Whether the COVID-19 (Coronavirus) outbreak presents a material risk to your business operations or not, there are steps all public companies should be considering given the developments relating to this global outbreak.
- Those in positions to make critical decisions relating to risk mitigation and disclosure need to keep informed and updated. This includes ensuring that accurate and clear information is disseminated in a timely manner to those with oversight over these functions.
- Potential risk from the COVID-19 outbreak needs to be assessed to determine the extent to which it may represent both short and long-term risk. This includes the implementation or review of contingency plans, business continuity policies and procedures and insurance.
- Appropriate action should be taken to prepare, or where necessary, operationalize alternative arrangements and address any identified risks. This includes mitigation and, where appropriate, public disclosure.
While the COVID-19 outbreak may represent novel challenges to many businesses, we review these considerations in light of basic principles that underpin public company governance, compliance and disclosure obligations. A global-scale development such as this serves as timely reminder of the importance of appropriate internal governance, including oversight of risk management, business continuity planning and disclosure controls and procedures.
Keeping Informed and Updated
Under corporate law, directors and officers are subject to a duty of care and fiduciary and oversight duties which require that they promote the corporation’s interests and act with the care, skill and diligence of a reasonably prudent person. When acting in response to global risks such as COVID-19, boards and management should continue to act in the best interests of the company and relevant stakeholders. This requires getting reasonably available information to have an accurate understanding of the potential risks, and reassessing decisions as new information is obtained. Depending on the nature of the business or industry, there may be direct risks to consider such as the impact on personnel and other resources, interruption or increased costs of critical business inputs, and changes to consumer or customer demand by those who consume goods or services. This latter impact may include reduced demand, as well as changes in buying or consumption patterns and/or inability to access products or services. There may also be indirect risks to consider that will require an equally fact-specific analysis. Given the rapidly evolving and uncertain nature of this outbreak, keeping informed and updated is key to ensuring that business risks related to COVID-19 are appropriately addressed and managed.
Issuers that have formal business continuity plans and procedures should follow those plans, making appropriate adjustments as necessary as new information becomes available or the impact evolves. Issuers should also review their Board and committee mandates to confirm which body(ies) will have oversight and support of management’s efforts in assessing and acting on the risks that are emerging. In many instances, an issuer’s human resources or health and safety committees or teams should be proactive. For further information about what employers need to know about COVID-19, please see our prior posts Update on COVID-19: What Employers Need to Know (March 2, 2020) and The Wuhan Novel Coronavirus: What Employers Need to Know (January 31, 2020).
The impact of developments such as COVID-19 on disclosure should also be assessed.
Canadian securities legislation requires reporting issuers to disclose the material risks affecting their business and, where practicable, the financial impacts of such risks. In particular, risk factor disclosure can be found in issuers’ MD&A, AIF and prospectus filings. For the purpose of this type of disclosure, information is likely material if a reasonable investor’s decision whether to buy, sell or hold securities in an issuer would likely be influenced or changed if the information in question was omitted or misstated.
While a review of risk factors may be the appropriate starting point, issuers should also consider the potential impact of COVID-19 on other company filings. This includes the impact on guidance or other forward-looking information as well as MD&A and other disclosure. Issuers are reminded that under Canadian securities legislation they have an obligation to update forward-looking information that has been previously disclosed by the issuer and that the MD&A requires a discussion of known trends, demands, commitments, events or uncertainties that are reasonably likely to have an effect on the issuer’s business. Listed companies are also subject to the ongoing obligation to disclose material information and make timely disclosure of material changes. A corollary to these disclosure obligations is to ensure, where such material information exists and until it is generally disclosed, that appropriate protocols implemented to prevent selective disclosure of material non-public information, as well as trading or other improper use of that information, are applied and enforced.
In particular, given many issuers have recently reported, or will soon report, their annual results which may include new financial guidance and other outlook for 2020, issuers should assess whether previously issued guidance and outlook needs to be revised, or, if the effects of COVID-19 remain uncertain, whether the guidance should be withdrawn. Such assessment and disclosure update may need to be made intra-quarter well prior to an issuer’s next scheduled earnings reporting date.
In making materiality assessments, issuers are reminded of the guidance found in National Policy 51-201 Disclosure Standards (NP 51-201). Notably, there is no bright line test for when certain information has become material and the materiality of certain information may vary between industries and issuers depending upon particular circumstances.
While reporting issuers might be inclined to include boilerplate disclosure about COVID-19 in their upcoming annual filings (financial statements, MD&A, AIF), best practices would suggest that an issuer-specific assessment of the real risks to the issuer’s business is required. There is no “one size fits all” disclosure model for risk factors.
As with all risk factor disclosure and other disclosure, Canadian securities legislation and guidance generally encourage issuers to avoid vague or boilerplate disclosure. Entity-specific disclosure that is relevant, clear and understandable is essential for investors to understand how the issuer’s business specifically may be impacted by any such material risks, including the new risks that may result from COVID-19. Depending on the nature of an issuer’s business and its relationship to affected regions, general economic crisis, global crisis, catastrophic event and/or global pandemic type risk factors that an issuer may already disclose are likely to suffice for the time being. As we noted above, given this is a developing matter, issuers should continue to monitor how COVID-19 could impact their business and update disclosure if and when required.
With annual general meetings of shareholders on the horizon, issuers will need to consider, where their governing law permits, whether to make electronic participation available to shareholders who may not be able to attend in person or prefer not to do so. If applicable law or constating documents do not formally allow these mechanisms, it may nonetheless be possible to permit electronic attendance by shareholders.