Disclosure considerations for reporting issuers as a result of the COVID-19 pandemic
By Jessica Brown and Lindsay Cox
As the COVID-19 pandemic continues to spread across Canada, its impact and the measures taken by Federal, Provincial and local governments to contain the virus have significantly impacted the economy. As a result, reporting issuers in Canada should consider what disclosure obligations are required to address the impact of the pandemic on their business, operations and financial condition. We have included below a summary of certain matters that should be considered by reporting issuers in light of the pandemic.
Timely disclosure and market updates
Given the rapidly changing circumstances, issuers must continuously assess the impact of the COVID-19 pandemic, and all related governmental and regulatory changes and announcements, on their business, operations and affairs in order to determine whether market updates are necessary. Actions taken by an issuer in response to the pandemic may necessitate immediate disclosure if such actions and changes constitute material information, being a material fact or a material change in the issuer's business and affairs.
While issuers are not generally required to interpret and disclose the impact of external political, economic or social developments on their affairs, if such an external development will have or has had a direct effect on the business and affairs of the issuer that is both material and uncharacteristic of the effect generally experienced by other companies in the same business or industry, then the issuer should explain the particular impact on it. Issuers must continually evaluate whether they are uncharacteristically impacted by the COVID-19 pandemic or by resulting governmental or regulatory policies triggering disclosure requirements. For example, while the recent dramatic drop in commodity prices is widespread, the particular impact on an issuer given its production mix, hedging position and liquidity and capital requirements and plans, needs to be assessed in relation to what specific disclosure is required by the issuer.
Issuers must also note that the rules and policies of Canadian stock exchanges require immediate disclosure by press release of all material facts related to the issuer even if such facts do not constitute a material change to the issuer requiring disclosure under applicable provincial securities laws. Issuers are encouraged to follow their disclosure policies to ensure that not only is information getting to the market in a timely manner, but also that it is broadly disseminated through a press release and filed on SEDAR and the issuer's website to avoid the risk of selective disclosure, which occurs when material non-public information is disclosed to one or more persons and not broadly to the public.
Updating forward-looking information and guidance
Issuers are generally not obligated to provide guidance to the market in respect of their future operations or financial condition. As the COVID-19 pandemic continues to spread, and its effect on the economy and additional measures taken by governments to control its transmission continue to evolve, issuers who do provide such guidance should continuously monitor and consider whether it is appropriate to amend or withdraw any previously disclosed financial outlook, forward-looking financial information or forward-looking information (FLI) in respect of its operations, business plans, strategy, goals and/or financial condition.
Pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) a reporting issuer is required to address in its management's discussion and analysis (MD&A) - or, depending on the timing of filing of the issuer's next MD&A, through a press release filed in advance of its MD&A and subsequently referred to in such MD&A - events and circumstances that are reasonably likely to cause actual results to differ materially from previously disclosed material FLI for a period that is not yet complete. Such disclosure would include the material differences between the FLI and actual results for the period, and if the issuer decides to withdraw any previously disclosed material FLI, it should disclose such decision and discuss the events and circumstances that led the issuer to that decision along with any assumptions underlying the FLI that are no longer valid. A broadly disseminated press release would be required if such change in previously announced material FLI would be considered a material change or material fact for the issuer, and would also reduce the risk of selective disclosure or rumors in the market.
Corporate governance and board responsibility
Boards of directors also need to carefully monitor the impact of the COVID-19 pandemic, and all governmental and regulatory changes and announcements as a result thereof, as it relates to the short and long term viability of the issuer's business in order to be available to make decisions quickly as the situation evolves and to provide updates to shareholders and the market in a timely manner, as required. To assist boards of directors in this role, management should provide frequent updates to the board on the issuer's financial condition, the health of its workforce, its ability to meet contractual obligations and other corporate matters that may arise. Procedures should be in place to allow for prompt decision making and disclosure, which should include scheduling frequent meetings of the board focused on a discussion of such matters.
