COVID-19 Disclosures; Not Just Speculation Anymore

Attorney Laura Anthony Reports New Pubco Regulations

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Oct 21, 2020, 05:00 ET

WEST PALM BEACH, Fla., Oct. 21, 2020 /PRNewswire/ -- Now that domestic markets have had two fiscal quarters to review and dissect new COVID-related disclosure requirements, and reporting companies are gearing up for third-quarter reporting, COVID disclosures are no longer just conceptual, they are tangible.

There has recently been a CD&I issued on COVID-19 executive employment benefits, and numerous unofficial statements on this topic. Now, the investment community and reporting companies, must traverse these and other specific aspects of disclosure, all of which require particular attention to detail.

As expected, the areas requiring the greatest consideration are management, discussion and analysis (including human capital disclosures and forecasting), risk factors, and internal controls over financial reporting.

Recently, the SEC issued a new compliance and disclosure interpretation (C&DI) related to the reporting of compensation perks or benefits. In particular, the SEC stated that:

In reporting compensation for periods affected by COVID-19, questions may arise as to whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are "named executive officers" under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.
An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties.
Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.
Whether an item is "integrally and directly related to the performance of the executive's duties" depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the CEO's home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive's duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive's duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.

Although not tied into COVID, a week after issuing the new C&DI, the SEC filed settled enforcement charges against Hilton Worldwide Holdings for failing to fully disclose perquisites and personal benefits provided to executive officers.

Management's Discussion and Analysis of Financial Condition and Results of Operation (MD&A)

Item 303 of Regulation S-K (MD&A) requires discussions on liquidity, capital resources, results of operations, off-balance-sheet arrangements, and contractual obligations including any material changes. For example, Item 303 requires disclosure of "known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way."

It also requires disclosure of unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations as well as known trends or uncertainties that have had or that the company reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

In January 2020, the SEC issued interpretative guidance on MD&A reminding companies to include information not specifically referenced in the item that the company believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations. COVID-19 has made MD&A a source of heartburn for most companies.

A part of MD&A inherently involves a certain degree of forecasting, especially in terms of liquidity, cash flow, and uses. This is now standard in addition to the established forecasting related to earnings releases and published guidance.

The COVID pandemic has affected different companies and sectors of the economy dramatically differently, with some struggling to get back to pre-outbreak operations (airlines) and others benefiting (Amazon). Either way, management has to use all of its available resources to provide meaningful MD&A disclosure on the results of operations for current periods and potential future impacts and changes. Moreover, it is likely that the world will not simply return to pre-COVID growth and operations, but rather, there could be a permanent shift in business models as a result of the pandemic.

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Attorney Laura Anthony

Laura Anthony, Esq. is the founding partner of Anthony, L.G., PLLC, a national corporate, securities and business transactions law firm. For more than two decades Ms. Anthony has focused her law practice on small and mid-cap private and public companies, capital markets, NASDAQ, NYSE American, the OTC markets, going public transactions, mergers and acquisitions, registered public and exempt private offerings and corporate finance transactions, Regulation A/A+, securities token offerings, Exchange Act and other regulatory reporting requirements, FINRA requirements, state and federal securities laws, general corporate law and complex business transactions. The Anthony, L.G. PLLC team has represented issuers, buyers, sellers, underwriters, placement agents, investors, and shareholders in mergers, acquisitions and corporate finance transactions valued in excess of $1 billion. ALG has represented in excess of 200 companies in reverse merger, initial public offering and direct public offering transactions. Palm Beach Attorney Laura Anthony is also the creator and author of SecuritiesLawBlog.com, the host of LawCast™, Corporate Finance in Focus and a contributor to The Huffington Post and Law360.