The Effects of COVID-19 on Public Company Reporting and Securities Fraud Litigation

Author: Alec Berin

COVID-19 (“novel coronavirus” or “virus”) has affected nearly every industry and occupation, to say nothing of the personal devastation it has caused so many.  The widespread economic impact of novel coronavirus raises numerous significant issues for public companies as they attempt to react to the virus and communicate to shareholders the measures they are taking, as well as the business risks posed by the virus.

The securities laws impose substantial continuous reporting obligations on public companies, including through Regulation S-K, which contains requirements including what is known as Management’s Discussion & Analysis of Financial Conditions and Results of Operations (“MD&A”).  This blog previously reported on recently-proposed amendments by the U.S. Securities and Exchange Commission (“SEC”) to Regulation S-K.

The MD&A regulations require disclosures to address subjects including liquidity and capital resources, sources and uses of funds, and gross and net revenues over various time horizons.  Other portions of the disclosure regulations address personal and environmental, social, and governance (“ESG”) factors as well.  Novel coronavirus has the potential to impact earnings, supply chains, customer demand, and fulfilment channels.  For many companies, the anticipated impact and risks posed by the virus will likely need to be disclosed.

The SEC has articulated that the recent proposed amendments and broader efforts to reform the disclosure regulations, as well as new virus-related guidance, are intended to be principles-based, and to provide meaningful context to investors and allow them to understand metrics and information “through the eyes of management.”[1]  Accordingly, disclosure related to the impact and risks associated with novel coronavirus should reflect these aims.

Over the last several weeks, the SEC Division of Corporation Finance has issued guidance regarding how companies should assess and communicate risks associated with novel coronavirus.[2]  Underpinning the guidance is the reality that the ways in which companies plan and respond to novel coronavirus and related events may be material to investment decisions.  The guidance indicates that disclosures should be specific to a company’s situation and includes a list of illustrative questions for companies to consider in preparing their disclosures.

Additionally, in recognition of the emergent challenges to public companies, in early March, the SEC extended filing deadlines for many company reports that would otherwise be due in March and April.  Since then, the SEC has also relaxed rules for transfer agents impacted by the virus.  Further, the SEC has indicated that it will likely continue to issue guidance and, perhaps, additional extensions of filing deadlines.

Public companies that issue false or misleading disclosures concerning the impact or risks associated with novel coronavirus may be exposed to liability for violations of the federal securities laws.  There will likely be significant litigation involving allegations of fraudulent disclosures around novel coronavirus.  Indeed, on March 12, 2020, a shareholder of Norwegian Cruise Line Holdings Ltd. (“Norwegian”) filed a class action complaint in the United States District Court for the Southern District of Florida alleging that Norwegian violated the federal securities laws by misrepresenting and omitting information related to the impact of novel coronavirus on Norwegian’s business.[3]

It is clear that novel coronavirus will continue to have a significant impact on financial markets in the weeks and months ahead.  Accordingly, public companies will face heightened scrutiny related to their virus planning and response, and meaningful disclosure will be as important as ever.

The legal team at Shepherd, Finkelman, Miller & Shah, LLP (“SFMS”) has significant experience litigating securities matters.  If you have any questions regarding this subject or this posting, please contact John Roberts (jroberts@sfmslaw.com) or Alec Berin (aberin@sfmslaw.com).  We can also be reached toll-free at (866) 540-5505.

SFMS is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania.  SFMS is an active member of Integrated Advisory Group (www.iag.global), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe.  For more information about our firm, please visit us at www.sfmslaw.com

A Message to Our Clients About Coronavirus COVID-19:
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A Message to Our Clients About Coronavirus COVID-19

At Shepherd, Finkelman, Miller & Shah, LLP, we view the safety and well-being of our clients, staff and business partners as our highest priority.

The situation regarding the COVID-19 virus is continually changing, and we are following all recommended guidelines to stay healthy. As a result, our lawyers and staff are working remotely in accordance with the CDC's recommendations. We continue to work for all of our clients and are happy to arrange for phone or video consultations. We are also able to exchange documents via secure drives or email.

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