On March 23, the Division of Enforcement of the Securities and Exchange Commission (SEC) issued a Statement warning against insider trading during the ongoing COVID-19 pandemic.  In particular, the SEC cautioned that insiders are “regularly learning” new material non-public information (MNPI) that may “hold an even greater value than under normal circumstances.”  The SEC also noted that unique circumstances mean more people may have access to MNPI than may typically be the case.  This is particularly true for companies that delay earnings releases and SEC filings due to the pandemic.

Recognizing the heightened risk of illegal securities trading as a result of these and other factors, the SEC urged publicly traded companies to be mindful of their established controls and policies to protect against the improper dissemination and use of MNPI.

Proactive Steps for Public Companies

In light of the SEC’s Statement and the unique circumstances that companies are facing during the pandemic, publicly traded companies should take affirmative steps to mitigate insider trading risks.


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Please join the Bass, Berry & Sims Corporate & Securities Practice Group for a series of complimentary webinars exploring various public company-related securities law issues. These programs are an extension of our Securities Law Exchange Blog and feature timely and practical guidance to SEC disclosure counsel on key topics of interest.

The COVID-19 global pandemic

In a previous blog post, we described the steps some states have taken or are currently taking to permit or facilitate virtual shareholder meetings (i.e., “virtual-only” or “hybrid” meetings) in light of the numerous restrictions on travel and large gatherings resulting from the COVID-19 pandemic.

The governors of California, Massachusetts and North Carolina subsequently issued executive orders that suspend the application of state law that would otherwise render a virtual annual meeting impractical or impossible.

California

On March 30, 2020, and effective for meetings that have already been scheduled or must occur before June 30, 2020, the governor of California issued an executive order suspending the application of California Corporations Code Sections 20 and 600, which require a corporation to obtain the consent of its shareholders before holding a virtual annual meeting.


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As companies continue to evaluate the impact of the novel coronavirus (COVID-19) pandemic on their business, public companies will be facing challenging disclosure considerations in connection with their upcoming first-quarter earnings calls and earnings releases.

As a backdrop, a significant number of public companies, concentrated in industries which have felt the strongest immediate impact of the crisis (such as companies whose business is tied to the travel industry), have either updated (e.g., Mastercard) or withdrawn (e.g., Hyatt Hotels, MGM Resorts, Twitter) their 2020 guidance due to the economic fallout and the uncertainty surrounding this pandemic.

Whether or not a public company has updated or withdrawn its 2020 guidance based on COVID-19 considerations, public companies will face challenging disclosure decisions as they approach their first-quarter (for calendar year-end companies) earnings releases and earnings calls.  A key reference point in this regard is CF Disclosure Guidance, Topic No. 9, issued by the Division of Corporation Finance on March 25, which highlights the perspective of the Staff regarding various disclosure considerations related to the COVID-19 pandemic.


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The COVID-19 pandemic has created a disclosure nightmare for public companies.  The Securities and Exchange Commission (SEC) has recognized this challenge and, to its credit, has provided relief to public companies by, among other things, extending the deadline for companies to file certain disclosure reports.  Nonetheless, companies are faced with the challenge of crafting disclosures regarding the risks presented by the coronavirus crisis to their business and operations and their plans for addressing those risks.  This challenge is made all the more difficult by the looming presence of securities class action firms, which already have sued companies over coronavirus-related disclosures.  In addition, the SEC in the recent past has charged companies for allegedly insufficient disclosures made in reaction to crisis situations.

The COVID-19 pandemic is wreaking havoc on the world economically.  Businesses are being harmed in a myriad of ways, from losing customers, to supply chain disruptions, to employee layoffs.  Many businesses and industries will change their operations in the short term and possibly permanently, while others will cease to exist.  Public companies have a unique responsibility under federal securities laws to disclose information to the public, including assessments and plans relating to their business and operations and related risks.  Such assessments and disclosures become thorny in the face of volatile markets, unprecedented events, and colossal business uncertainty.


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The Staff of the various Securities Exchange Commission (SEC) divisions, including the Division of Corporation Finance, issued an announcement on March 24, 2020, which provides some flexibility to registrants seeking to satisfy the record retention requirement in Rule 302(b) of Regulation S-T that the registrant retain the manually signed documents.

Rule 302(b) of Regulation S-T requires that each signatory to documents electronically filed with the SEC “manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Such documents must be executed before or at the time the electronic filing is made.  Further, electronic filers must retain such documents for a period of five years and furnish copies to the SEC or its staff upon request.


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Eric KnoxRecently, I provided guidance for an article in Agenda about best practices for conducting virtual board meetings. Some best practices mentioned in the article involve facilitating discussion, completing minutes in a timely manner, and protecting the privacy of the meeting’s discussion.

I’ve advised, “If you’re talking about something that relates to finances, your financial experts are the ones you might want to direct discussion to after you finish the introduction so questions are flowing to people with expertise first. Then, other directors can interject with their questions or thoughts.”


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In a previous blog post, we discussed the availability of virtual shareholder meetings (i.e., “virtual-only” and “hybrid” meetings) as a potential alternative to the traditional in-person meeting during the 2020 proxy season in light of the public health and safety crisis posed by the novel coronavirus (COVID-19) pandemic (we also discussed virtual annual meeting guidance provided by the SEC in a subsequent blog post). In response to COVID-19, states such as Connecticut, Georgia, New Jersey and New York have taken steps to remove barriers to virtual annual meetings under existing state law. Continue reading to learn more about steps these states are taking.

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The ongoing fallout from the pandemic associated with the novel coronavirus (COVID-19) continues to challenge companies, boards and management teams across all aspects of their business.  In trying times like these, senior management team members are meeting regularly to discuss the impact of the virus on their business operations and formulate contingency plans that must be put into place to manage through this difficult environment.

Sometimes, management teams can be so focused on managing through a crisis that they fail to implement the protocols they are adopting for their broader associate base amongst themselves.  For instance, many companies have recently implemented social distancing protocols among their employees including, remote working arrangements, limiting large meetings or non-essential face-to-face meetings.  Meanwhile, groups of senior managers are meeting in-person in close contact with one another.


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The novel coronavirus (COVID-19) has already proven to have profound social, political and economic effects on the world, impacting nearly every continent, community and business sector.  With the growing uncertainty about the extent to which such effects will be felt in the future, many companies have begun to evaluate their pending acquisition agreements and financing arrangements to consider the scope of terms such as “Material Adverse Change” and “Material Adverse Effect” (MAC), and the provisions using such terms, as they relate to COVID-19.

While merger and acquisition (M&A) agreements and debt financing arrangements typically include MAC provisions, these provisions vary widely and should be read carefully.  This article briefly describes some of the things companies should consider in evaluating COVID-19 in the context of MAC provisions in both M&A arrangements and debt financing transactions.

MAC Provisions in M&A Transactions

One area of law where participants may be taking a fresh look at contractual provisions with the effects of COVID-19 in mind is in M&A contracts.  In the vast majority of M&A agreements, whether for public or private targets, the buyer will have a “walk right” between signing and closing if the target business suffers a MAC.  Regardless of the terminology used and the particulars of the contractual definition, the intent of these provisions is generally understood to allow a buyer that has signed an M&A contract not to have to close if some negative event or circumstance has affected the target business and it is so severe that the buyer’s benefit of the bargain is essentially lost, and the buyer, therefore, has the right to terminate the agreement without closing the acquisition.


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