May 8, 2020

One Size Does Not Fit All: Continuous Disclosure Obligations in Light of COVID-19

On May 6, 2020, the Canadian Securities Administrators, in conjunction with the Ontario Securities Commission, held a webinar on public companies’ COVID-19 continuous disclosure obligations. The main message is that there is no “one size fits all” when it comes to fulfilling continuous disclosure obligations in light of COVID-19. COVID-19 will impact reporting issuers in a variety of ways, and these need to be detailed for investors.

The following are considerations for issuers to think about when discussing the effects of COVID-19 above and beyond their existing disclosure requirements.

Filing Extensions

Ontario Instrument 51-502: Temporary Exemption from Certain Corporate Finance Requirements also known as a “Blanket Relief Order” provides affected persons or companies with a 45-day extension to file, send or deliver certain documents otherwise due during the period from March 23, 2020 to June 1, 2020.

Although the Blanket Relief Order helpfully provides a 45-day extension to file, it does not provide any sort of exemption regarding content, nor is there an exemption from filing Material Change Reports.

Management’s Discussion & Analysis (MD&A)

An MD&A explains where a company was, where it is today, and where it expects to be in the future.

Discussion of Operations

When discussing operations, an issuer should inform all investors of the specific risk factors faced by the business, the actions taken, and remedies provided to mitigate the impacts of COVID-19. This may include adjustments for physical distancing, changes to salaries and labour force, the shut down of store locations, the implementation of a contact-less provision of services, etc.

Wherever possible, issuers should quantify the impact on each area (revenue, cost of sales, gross profit). For example, a company might report: an amount of reduction in gross profits arising from the ordered closure of store locations.

Liquidity and Capital Resources

When discussing liquidity and capital resources within an MD&A, regulators expect the discussion to address the following items considering COVID-19:

  • an issuer’s ability to generate amounts of cash and cash equivalents;
  • specific details of how an issuer intends to meet its obligations;
    • inclusive of any operating expenditures to remedy any form of default
  • specific initiatives to address liquidity demands; and
  • significant risks of arrears like mortgage or interest payments or dividends.

Forward Looking Information

Forward-looking information or “FLI” should only be provided if a reporting issuer has a reasonable basis for disclosing it. In considering whether a reasonable basis exists, an issuer should consider the implications of and risk factors associated with COVID-19 on its FLI and future planned FLI.

An issuer should be mindful to either update or withdraw already disclosed FLI if it is no longer accurate and/or the information can no longer be supported by the assumptions made because of COVID-19.

Financial Information

Regulators acknowledge that issuers are preparing financial statements in an incredibly uncertain environment. The message for reporting issuers is to:

  • use best available information in making well-reasoned judgments and estimates;
  • be specific, especially because businesses in similar positions may disclose judgments and estimates that differ, and an explanation as to why that is helpful to investors;
  • consider whether judgments and estimates need to be updated and prospectively reflected in the financial statement as changes occur.

The presenters hit home the point that it would be misleading to describe an adjustment as COVID-19 related without explaining specifically how the adjustment amount was associated with COVID-19. If an indicator of impairment existed prior to the pandemic that was unrelated to COVID-19, an issuer should not report it as COVID-19 related. Again, it is imperative to be specific about the COVID-19-related impact to maintain compliance with continuing disclosure obligations.

Ensuring Compliance

At the webinar, issuers were advised to ask themselves these questions as a “gut check” to make sure they are on the right track:

  • Has your company avoided boilerplate language and tailored the disclosure to the issuer’s specific circumstances?
  • Has your company been specific in its disclosure about any new specific risks affecting the issuer’s business?
  • Did your company discuss in sufficient detail the specific steps it has taken to mitigate the risk(s)?
  • Has your company provided entity-specific information as part of its risk factor disclosure, and not just included general risk factor disclosure because another issuer in the same industry has disclosed a similar risk factor?
  • Have you considered risks or uncertainties that you reasonably believe will materially affect your company’s future performance and liquidity position?