The Continuous Disclosure Challenges of COVID-19: What Are the Risks for Your Company?

Author: Steven Robertson

As the unfolding COVID-19 pandemic continues to affect the global economy in profound and unprecedented ways, public companies face the challenge of explaining the current and anticipated future impact of COVID-19 on their business operations and prospects to investors.

Companies are required to include in their Management’s Discussion & Analysis (MD&A), and other comprehensive disclosure documents, detailed information about the impacts to date of COVID-19, anticipated future implications and risks and the steps taken, or to be taken, to mitigate those impacts and risks.

COVID-19 affects different businesses in different ways with varying degrees of severity and few sectors across the global industrial spectrum have been spared. Thus, it would be unusual for any public company not to include in its continuous disclosure documents a description of COVID-19 impacts, risks and mitigation strategies. For companies operating in industries such as retail, hospitality and travel, these disclosures will need to be detailed and extensive. Even for companies less severely impacted by COVID-19, it is important to describe specifically how the pandemic has affected their business and what risks they face depending on how the pandemic unfolds in the future. Although boilerplate risk disclosure concerning COVID-19 is probably better than nothing, it will likely be less effective in insulating companies against possible regulatory scrutiny and litigation.

Some of the more significant risk factors presented by COVID-19 that public companies may need to address in their continuous disclosure documents include the following:

Market volatility and availability of financing

Significant and sustained volatility in global equity and debt markets may make it difficult or impossible for companies to obtain financing on a timely basis or at all. Although always a risk for junior companies, more established businesses that experience sustained revenue impairment as a result of the economic effects of COVID-19 may find it difficult to access additional sources of funding, exposing them to the risk of default under existing credit facilities and possible insolvency.

Financial performance and constraints on liquidity and capital resources

The economic effects of COVID-19 are likely to have materially undermined the reasonableness of the assumptions underlying the financial guidance that many companies have previously provided to investors respecting their anticipated financial performance. These companies will need to consider making disclosure of how, and to what extent, the events and circumstances surrounding the COVID-19 pandemic are likely to cause their actual financial results to differ materially from those predicted in previously published guidance. A discussion of how, and to what extent, these events and circumstances are expected to affect the company’s liquidity and capital resources will be a key component of its MD&A, which should also include cautionary language as to how the uncertainty of the duration and severity of the COVID-19 pandemic may affect the reliability of any guidance provided as to future financial results.

Human resource constraints and supply chain disruptions

For many companies, a significant number of their employees may already be ill with COVID-19 and required to self-isolate. For others, the adoption of social distancing measures as a means of mitigating the spread of COVID-19 has necessitated the adoption of work-from-home protocols for their employees. Some businesses, particularly in the manufacturing sector, are not well-suited to a work- from-home strategy. Those businesses for which work- from-home protocols are not feasible may be required to reduce their operations or shut down entirely. This creates the risk of a cascading domino effect where the resulting disruptions in global supply chains cause businesses that would otherwise continue to operate to slow down or cease operating.

Forced cessation of business operations

As mandatory social distancing measures are being adopted around the world, public companies that operate businesses in the retail and hospitality sectors are also being forced to close those businesses for an indeterminate period of time. This necessarily involves business cessation costs to, among other things, lay off employees and write off inventory. In the absence of any revenue, many of these companies must also fund, from other sources, the cost of maintaining their leasehold premises or risk being unable to re-open when social distancing measures are lifted. These forced closures will also have a materially adverse effect on the financial results of the companies that supply these and other complementary businesses.

Deterioration of consumer demand

Even before the adoption of mandatory social distancing measures and the closure of international borders in many places around the world to all but non-residents, the travel, leisure and tourism industries were disproportionately affected by COVID-19. Airlines, in particular, are drastically cutting back schedules and parking planes in the face of minimal demand for air travel. Hotels that typically earn most of their revenue in the spring and summer months are seeing bookings plunge as the COVID-19 pandemic is forecast to continue indefinitely. Cruise lines have suspended operations until later this year. Businesses in cities all over the world that rely heavily on tourism will undoubtedly be adversely impacted. Given the heavy integration of the global economy, many businesses not directly involved in these industries are likely to experience potentially adverse effects from the downturn precipitated by COVID-19 and should frame their risk disclosure to reflect this, to the extent applicable and appropriate.

For public companies seeking to fulfil their continuous disclosure obligations under applicable securities laws in a manner that mitigates the risk of regulatory scrutiny and litigation, the COVID-19 pandemic represents a unique and evolving challenge insofar as its effects on societal health and the global economy are truly unprecedented and will continue to be felt for an indeterminate period of time to come. Thus, it behooves management to exercise the utmost care and prudent judgement in analyzing the current and anticipated future impact of COVID-19 on the company’s business and fully, truly and plainly reflecting the results of that analysis in the company’s continuous disclosure documents.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.