The COVID-19 outbreak has had and continues to have significant human, commercial and financial impacts all over the world. This alert sets forth considerations and guidance to assist US public company boards of directors and senior management in their respective efforts to evaluate and plan for the resultant risks of COVID-19.
DLA Piper's global team can help advise companies and their boards, wherever they are based, on the legal issues related to the coronavirus. We are currently advising clients on a range of issues related to the COVID-19 outbreak and have extensive experience advising on similar outbreaks such as SARS. Additionally, as a global law firm with almost 7,000 employees in 40 countries, we are dealing with these issues directly ourselves in real-time all over the world.
Please visit our COVID-19 landing page for additional publications and webinars on legal issues related to COVID-19.
I. Prioritize public health
In the context of the discussion below, note that above all else, the COVID-19 outbreak is a matter of public health, and a company's business is built on the trust that its employees, customers, partners and other stakeholders have in the company to make the right decisions and take the right actions to protect them. We encourage all companies responding to the outbreak to always prioritize the health, safety and welfare of their employees, customers, suppliers and other personnel involved. For example, management and the board should prioritize public health when scheduling meetings and, if permitted by the company's charter documents and state law, consider holding virtual board and stockholder meetings in lieu of in-person meetings. For a discussion of other measures that companies may implement to mitigate the risk of an outbreak and to educate employees, please see our January 29 alert, Coronavirus and the workplace.
II. Keep the board informed
The business and affairs of Delaware and other US corporations are required to "be managed by or under the direction of" the board. The board has an obligation to be reasonably informed and use good faith efforts in overseeing a company's operations. A critical responsibility of the board in this regard is its oversight of material risks to the company, a function commonly referred to as enterprise risk management.
While the situation remains fluid and the specific impacts on most businesses are uncertain, the outbreak may create risks in all aspects of business. Management should keep the board sufficiently well informed and engaged to enable the board to consider and understand the material risks posed by the coronavirus outbreak and their potential magnitude, as well as management's plans to mitigate and address these risks.
Management may do this through periodic or current communications with the full board. Alternatively, the board may designate one or more directors to interface with management, with reporting to the full board as appropriate. The latter approach ensures that management has the benefit of the board's perspective in its day-to-day management of the risks with lesser operational inefficiencies. Certain specific responses or actions more appropriately necessitate the involvement of board committees or the full board. For example, if management is considering whether to update its guidance or other forward-looking statements, the audit committee would be consulted.
III. Remain mindful of disclosure and trading obligations
Because the full impact on the business of the COVID-19 outbreak is uncertain, we expect analysts, investors, traders and other persons in the investment community to seek information in order to assess for themselves the impact.
As the impacts to the company become more apparent, management and other involved persons must be vigilant about complying with the company's disclosure obligations and, in particular, Regulation FD's prohibition against selective disclosure of material nonpublic information. Communications about the impact of the outbreak on the business should be planned and coordinated with the investor relations and legal teams to ensure compliance with applicable law. As a reminder, casual statements that reiterate or call into question previous guidance may be deemed material nonpublic information.
Guidance and other accounting considerations. In general, US securities laws do not require a company to update prior forward-looking statements. Nevertheless, many companies will preannounce or otherwise update prior guidance if the company becomes aware that such statements are not reasonably likely to come to fruition.
Management and the board should make a good faith assessment of the impact of the COVID-19 outbreak on the company's future operating results and liquidity. The impact of COVID-19 and related supply chain disruptions on short and long-term revenue has been a leading theme of recent earnings releases and analyst calls. Management and the board also should consider any accounting impacts resulting from the COVID-19 outbreak, such as goodwill and intangible impairments. If an impairment conclusion is made at a time that does not coincide with, and is not otherwise made in connection with, the preparation, review or audit of financial statements required to be included in the company's next periodic report, the company's should consider whether a Form 8-K should be filed pursuant to Item 2.06.
Once this assessment is complete, management and the board should consider whether prior guidance and other forward-looking statements remain reasonably likely and whether the company should update such statements. We can assist management and the board with such assessment as well as the consideration of the degree of specificity of any such update.
Recognizing the health and safety risks of COVID-19, many companies have also announced the cancellation of significant conferences and other events, substantially modified travel and related policies, and disclosed store closures, reduced sales and shipment delays. While not explicit changes to guidance, these cancellations, policy modifications and announcements in many cases will have a material impact on the operating results of these companies.
Management's discussion and analysis. Even if a company determines that there is no need to update guidance, it will face similar questions in connection with preparing its ongoing periodic reports and any registration statements. In general, these filings require a company to include management's discussion and analysis of financial condition and results of operations, which among other things requires discussion of trends or uncertainties that have had or that it reasonably expects will have a material impact on its financial condition or results of operations. Management and the board should consider if matters relating to COVID-19 require disclosure in management's discussion and analysis.
