COVID-19: Corporate Governance and Disclosure Guidance for Public CorporationsTuesday, March 31, 2020
The novel coronavirus (COVID-19) pandemic has disrupted markets, business operations and supply chains worldwide. Its continuous spread presents an unprecedented challenge for boards of directors and senior management of publicly-traded corporations (“reporting issuers”). We highlight some areas to consider in managing business continuity and in meeting reporting issuers’ continuous disclosure obligations.
Keeping Informed and Risk Management
Corporate law in Canada establishes a duty of care and fiduciary duties on the parts of directors and officers of a corporation, which requires that they act in the best interests of the corporation and with the care, skill and diligence of a reasonably prudent person. In responding to the COVID-19 pandemic, prudent boards and management should be keeping up to date with available information in order to address potential risks to the business and affairs of their companies and to continually monitor the implementation of the decisions they make on behalf of the corporation. It is essential during these challenging times that boards and management remain flexible and well informed in order to respond quickly to the evolving situation.
Boards and management should take the time to either develop or update existing formal business continuity plans and procedures in order to establish clear decision-making processes – having processes in place will assist with timely and appropriate decision-making. They should also re-evaluate committee mandates to confirm which committee will have the responsibility of assessing and acting on emerging risks, in light of travel restrictions and potential communication disruptions. Moreover, boards should be prepared to address scenarios in which a member of key senior management tests positive for COVID-19 and is incapacitated as a result. This risk can be mitigated by having succession plans in place for key senior management positions such as the CEO, CFO and department heads.
The decisions boards and management are being forced to make in response to this pandemic have the potential to materially impact all stakeholders of a reporting issuer as well as affect business relationships of the reporting issuer in both the near and long term. An effective board and management team should consider not only the current short-term impact of the COVID-19 pandemic on the business of the reporting issuer, but also the long-term impact of any decisions that are made in response to the COVID-19 pandemic with a view to crafting the path for a return to “normal” operations.
Protecting Employees and the Workplace
The COVID-19 pandemic presents significant challenges to corporations’ normal workplace operations. Health authorities have called for social and physical distancing, restricted travel, self-isolation and closure of bricks and mortar businesses characterized as “non-essential.” However, corporations are still tasked with the continued operation of safe workplaces in accordance with health regulations where its employees could come into contact with other members of the public despite the current restrictions in carrying out their duties. Despite reorganizing the workplace to accommodate the regulations, corporations must remain in compliance with legal obligations regarding compensation, absences, privacy and anti-discrimination. Boards and management should ensure they have developed an adequate response plan when re-crafting workplace operations in light of the COVID-19 pandemic, which is informed by up to date guidance from the applicable health authorities. Some measures that response plans should contemplate include: (i) providing additional cleaning and sanitization in the workplace; (ii) monitoring the travel history of employees and any terms of isolation required by such travel; (iii) limiting physical contact among employees by encouraging electronic and telephonic meetings; (iv) ensuring that adequate information technology systems are provided to employees to enable remote access; and (v) preparing and adjusting for increasing absenteeism due to potential illness, self-isolation and/or school and child care facility closures.
In the modern global marketplace, disruptions in any part of the world can have an impact on businesses around the globe. We have seen that the COVID-19 outbreak has caused significant disruptions, including to suppliers of, and service providers to, businesses. As part of business continuity planning, boards and management should consider conducting stress tests based on various potential scenarios related to a prolonged global COVID-19 outbreak. In particular, corporations should assess the potential impact to covenants and obligations in material contracts, such as supply and loan agreements, as well as licenses and permits. Despite otherwise adequate business continuity planning, corporations may be faced with an inability to comply with contractual obligations (either on their own part, or on the part of the counterparty) in their material contracts. In order to avoid as much disruption (and mitigate any legal liability), a thorough review of any waiver and force majeure provisions should be conducted in relevant agreements. Given the worldwide nature of the COVID-19 pandemic, there is a real risk that corporations may not be able to fully comply with all of their legal obligations (or that any counterparties may not be able to comply) in their material contracts. Accordingly, it may be prudent for corporations to open the lines of communications with their counterparties to identify any such disruptions with a view to amicably finding workable solutions. For more details on how COVID-19 could affect contractual obligations, see our previous update.
Canadian securities legislation requires reporting issuers to disclose material risks affecting their businesses, which could include risks relating to the COVID-19 pandemic. Regulatory compliance in Canada consists of continuous periodic disclosure and timely disclosure.
Reporting issuers are required to file, among other things, annual and interim financial statements and management’s discussion and analysis (MD&A) and, in some instances, an annual information form (AIF), as part of their periodic disclosure obligations. Risk factor disclosure is required to be disclosed in the MD&A and AIF. Risk factor disclosure is required to contain information regarding factors that could materially affect a reporting issuer’s business, financial condition and results of operations. Boards and management should consider if additional disclosure relating to the COVID-19 pandemic should be included among the risk factors in these documents required to be filed during the currency of the COVID-19. Reporting issuers are generally encouraged to avoid including generic boilerplate disclosure and this applies to the COVID-19 pandemic as well. In disclosing risks related to COVID-19, reporting issuers should consider all risks the COVID-19 outbreak presents to the issuer’s specific business having regard to its industry, geographic location, business model, supply chain and extent of affected management, employees and customers. In addition to risk factor disclosure, reporting issuers are advised to discuss how the COVID-19 outbreak could materially impact the operations, financial needs and potential growth forecasts of the business in the MD&A and financial statements. In future disclosure, reporting issuers should provide any relevant update to their assessment of such risks.
