takes a leave of absence due to the illness. Companies would disclose this information under Item 5.02 of Form 8-K. For an example of disclosure, see Form 8-K dated March 19, 2020. Companies should also consider disclosing whether an interim or replacement officer has been appointed and whether they have a succession plan in place.
- Whether to impose a special blackout period or otherwise close the trading window under its insider trading policy if the company decides not to disclose.
Companies that determine not to report this information should re-evaluate their decision and the materiality of the illness of a senior executive or key employee when it is time to announce their earnings or file the next periodic report. At a minimum, companies should review and consider updating their risk factors, forward-looking statements and MD&A for the potential impact of employees testing positive.
For more information on risk factors, see Standard Clause, Sample Risk Factor: Coronavirus (COVID-19) and Practice Note, What’s Market: Risk Factor Disclosure on Coronavirus (COVID-19).
2. Has there been any guidance on businesses laying off employees due to COVID-19 related cash flow issues?
The following is limited in scope to the perspective of Capital Markets and Corporate Governance.
As of March 26, 2020, there has been no specific SEC guidance regarding layoffs of employees. However, companies should consider the size and impact of employee layoffs and whether they would be considered material to the business. Companies should be mindful of their own specific facts and circumstances and the March 25 SEC guidance (see Legal Update, SEC’s Division of Corporation Finance Provides Guidance for Disclosure Obligations Amid COVID-19 Concerns). For example, companies may choose to disclose under Item 8.01 of Form 8-K any events that a company deems of importance to its security holders. In addition, if a company terminates employees under a plan of termination described in FASB ASC Paragraph 420-10-25-4 (Exit or Disposal Cost Obligations), it must disclose certain information under Item 2.05 of Form 8-K.
Companies should consider the impact of employee layoffs from an investor/public relations perspective. Large layoffs during a global pandemic can give rise to significant blowback from the public as well as security holders.
Companies should remind themselves of recent discussions relating to rethinking the purpose of a corporation and the Business Roundtable’s commitment to the role of the corporation in creating jobs, fostering innovation and providing essential goods and services, supporting a variety of other stakeholders, including customers, employees, suppliers, and local communities.
Lastly, human capital management is a specific corporate social responsibility area of focus for certain socially conscious activist investors. For more information, Practical Law’s Standard Document, Memorandum to Board: Issues to Consider When Preparing for Shareholder Engagement on Sensitive Social Issues and Article, What’s Market: Corporate Social Responsibility and Corporate Sustainability Disclosures.
3. Are there disclosure or notice requirements regarding investors in non-publicly traded companies?
While nonreporting companies are not required to file periodic reports under the Exchange Act, they may have disclosure and notice obligations that arise under other legal requirements. Companies should review the following to determine if they are required to disclose any information or otherwise provide notice to stakeholders:
- Organizational documents and the corporate laws of their state of incorporation. Companies are typically obligated to hold an annual meeting of stockholders and will need to notify stockholders of record of the upcoming meeting. Companies should pay particular attention to the need for holding a physical annual meeting or whether the meeting can be held virtually. In addition, companies should review whether their organizational documents require any other information to be disclosed, or other notices sent, to stockholders.
- Agreements with stockholders, including stand-alone subscription or securities purchase agreements and any agreements among stockholders. A common provision is for a company to provide certain financial information to its stockholders, but this will be dependent on the specific terms negotiated.
- Debt instruments, including any credit facilities, bonds, notes, indentures, debt purchase or subscription agreements. A common provision in these documents as well is for a company to provide certain financial information to its lenders. In addition, these documents may have covenants that restrict actions that the company can take, including the ability to borrow additional funds, issue additional securities or enter into new businesses or shut down existing businesses.
Please note that this is not an exhaustive list. Companies should be mindful of their own specific facts and circumstances and consult with their counsel.
In addition, nonreporting companies that are currently or are considering selling securities should not forget that they are bound by applicable federal securities laws:
- Section 12(a)(2) of the Securities Act imposes on any seller potential liability for material misstatements or omissions made by that seller in any prospectus or oral communication in the offer or sale of the issuer’s securities whether or not those securities are exempt from registration.
- Section 10(b) and Rule 10b-5 under the Exchange Act prohibit fraud or manipulation in connection with the purchase and sale of securities. Rule 10b-5 prohibits making an untrue statement of a material fact or omitting to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading.
4. What are Delaware corporations doing to update shareholders on changes to a virtual meeting? Are they re-mailing notices? Or are they considering press releases to be enough?
Per the SEC’s March 13, 2020 guidance, companies that had previously mailed and filed their definitive proxy materials can notify their shareholders of a change in the date, time, or location of its annual meeting, including a change to a virtual-only meeting, without mailing additional soliciting materials or amending its proxy materials if they:
- Issue a press release announcing the change(s).
- File the announcement as definitive additional soliciting material on EDGAR.
- Take all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the securities exchanges on which their securities are listed) of the change.
To the extent that companies had not yet mailed and filed their definitive proxy materials, they should consider whether to include disclosures regarding the possibility that the date, time, or location of the annual meeting will change due to COVID-19.
Companies that have included precautionary language regarding the potential for a change in their annual meeting to a virtual-only format in their definitive proxy materials on the basis of the SEC guidance should comply with what they have recommended to ensure that they reach all shareholders. At a minimum, companies should issue a press release regarding the change and file it as definitive additional soliciting materials.
However, as a cautionary note, companies should be mindful of their own specific facts and circumstances. Companies with a significant retail investor population should consider whether, in an abundance of caution, it may be worth mailing the information about the meeting changes to their shareholders.
For more information, see Legal Update, SEC Provides Guidance for Conducting Annual Meetings Amid COVID-19 Concerns, Practice Note, What’s Market: Disclosure Regarding Potential Change to Annual Meeting Due to Coronavirus (COVID-19), and Standard Clause, Sample Language Regarding Potential Change to Annual Meeting Due to Coronavirus (COVID-19).
The information provided in these FAQs does not, and is not intended to, constitute legal advice or legal guidance on how the reader should proceed based on its particular facts or circumstances. Instead, all information, content, and responses are for general informational purposes only. Responses direct the reader to free access Practical Law resources that may be generally helpful to the inquiry as a starting point. Given that the situation related to COVID-19 and the government responses to it are rapidly evolving, the information in this section may not constitute the most up-to-date legal or other information.