This is a continuation of our series addressing steps companies can take to protect themselves during government enforcement actions related to COVID-19. For more information, see our previous articles addressing corporate best practices and the health care industry.

COVID-19 has affected the financial conditions and operations of all public companies, most in a negative way but some in very positive ways. Regardless of the impact, all public companies must consider the anticipated scrutiny they will receive from the U.S. Securities and Exchange Commission (SEC) and the possible risk they face from SEC Enforcement if they do not proceed with caution. While the rules and landscape may continue to evolve, it seems apparent at this point that SEC scrutiny related to COVID-19 is most relevant in the following ways.

1. SEC Enforcement’s role in monitoring relief funding. In a prior article, we discussed steps health care companies can take to protect themselves against government investigations related to COVID-19. But all companies that received relief funding must be careful.

Continue Reading How Public Companies Can Protect Against SEC Scrutiny Related to COVID-19

Subscribers to our blog know that we monitor EDGAR for new SEC comment letters and enjoy bringing attention to the more interesting ones.  In today’s blog post, we bring you three new SEC comment letter exchanges.

  • In the first, the SEC asks the registrant for more information related to a COVID-19-related adjustment in its non-GAAP financial measure.
  • The second involves the SEC questioning, and eventually disagreeing with, the registrant’s materiality analysis under Staff Accounting Bulletin No. 99 (SAB 99).
  • The third letter involves an offering document produced by South Korea.

SEC Staff Wants More Information about a COVID-19 Adjustment in Non-GAAP Net Income

We’ve previously blogged about COVID-19-related adjustments in connection with the presentation of non-GAAP financial measures, including the difficulty that some public companies may have in reasonably quantifying the extent to which incremental expenses were driven by the COVID-19 pandemic as opposed to other factors. Continue Reading Recent SEC Comment Letters of Interest Regarding COVID-19 Adjustments, SAB 99 and South Korea

On August 26, the SEC voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K.  The amendments reflect the SEC’s continued movement to a principles-based, registrant-specific approach to disclosure.

As detailed below, some of the changes are rather significant, particularly the changes to the business disclosures and the requirement to have a new risk factor summary section of no more than two pages if the risk factors exceed 15 pages.  As a result, we expect most companies will need to make revisions and updates to their existing disclosures, specifically in connection with their Annual Report on Form 10-K where Items 101 and 105 of S-K are triggered. The rules are effective 30 days after their publication in the Federal Register.

The following table briefly summarizes the final amendments.  We have presented some practical takeaways following the table.

Continue Reading Practical Takeaways on SEC Amended Disclosure Requirements for Business Description, Legal Proceedings and Risk Factors under Regulation S-K

Following up on our prior blog post regarding first quarter COVID-19 risk factor disclosure considerations and our prior blog post regarding second quarter COVID-19 risk factor disclosure considerations, we surveyed the risk factor disclosures of 75 calendar year-end NYSE- and Nasdaq-listed companies included in Quarterly Reports on Form 10-Q (Form 10-Qs) filed for the first and second quarters of 2020.

Risk Factor Survey Results

Of the companies surveyed, we found that 96%, or 72 of the companies surveyed, included standalone risk factors related to COVID-19 (the average number of COVID-19 risk factors was approximately 1.16). None of the companies surveyed included an additional standalone COVID-19 risk factor in the second quarter Form 10-Q that was not in the first quarter Form 10-Q.  Approximately 63%, or 47 of the companies surveyed, updated their COVID-19 risk factor disclosure from their first quarter 2020 Form 10-Q in their second quarter 2020 Form 10-Q.

The three companies that did not include a standalone COVID-19 risk factor disclosure during their first or second quarter 2020 Form 10-Q did include language indicating that COVID-19 could exacerbate or heighten the risk factors that were previously included in their 2019 Annual Report on Form 10-K. A small portion of the companies we surveyed repeated the risk factor disclosure from their first quarter Form 10-Q verbatim in their second quarter Form 10-Q. However, most of the companies that did not update their first quarter Form 10-Q COVID-19 risk factor disclosure in their second quarter Form 10-Q incorporated their first quarter Form 10-Q risk factor disclosure by reference.

Continue Reading Updated Risk Factors in Response to COVID-19

As public companies continue to navigate the ongoing economic upheaval caused by the COVID-19 pandemic, opportunistic activist investors may find the resulting economic conditions conducive to accumulating significant ownership positions, agitating for changes in corporate strategy and management, and pursuing public activist campaigns.  Although the number of overt activist campaigns were down during the primary 2020 proxy season, as the annual meeting season for most public companies took place during the initial months of the pandemic lockdown, the third and fourth quarters generally tend to see an increase in activist activity as hedge funds make initial preparations for the following year’s proxy season. Given these circumstances, this is an opportune time for public companies to make preparations by reviewing and evaluating their defensive profiles.

The following summarizes most of the common defensive mechanisms that companies utilize when faced with activist campaigns, hostile takeover attempts, and other attempts to influence corporate policy in ways that may not be in the best interest of all shareholders. While there is no one-size-fits-all approach to defensive measures, an evaluation of the existing defensive profile of the company is a critical first step.  In our experience advising on behalf of companies and their boards of directors, an analysis of the corporation’s defenses under its organizational documents and applicable law is usually undertaken and summarized for the board in connection with a defensive profile review.