Risk factors. Management and the board should evaluate the risk factors in its public filings, and those referred to in forward looking statement disclaimers in press releases, to ensure they adequately capture the risks to the company of the COVID-19 outbreak. Standard boilerplate language that does not identify the risks with specificity may not be adequate protection. Similarly, if the company considers a capital markets transaction, the risks disclosed in your offering documents should be modified or supplemented as needed.
SEC guidance provides that companies should focus on risks specific to the company and provide examples where appropriate. To that end, the company should consider risks related to operations in areas impacted by the outbreak, the effects of the outbreak on the company's suppliers and customers, and any indirect impacts that the outbreak could have on demand or supply of the company's products or services.
Please note that, as partially discussed elsewhere in this release, disclosure of risks or related matters may be required in other sections of a company's public filings, including management's discussion and analysis, the business section, legal proceedings, disclosure controls and procedures and the notes to the company's financial statements. To date, of the S&P 500 companies that have filed periodic reports in 2020, nearly 40 percent have mentioned coronavirus.
Special "blackout" periods. When new information becomes available, in addition to assessing whether public disclosure is required or warranted, management and the board should consider whether persons in the know are in possession of material nonpublic information and should be subject to a special "blackout" period.
Note that this blackout period would impact both active trading as well as the establishment or modification of any 10b5-1 trading plans. The board also would need to consider the advisability of making equity grants while in possession of material nonpublic information.
Executive compensation. Many executives are compensated, in part, based on the satisfaction of company financial or operational performance objectives that may be adversely impacted by the COVID-19 outbreak. Compensation committees may wish to consider if previously established performance objectives remain appropriate to incentivize executives to contribute to the company's growth and align with the long-term interests of shareholders. Revisions to previous metrics may require discussion in the company's executive compensation disclosure and in some cases Form 8-K filings. For performance-based equity-awards, material amendments may constitute a new award and trigger Form 4 obligations.
Disclosure procedures. Management and the board should evaluate the impact of the coronavirus outbreak on its disclosure controls and procedures and also confer with its independent accountant to evaluate any potential negative impacts on the company's ability to make timely disclosures.
The SEC has issued statements related to the outbreak emphasizing (1) the need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events and (2) the SEC's general policy to grant appropriate relief from filing deadlines in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with appropriate review and attention. In addition, the SEC stated that it welcomes engagement if issuers have questions regarding the reporting of matters related to the potential effects of the outbreak, including potential subsequent event disclosure. Additional information can be found here.
IV. Consider creating a dedicated response team
Consider creating a specialized response team, composed of key human resources, finance, legal and other internal and external representatives, that is charged with planning, coordinating and communicating the company's responses and actions. Such a task force can greatly aid in quickly responding to events.
The response team should assess potential areas of impact, whether commercial, financial, personnel or investor related. In so doing, the response team should review all relevant business continuity and other policies and procedures to ensure their execution or to propose modification where appropriate. Additional information, such as insurance policies, lease obligations and other contractual arrangements should be provided to the team as needed in the discharge of its responsibilities.
Legal guidance on key items can be found below:
- Employment considerations. For a discussion of key employment considerations of multinational companies impacted by the outbreak, please see our February 25 alert, Coronavirus: key employment issues for multinational employers. In addition, please see our jurisdictional-specific client alerts for companies with employees in the United States, China and other countries in Asia Pacific.
- Supply chain disruption, force majeure and other commercial and operational risks. Our February 12-14 client alerts concern various commercial and operational risks of the outbreak, including supply chain disruption considerations, the legal impact of force majeure events and other contractual issues, and other considerations for mitigating commercial and operational risks related to the coronavirus.
- Interruption of IT functions. For a discussion of what to do if the coronavirus outbreak leads to an interruption of your company's IT functions, please see our February 25 alert.
- Sector-specific concerns. Additionally, COVID-19 may raise concerns for specific sectors, such as construction delays impacting the infrastructure, construction and transportation and real estate sectors, or issues impacting international arbitration, sales of goods, shipping and shipbuilding in the infrastructure, construction and transportation and consumer goods, food and retail sectors.
Senior management should modify or supplement the response team and its plans as needed to address the potential impacts on the business and changes in the situation. Team members also should remain mindful in their communications about protecting attorney-client privilege where available.
V. Ensure message control and continuity
As the company's response evolves, the board and management should designate those persons authorized to speak on the company's behalf both internally and externally. Members of the board and management should review existing communications policies, make any necessary updates and then remind all internal stakeholders to follow the proper protocols. Adherence to communications policies is especially important as questions are raised by analysts, investors, other members of the investment community or the media.