Authors: Jessica Zhang, Doug Stewart
Canadian reporting issuers should proactively monitor and assess the impact of COVID-19 on their businesses and evaluate whether they need to update or withdraw their previously disclosed financial disclosure and outlook.
Despite the existing impacts of the global COVID-19 pandemic on the capital markets and companies worldwide, investors continue to look for transparent and clear disclosure about present and future corporate operations and performances. Reporting issuers need to address investors’ demands by providing reliable, relevant and up- to-date disclosure.
Disclosure of forward-looking information (“FLI”), including financial outlook and future-oriented financial information (“FOFI”) is governed by National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”).
FLI is defined under NI 51-101 as disclosure regarding possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action and includes future-oriented financial information with respect to prospective financial performance, financial position or cash flows that is presented as a forecast or a projection.
Disclosure of FLI is not mandatory for reporting issuers. Under NI 51-102, reporting issuers must not disclose FLI unless the issuer has a reasonable basis for the FLI. Reporting issuers that choose to disclose material FLI must include disclosure that: (a) identifies the FLI; (b) cautions users of FLI that actual results may vary from the FLI and identifies material risk factors that could cause actual results to differ materially from the FLI; and (c) states the material factors or assumptions used to develop FLI.
FOFI and Financial Outlook
FOFI and financial outlook are FLI about prospective financial performance, financial position or cash flows, based on assumptions about future economic conditions and courses of action.
Under NI 51-102, reporting issuers must not disclose FOFI or financial outlook unless the FOFI or financial outlook is based on assumptions that are reasonable in the circumstances and must be limited to a period for which the information in the FOFI or financial outlook can be reasonably estimated. Securities regulators have indicated that in many cases, that time period will not go beyond the end of the issuer’s next fiscal year. In disrupted business conditions, such as COVID-19, issuers may want to consider shortening their guidance period to adjust for short-term fluctuations in the markets. If it is simply not possible to formulate reasonable assumptions, it would be appropriate to fully withdraw all guidance, as opposed to revising guidance.
Update to Previously Disclosed Material Forward-Looking Information
Updates on FLI help investors understand how actual results may be reasonably likely to differ from previously disclosed FLI and the progress made by the reporting issuer in relation to its previously disclosed targets and objectives.
Reporting issuers are required under NI 51-102 to discuss in their MD&A events and circumstances that occurred during the period to which the MD&A relates that are reasonably likely to cause actual results to differ materially from previously disclosed FLI and the expected differences. Alternatively, the reporting issuer can disclose such events and circumstances in a news release issued and filed before the filing of the MD&A, provided that the MD&A must refer to the news release. The requirement to disclose and discuss material differences between actual results and previously disclosed FOFI or financial outlook must be included in the MD&A.
Withdrawal of Previously Disclosed Material Forward-Looking Information
If a reporting issuer decides to withdraw previously disclosed material FLI during a period to which its MD&A relates, NI 51-102 requires that the reporting issuer must disclose in its MD&A the decision and discuss the events and circumstances that led the reporting issuer to that decision, including a discussion of the assumptions underlying the FLI that are no longer valid. Alternatively, the reporting issuer can disclose such decision and discussion in a news release issued and filed before the filing of the MD&A, provided that the MD&A must refer to the news release.
Non-venture issuers must file their audited annual financial statements and MD&A on or before the 90th day after the end of its most recently completed financial year and venture issuers must file their audited annual financial statements and MD&A on or before the 120th after the end of their most recently completed financial year. For example, non-venture issuers and venture issuers with a December 31, 2019 year-end must file their audited annual financial statements MD&A no later than March 30, 2020 and April 29, 2020, respectively.
The Canadian Securities Administrators (CSA) announced on March 18, 2020 that it will provide a 45-day extension for period filings normally required to be made on or before June 1, 2020, including financial statements, MD&As, management reports of fund performance, AIFs, technical reports, and certain other filings. Issuers choosing to rely on this exemption and that are complying with the conditions of the relief will not need to file applications for management cease traded orders as they will not be noted in default.
Disclosure Options Available to Issuers
Reporting issuers that have filed their audited annual financial statements and MD&A should continue to monitor and assess the impact of COVID-19 on their businesses. If changes to the businesses as a result of COVID-19 have impacted any previously disclosed financial guidance or outlook, the reporting issuer has the options under NI 51-102 to either update or withdraw its previously disclosed guidance.
Reporting issuers that have not filed their audited annual financial statements and MD&A now have a 45 day extension to their filing deadline. It is important for reporting issuers to consider when disclosing FLI with respect to COVID-19 whether it remains reasonable to disclose such FLI. Disclosure of FLI is not mandatory for reporting issuers, but reporting issuers that choose to disclose material FLI must caution users of FLI that actual results may vary from the FLI, identify material risk factors that could cause actual results to differ materially from the FLI, and state the material factors or assumptions used.
Given the unknown scale and impact of COVID-19, recent disclosures have shown that Canadian public companies have either ceased to provide new FOFI or financial outlook, or have taken out the effect of COVID-19 in providing or updating previously provided guidance. A significant number of public companies have also withdrawn their previously disclosed 2020 guidance due to uncertainty around COVID-19.
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.