Although the COVID-19 pandemic is an external development that is widely known to shareholders and investors, as discussed above, the impact of the pandemic on the issuer's business specifically, if not publicly disclosed, may constitute material non-public information. In such a circumstance and given the situation is continually evolving and material changes may occur frequently and unexpectedly, the issuer will need to determine whether or not to impose trading restrictions or a "blackout" on trading in the issuer's securities until any material non-public information is disclosed. Further, given such rapidly changing circumstances and the uncertain impact on the issuer's business and operations, issuers should also consider whether is it appropriate for insiders to remain in blackout and subject to trading restrictions for the foreseeable future.
Issuers will need to continually evaluate the risks affecting their business as a result of the COVID-19 pandemic and consider whether the risk factors presented in their continuous disclosure filings, including their annual information form and MD&A, address all of the risks facing the issuer's business as of a result of the pandemic and its effect on the economy. The Canadian Securities Administrators (the CSA) expect issuers to provide detailed disclosure specific to the issuer's business and operations and avoid boilerplate risk factors in order for investors to be able to evaluate and asses such risks and the impact on the issuer's business. For example, specific risks that may have an effect on the issuer's business, operations and financial condition as a result of the pandemic may include:
- reduced global economic activity, including lower demand for crude oil and natural gas, a reduction in the price of crude oil and natural gas, changes to the issuer's supply chain (i.e. by limiting the manufacturing of materials or the supply of services used in the issuer's operations) and reduced customer spending;
- impact on the health of the issuer's employees, contractors, suppliers, customers and other partners and the risk that such persons are may be restricted or prevented (as a result of quarantines, closures or otherwise) from conducting business activities for undetermined periods of time;
- impact of actions taken by Government to reduce the spread of the virus, including declaring states of emergency, imposing quarantines, border closures, temporary business closures for companies and industries deemed non-essential, significant travel restrictions and mandated social distancing and the short and long term effects of these government actions on the issuer's operations, access to customers and suppliers, availability of employees and other resources;
- impact of actions taken by the issuer to reduce the spread of the virus, including reducing hours of operation, having employees work remotely from home and cancelling all in-person meetings and travel;
- uncertainty regarding the long-term effect on the issuer and the economy;
- the financial capacity of contract counterparties and the impact on their ability to perform their respective contractual obligations;
- the potential for shareholder activism, unsolicited expressions of interest or hostile take-overs; and
- potential litigation from contract counterparties, supply or service disruptions, employment matters and securities disclosure obligations.
In response to the COVID-19 pandemic, the CSA have recently provided coordinated relief for market participants from certain continuous disclosure filing requirements. The Toronto Stock Exchange (the TSX) and the TSX Venture Exchange (the TSXV) have also announced temporary relief measures in response to COVID-19 pandemic. Issuers who may be concerned that they will be unable to meet timelines to file their continuous disclosure documents under applicable securities laws, or require relief from certain TSX and TSXV requirements, should review our summary of such guidance and relief available on our website here. As the situation evolves, each of the CSA, the TSX and the TSXV has advised that it will continue to monitor the impact of the pandemic and market conditions on Canadian capital markets and issuers and may issue further guidance, relief, extensions and updates, as required.
Review of and compliance with material contracts
Issuers should continually review their material contracts, not only to determine if, as a result of the COVID-19 pandemic and its effect on the economy, the issuer and its contract counterparties are able to meet their obligations under such agreements, but also to consider clauses dealing with force majeure, events of default, material changes, potential notice requirements, termination rights of the parties and other similar clauses. Such review is particularly important in connection with an issuer's understanding of its liquidity position and its obligations under its credit facilities and other debt contracts, including cross defaults or the need for consents or waivers under such agreements, and the issuer's disclosure obligations summarized above.
See our article entitled "Force majeure clauses might cover COVID-19 and partially excuse contractual duties" located here.
Securities Act (Alberta) - http://www.qp.alberta.ca/documents/Acts/s04.pdf
NP 51-201 - https://www.albertasecurities.com/securities-law-and-policy/regulatory-instruments/51-201
NI 51-102 - https://www.albertasecurities.com/securities-law-and-policy/regulatory-instruments/51-102
Temporary relief from securities requirements due to COVID-19 – https://www.bdplaw.com/publications/temporary-relief-from-securities-requirements-due-to-covid-19/
Force majeure clauses might cover COVID-19 and partially excuse contractual duties - https://www.bdplaw.com/publications/force-majeure-clauses-might-cover-covid-19-and-partially-excuse-contractual-duties/