The global spread of COVID-19 continues to have a significant impact on Canadian businesses across a variety of sectors and industries, with its scope, scale and financial effects continuously evolving. These impacts raise specific considerations for Canadian reporting issuers, who must consider how the impact of the pandemic on their businesses affects their annual and/or quarterly disclosure obligations and other securities law obligations.
Below are some important issues for Canadian reporting issuers to consider as they navigate their continuous disclosure and other securities law obligations and assess COVID-19’s impact on their businesses:
Continuous disclosure obligations
- Reporting issuers should assess whether they will be able to file their annual or interim financial statements by the required filing deadline
As of this date, in recognition of the impact of COVID-19 on reporting issuers and other market participants, the Canadian Securities Administrators (CSA) have announced that they will provide temporary relief from some regulatory filings required to be made on or before June 1, 2020. The blanket relief will provide a 45-day extension for filing of financial statements, management’s discussion and analysis (MD&A), annual information forms (AIFs) and certain other filings. The CSA has not yet disclosed all the details about the relief but has stated that reporting issuers choosing to rely on this exemption and that comply with the conditions of the relief will not need to file applications for management cease trade orders as they will not be noted in default.
- Reporting issuers should be monitoring the impact of COVID-19 on any previously disclosed financial outlook
The nature of a pandemic means that circumstances surrounding the virus are changing rapidly. Despite COVID-19 being a global event that is beyond the control of any issuer, reporting issuers are responsible for disclosing any material effects of the virus/pandemic on their businesses. Reporting issuers should be cognizant of swift changes in the pandemic’s effects on their business and continuously monitor how these changes affect any previously disclosed financial outlook. Under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”), Canadian public companies are required to address events and circumstances that are reasonably likely to cause actual results to materially differ from previously disclosed material forward looking information, either in their MD&A or a press release issued prior to the filing of their MD&A. As a result, reporting issuers must decide if any developments as a result of the pandemic have affected any earnings guidance or other financial outlook they previously disclosed and if so, take the necessary steps to update or withdraw such financial outlook.
- Reporting issuers need to identify the specific risks and effects of the virus on their businesses
The risk factors and material effects of COVID-19 on an issuer differ depending on the nature of the issuer’s business. Canadian reporting issuers should address the specific risks and uncertainties applicable to them related to the pandemic in their MD&A and AIFs. It is important an issuer to avoid ‘boilerplate’ language, and give detailed disclosure of the risks and the anticipated significance and impact those risks may have on the issuer’s financial position, operations and cash flows. Some specific risks may include:
- Disruptions as a result of travel restrictions
- Disruptions to the issuer’s supply chain as a result of mass quarantines or lockdowns in the reporting issuer’s home jurisdiction or elsewhere
- Disruptions to operations resulting from quarantined employees and government-imposed closures
- Uncertainty around the pandemic’s impact on the cost of capital
- Reporting issuers need to be mindful of material changes and address them appropriately in the circumstances
The impacts of COVID-19 are rapidly evolving. It is essential for issuers to be conscious of changes in their businesses, operations or capital that would reasonably be expected to have a significant effect of the market price or value of their securities. Reporting issuers must continue to comply with the requirement in NI 51-102 to disclose any such material changes by immediately issuing a press release discussing the nature and substance of any material change and filing a material change report within 10 days following the material change.
Other securities law obligations
- Executive officers, directors and other insiders should understand and observe their obligations under securities laws regarding trading of securities and comply with the trading and black out policies of the reporting issuers they serve
Caution should be exercised in times of turmoil when insiders engage in trading activities. External volatility is often commensurate with dynamic ‘on the ground’ business changes that may not appear to be material within the securities law context in the heat of the moment. However, such changes can be seen by regulators and investors as having been material when looked at in hindsight. Trading by insiders in unpredictable times can be fraught with risk of reputational damage. It may raise red flags for regulators, who may pursue time consuming and costly inquiries and investigations even if the trading had been done in compliance with applicable policies and laws. Public companies should consider imposing blackout periods as appropriate to reduce the risk of challenge or of improper actions by those in a 'special relationship’ with the reporting issuer.
- Reporting issuers need to consider applicable corporate statutes when changing the date, time or location of an annual shareholder meeting
The CSA has not yet provided specific guidance regarding the conduct of annual meetings and related proxy materials in light of COVID-19, other than to state that they are supportive of measures issuers are taking to mitigate the risk of transmission and that issuers can contact their principal regulators to discuss any COVID-19 related issues in delivering proxy materials. We are in contact with the regulators and clarification is soon expected, especially since the U.S. Securities and Exchange Commission (SEC) has made an announcement in this regard.
The SEC has stated that in light of the difficulties arising from COVID-19, a U.S. issuer that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the date time or location of its annual meeting (including switching the meeting to be a “virtual” meeting) by way of press release without mailing soliciting materials or amending its proxy materials, subject to certain reasonable conditions. The SEC was careful to note that issuers must continue to comply with applicable corporate law (or obtain any necessary exemptions).
We have previously provided an update regarding the ability of issuers in Canada to hold such virtual shareholder meetings, which can be found here. Issuers in Canada will have to consider a similar mix of corporate and securities law in either changing their meeting and/or record dates or changing the location of their meetings. The specific considerations will depend on the applicable issuer’s circumstances.
As the pandemic progresses, so will the effects on Canadian businesses. It is important to remember that disclosure requirements will differ from issuer to issuer. Canadian public companies should continually assess the impact of the pandemic on their business, and whether their public disclosure should be updated or revised.
Canadian regulators are regularly revising their expressed expectations of market participants, including in the area of public company disclosure. We have written about this in a recent post, and have made available a chart of regulatory pronouncements that we have been keeping up to date, which can be found here. We invite you to visit this material often to help you stay up to date.