Defensive Measures Related to Stockholder Meetings

Are stockholders able to take action by written consent?

Section 228(a) of the Delaware General Corporation Law (DGCL) generally provides that, unless restricted by the certificate of incorporation, the requisite stockholders needed to approve an action may do so by written consent instead of a meeting—including actions to elect new directors or to approve a takeover proposal.  Limiting stockholder action by written consent is particularly important for companies with large blocks of its common stock concentrated among one or several large stockholders, including holdings by large institutional holders, which could otherwise take swift action by written consent and without holding a stockholder meeting.

Continue Reading A Practical Guide to Evaluating a Company’s Defensive Profile

In a first-quarter (for calendar year-end companies) SEC disclosure landscape dominated by COVID-19 considerations, almost all public companies included a new risk factor addressing COVID-19 in their first quarter Form 10-Q. Public companies are now considering potential risk factor disclosure in their Form 10-Q related to COVID-19 (see our prior blog post regarding first quarter COVID-19 risk factor disclosure considerations).

With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).

This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).

While practice has not been uniform regarding whether public companies repeat risk factors included in a prior Form 10-Q in subsequent Form 10-Qs, there is a good argument based on the text of Form 10-Q as cited above that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs through the filing of the next Form 10-K (assuming that the risk remains applicable).

Continue Reading Approaching COVID-19 Risk Factor Disclosure in Upcoming Quarterly Reports on Form 10-Q

Earlier this year, the Securities and Exchange Commission (SEC) issued interpretive guidance, effective February 25, 2020, regarding the disclosure of key performance indicators and metrics (KPIs) in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), which we discussed in a previous blog post.

This guidance may not have been at the forefront of disclosure matters under consideration for many companies during the first quarter 2020 reporting cycle given the disclosure and other challenges resulting from the COVID-19 pandemic at that time.

Reminders for Public Companies

With the passage of time and a greater sense of clarity on COVID-19 disclosure matters, some companies may use the second quarter 2020 financial reporting cycle as an opportunity to revisit, review and, to the extent necessary, revise their KPI disclosure to ensure alignment with SEC’s interpretative guidance issued during the first quarter 2020. As companies do so, they should ensure that KPIs and other operating metrics disclosed in the MD&A are appropriately considered. For example, to the extent a company identifies an operating metric as a KPI, the company should ensure that its disclosure aligns with the SEC’s interpretive guidance, which may include current and prior-year period comparative disclosure and analysis of factors contributing to year-over-year changes, to the extent material.

Continue Reading Second Quarter Form 10-Q Disclosure Reminder: SEC Guidance on Key Performance Indicators

Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date. Therefore, accelerated filers will need to comply with the new iXBRL rules in their next 10-Q, including cover page tagging and the new Exhibit 104 requirement. (These rules already took effect last year for large accelerated filers and except for accelerated filers as mentioned here, go into effect for all other filers for fiscal periods ending on or after June 15, 2021.)

Continue Reading Reminder for Accelerated Filers – Inline XBRL Rules Now Effective

A recent SEC comment letter contained an exchange in which the Staff, in connection with a 10-K review, reminded the registrant to give equal prominence to the comparable margins computed on a GAAP basis wherever EBITDA margin and adjusted EBITDA margin were disclosed.

As a reminder, in the SEC’s Adopting Release titled “Conditions for Use of Non-GAAP Financial Measures” (Release No. 33-8176), the SEC states, “An example of a ratio that would not be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where both revenue and operating income are calculated in accordance with GAAP. Conversely, an example of a ratio that would be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where either revenue or operating income, or both, were not calculated in accordance with GAAP.”

This comment exchange, which is repeated below for reference, is a helpful reminder to our blog readership that non-GAAP continues to a focus of the Staff and that a margin number which is itself derived from one or more adjusted numbers will itself be a non-GAAP financial measure in many cases.

Continue Reading EBITDA Margins Are Non-GAAP Measures Also

Today, June 30, is the reference date for calendar year-end companies to calculate next year’s filer status, as well as the aggregate market value of equity held by non-affiliates (i.e., public float) for purposes of inclusion in the annual report on Form 10-K to be filed in early 2021. In preparing these calculations, it is important each year for counsel to apply the definitions of public float and the relevant filer statuses to ensure that upcoming filings are made timely.

For calculating 2021 filer status, however, several of the definitions have changed. Earlier this year, the SEC adopted amendments adding a revenue element to the definitions of accelerated filer and large accelerated filer to exclude low revenue filers. While relatively straightforward in theory, the tests have proven rather complicated in practice. To assist companies in applying the amendments, the SEC has produced a Small Entity Compliance Guide. Although helpful, even this guide may prove difficult at times to follow.

Since most companies will start analyzing these changes today, this blog post is intended as a practical reminder of and gap-filling guide to the relevant changes for public companies. Generally, the amended definitions now include a carve-out for smaller reporting companies (SRC) with annual revenues less than $100 million in most recent audited annual financial statements.

Continue Reading Happy Filer Status Day! Remember to Check the New SEC Definitions for Accelerated Filer and Large Accelerated Filer