SEC Provides Guidance on Earnings Disclosures & COVID-19 Impacts
On April 8, 2020, Jay Clayton, Chairman of the SEC, and William Hinman, Director of the SEC’s Division of Corporation Finance, issued a statement discussing the importance of disclosures related to the COVID-19 pandemic in anticipation of upcoming earnings releases and investor calls. In order to encourage more robust disclosures and shareholder engagement on this topic, the statement outlines, among others, several areas of observation and concern for companies:
- Disclosures should reflect the general contraction of the economy in response to the pandemic and that economic activity is expected to incrementally grow as additional tools are developed to combat COVID-19.
- Disclosure should be responsive to specific investor concerns relating to the current operational and financial state of the company, the development of the company’s response to COVID-19 (including efforts to protect the health and safety of customers and employees) and how the company’s operations and financial condition may change as the pandemic continues.
- Because robust, forward-looking disclosures will benefit investors, the SEC requests that companies “strive to provide, and update and supplement, as much forward-looking information as is practicable.”
The statement encourages companies to provide detailed discussions of current liquidity positions and expected financial resource needs. To the extent that companies may be receiving financial assistance under the CARES Act or other similar COVID-19 related federal and state programs, disclosure of the nature, amounts and effects of such assistance should be disclosed if the assistance is reasonably likely to have a material effect upon the companies.
Additionally, the statement advises companies to closely hold relevant information until actual disclosure, and, upon disclosure, to broadly disseminate this information to provide a sufficient level of protection for investors. Finally, the statement supports the continued use of the safe-harbors for forward-looking statements and provided that the SEC would generally not second-guess good faith attempts to provide investors properly-framed forward-looking information during this uncertain time.
For a copy of this statement, please click here.
SEC Updates Annual Meeting Guidance
On April 7, 2020, the SEC updated its previous guidance issued on March 13 (summarized in our legal alert, here) regarding upcoming public company annual shareholder meetings. In the updated guidance, the SEC acknowledges concerns that some issuers would like to furnish their proxy materials through the “notice-only” delivery option permitted by Exchange Act Rule 14a-16, but have concerns about their ability to comply with certain timing and deadline requirements of the rule. The SEC encourages issuers to continue providing proxy materials on a timely basis, but in circumstances where delays are unavoidable due to COVID-19, the SEC will not object to an issuer using the “notice-only” delivery option in a manner that will provide shareholders with materials sufficiently in advance of the meeting, so long as the issuer announces the change in the delivery method by following the steps previously described in the March 13 guidance for announcing a change in the meeting date, time, or location.
The SEC also clarified that the previous guidance relating to changing the date, time and location of the annual meeting also applies to special meetings. To read the complete guidance, click here.
ISS Policy Guidance Addressing the Impact of the COVID-19 Pandemic
On April 8, 2020 ISS announced updated proxy voting guidelines for the 2020 annual meeting season to address the COVID-19 related difficulties faced by companies. The full guidance can be found here and the major highlights are as follows:
- Virtual Annual Meetings – ISS does not have a policy to recommend against companies holding virtual-only meetings and ISS updated that they will not change that policy.
- Poison Pills – ISS emphasized that its current policy on poison pills addresses the need for adopting them in situations involving short-term potential threats—such as a pandemic like COVID-19. Current ISS policy encourages boards to put poison pills to a shareholder vote and to be less than a year in duration. Boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period.
- Director Attendance – Most markets, including the US, have rules that count telephonic/electronic participation as full participation in board and committee meetings. However, for markets that do not, ISS will look for company disclosures to provide adequate explanations of the alternative form of attendance.
- Changes to the Board and Senior Management – Existing ISS policy provides discretion and flexibility in applying guidelines related to directors’ independence, potential overboarding, board diversity and other attributes. If boards need to fill vacancies due to the disability or incapacity of a director or need to urgently add critical expertise to their board or senior management to address concerns created by the pandemic, appropriate case-by-case consideration will be given, assessing any explanation provided by the company regarding such changes.
- Compensation – ISS encourages boards to provide disclosure to shareholders of rationales for making changes to performance metrics, goals or targets used in short-term compensation plans in response to the market drop and a possible recession. ISS will evaluate changes to long-term incentive awards on a case-by-case basis to determine whether boards exercised appropriate discretion and provided adequate disclosure of the rationale.
- Dividends – ISS will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice. In analyzing such proposals, ISS will look at whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce.
- Share Repurchases – ISS warns of potential criticism and reputational risk for companies doing share repurchases now and ISS will review board actions taken in 2020 related to share buybacks in advance of 2021 meetings to consider whether directors managed risks appropriately.
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