Kathleen M. Ritchie
Partner
Article
The outbreak and spread of a novel coronavirus (COVID-19), declared a public health emergency by the World Health Organization, has already had significant human, political, and economic consequences around the world. The coronavirus is still evolving, and its full impact remains to be determined. However, its wide-ranging effects include financial market volatility, interest rate cuts, disrupted movement of people and goods, and diminished consumer confidence.
Canadian public companies preparing disclosure documents - whether annual and quarterly filings, or in connection with offerings of securities - should consider disclosure regarding any effects that the coronavirus has had or may be expected to have on their operations, financial performance, and prospects, and the risks and uncertainties to which they are exposed.
While Canadian securities regulators have not to date issued any guidance regarding coronavirus disclosure, the Securities and Exchange Commission (SEC) in the United States has addressed this issue - on January 30, 2020[i] and February 19, 2020[ii]. Notwithstanding, we are already seeing Canadian public companies incorporating disclosure regarding the coronavirus in their filings. Between January 1 and March 3 of this year, 161 companies filed a total of 271 documents with Canadian securities regulators that included the words "coronavirus" or "COVID-19". Some companies have provided detailed disclosures of actual and potential impacts of the coronavirus on their operations and industries, while others have made general disclosures addressing general conditions and unforeseeable events. For companies with connections to China and other affected jurisdictions, it may be easier to assess these impacts and risks. For others, given the evolving situation, it may be harder to do so.
MD&A is intended to be a narrative explanation through management's eyes of how a company performed during a particular period and its future prospects. Canadian public companies are required to discuss trends and risks that are reasonably likely to affect their financial statements, and events and uncertainties that are reasonably likely to affect their business. Risks or uncertainties may be discussed in the context of a company's operations, liquidity and/or capital resources.
As examples:
AIFs are intended to provide material information about a company and its business at a point in time in the context of its historical and possible future development. It describes the company, its operations and prospects, risks and other external factors that impact the company specifically. In particular, companies are required to disclose risk factors relating to the company and its business, including any matter that would be likely to influence a reasonable investor's decision to purchase or hold its securities. Risk factors must be disclosed in order of seriousness from the most serious to the least serious and must not be de-emphasized by including excessive caveats or conditions. Risk factors should be stated with meaningful precision where possible, and should not be boilerplate.
In recently filed AIFs, companies have referred to the coronavirus in the context of matters specific to them and their industries, as well as more broadly. For example:
In addition to continuous disclosures such as MD&A and the AIF, Canadian public companies are required to make timely disclosure of material changes. When it becomes clear that risks have materialized to the level of a change in the business, operations or capital of the company that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the company, a press release must be issued immediately and a material change report is required to be filed with the applicable securities regulators within 10 days. Rapidly evolving situations may make it difficult to determine precisely when timely disclosure is necessary. Premature disclosure is also problematic. Heightened vigilance will help to limit disclosure risks. It may be desirable to review corporate disclosure policies and the adequacy of internal reporting procedures, and confirm that the company's disclosure committee continues to be available on short notice.
Canadian public companies are encouraged to provide forward-looking information in their disclosures if they have a reasonable basis for doing so. That said, all forward-looking information must contain: a statement that the information is forward-looking; a description of the factors that may cause actual results to differ materially from the forward-looking information; material assumptions; and appropriate risk disclosure and cautionary language. In conjunction with updating their risk disclosures, Canadian public companies should also consider whether updates to their forward-looking cautionary language are appropriate.
In preparing their disclosures, Canadian public companies are required to consider the risks and uncertainties that have impacted or may impact their financial performance and future prospects. Whether a particular impact to a supply chain, other key operational relationships, pricing, markets, sales, business continuity, reputational matters or more broadly risks impacting the global economy, the evolving coronavirus is a development that Canadian public companies should be considering when preparing their disclosures.
Canadian public companies should consider whether existing risk factors in recent filings adequately disclose the risks they now face in light of the coronavirus. They will also need to review their coronavirus-related disclosures in subsequent filings to ensure that they remain accurate in light of rapidly changing circumstances.
[i] On January 30, 2020, the SEC noted that the effects of the coronavirus "may be difficult to assess or predict with meaningful precision both generally and as an industry- or issuer-specific basis. This is an uncertain issue where actual effects will depend on many factors beyond the control and knowledge of issuers. However, how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision."
[ii] On February 19, 2020, the SEC noted that "U.S.-listed companies (including companies based in the U.S., companies based in China and companies based outside of the U.S. but not based in China) may have significant operations in China and other jurisdictions that may be affected by the coronavirus. In addition, companies that do not themselves have operations in China or other potentially affected jurisdictions may depend on companies that do have operations in those jurisdictions, including, for example, as suppliers, distributors and/or customers." The SEC also emphasized, among other things, "the need to consider potential disclosure of subsequent events in the notes to the financial statements…".
[iii] See Form 51-102F1 - Management's Discussion & Analysis.
[iv] See Form 51-102F2 - Annual Information Form.
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