Reporting issuers are subject to an ongoing obligation to immediately publicly disclose any “material changes” to their business. A “material change” is a change in the business, operations or capital of the reporting issuer that would reasonably be expected to have a significant effect on the market price or value of any securities of the reporting issuer. Boards and management of the reporting issuer must determine whether the COVID-19 pandemic, or the fallout therefrom, constitutes a “material change.” The fluid nature of the pandemic means reporting issuers have a continuous obligation to assess the pandemic’s effects on their business and monitor how such changes affect any previous guidance or future-oriented financial disclosure. If the ongoing pandemic materially affects previously disclosed forward-looking information such as earnings guidance, the reporting issuer has an obligation to disclose in its subsequent MD&A the events that took place during the relevant reporting period that caused (or are reasonably likely to cause) actual results to differ from those previously anticipated. The issuer may (and, in some instances, should) disseminate and file a press release to update or withdraw the outdated disclosure in advance of its next MD&A, in which case the MD&A would be required to reference such release and build out the disclosure as necessary to meet the requirements of National Instrument 51-102.
Additionally, reporting issuers listed for trading on a stock exchange are also subject to the ongoing disclosure obligations of the exchange on which they are listed, which often provide for disclosure of additional information that would not necessarily trigger a disclosure obligation under applicable securities legislation. In either event, an assessment of materiality will depend on the circumstances of the specific issuer.
Recognizing that corporations are reckoning with the issues mentioned above, among others, in response to the COVID-19 pandemic, the Canadian Securities Administrators (“CSA”) have issued temporary blanket relief orders for some regulatory filings required to be made on or before June 1, 2020 (the “CSA Relief”). The CSA Relief provides a 45-day extension for periodic filings such as financial statements, MD&A, AIFs, management reports of fund performance, technical reports and certain other filings required to be made by issuers, investment funds, registrants, certain regulated entities and designated rating organizations.
In order to rely on the CSA Relief, an issuer must issue a news release as soon as reasonably practicable and file it on SEDAR in advance of the original filing deadline for which CSA Relief is sought. The news release must disclose: (i) each requirement from which the issuer is relying on the CSA Relief, (ii) that management and certain other insiders are subject to an insider trading blackout during the relief period, (iii) the estimated date by which the required disclosure is expected to be filed, sent or delivered, and (iv) an update on any material business developments since the last financial statements filed by the issuer, or confirmation that there have not been any material business developments since that date.
Further, issuers are required to issue an updated news release no later than 30 days following the date of the first day of the extension period and again 30 days thereafter if the documents have not yet been filed at such time. These updated news releases must provide an update on material business developments since the date of the last news release, or confirmation that there have not been any material business developments.
Moreover, an issuer is not permitted to file a preliminary or final prospectus for an offering of securities until it has filed all documents for which it relied on the CSA Relief.
Although this extension provides regulatory relief for corporations, it is important to note that it does not provide covenant relief with respect to potential obligations in credit agreements and note, bond or debenture indentures which may require delivery of such filings to the relevant creditor(s) by certain specified dates. Therefore, corporations should review the terms of their credit (and other) agreements to assess whether the corporation needs to prepare certain materials in advance of the date(s) permitted by the blanket relief being provided by the CSA due to pre-existing contractual obligations.
The Toronto Stock Exchange (“TSX”) on March 23, 2020 issued Staff Notice 2020-0002 granting temporary relief for issuers with respect to certain provisions of the TSX Company Manual in light of the COVID-19 pandemic. The TSX is providing relief by extending the deadlines for filing of financial statements, holding of annual meetings of securityholders and obtaining securityholder approval for certain security-based compensation agreements within a specified time frame. Further, the TSX is temporarily waiving certain minimum listing requirements, and amending its normal course issuer bid rules to allow issuers to repurchase more of their shares on any trading day than would otherwise be permitted. Issuers are not required to apply to the TSX in order to benefit from the blanket relief orders listed below. In addition, the TSX has indicated that it may grant discretionary relief to issuers with respect to the definition of “market price” by shortening the time period used to determine the market price for private placements. Similarly, the TSX Venture Exchange (“TSXV”) also issued a bulletin on March 23, 2020 announcing that it will be providing temporary blanket relief from certain provisions of the TSXV’s Corporate Finance Manual. The TSXV is temporarily extending the timeline for issuers to hold annual meetings and obtain securityholder approval for rolling stock option plans up to December 31, 2020.
If you have any questions with respect to this legal update, please contact Al Wiens (firstname.lastname@example.org), Sanjeev Patel (email@example.com), Michael Rennie (firstname.lastname@example.org), Sarim Ali (email@example.com), or any other member of Wildeboer Dellelce LLP.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.