April 17, 2020
Public companies, proxy advisors, government agencies and market participants collectively are responding to the economic and market disruption caused by the coronavirus (COVID-19) pandemic. Read on for a discussion of the following new and updated guidance from the Securities and Exchange Commission and Institutional Shareholder Services:
SEC Leadership Stresses Importance of High-Quality Corporate Disclosures to Investors
On April 8, 2020, Chairman Clayton and Director Hinman issued a public statement regarding the importance of high-quality, forward-looking disclosures by public companies, given the economic contraction and market volatility caused by the COVID-19 pandemic. They emphasized that, when issuing earnings releases and conducting analyst and investor calls in the coming weeks, public companies should provide as much information as practicable regarding their current financial and operating status, as well as their future operational and financial planning.
Chairman Clayton and Director Hinman noted that upcoming earnings reports and related analyst and investor calls will not be routine and historical information regarding financial performance will be less significant to investors. They emphasized investors’ and analysts’ desire to know where companies stand today, and how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis. In particular, they encouraged companies to provide additional guidance to the marketplace on the following:
Chairman Clayton and Director Hinman acknowledged that providing such forward-looking disclosure in the midst of an evolving and unpredictable situation will be difficult, but observed that such robust, forward-looking disclosures will benefit investors and markets and give them greater confidence in providing financing or credit to the company and, ultimately, will “substantially contribute to our nation’s collective effort to fight and recover from COVID-19.” Regarding this last point, the pair noted that the great interconnectedness of the economy as a whole makes it necessary for there to be broad dissemination of information from public companies regarding the challenges and responses to the COVID-19 crisis. Chairman Clayton and Director Hinman’s statement appears to characterize a company’s forward-looking disclosures about its plans as a key public service in the COVID-19 recovery. It notes that “the exchange of forward-looking information is essential” to the “broad and extensive coordination across workers, firms, investors and governmental officials” that will be critical to successfully emerge from the pandemic.
Chairman Clayton and Director Hinman stated that the SEC remains committed to investor protection and market integrity, and focused on identifying bad actors that attempt to use the current uncertainty to prey on investors. Recognizing that companies would be concerned about the legal risks of providing forward-looking disclosures, and particularly specific estimates, that may prove to be incorrect, Chairman Clayton and Director Hinman concluded by assuring companies that “
Finally, they stressed the importance of good corporate hygiene, particularly with respect to the protection and distribution of material non-public information. Here, companies and their investors are well-served when the kind of current and forward-looking financial and operational information they are advocating to be disclosed is held closely until disclosed and, when disclosed, broadly disseminated. For an update on potential insider trading concerns related to COVID-19, please see this Subject to Inquiry blog post by McGuireWoods lawyers.
SEC Staff Updates Guidance on Conducting Shareholder Meetings in Light of COVID-19
On April 7, 2020, the Staffs of the SEC’s Division of Corporation Finance and Division of Investment Management (the “Staff”) updated previously issued guidance regarding shareholder meeting issues related to the COVID-19 pandemic. The updated guidance concerned the manner in which an issuer should alert investors that it has changed the previously disclosed date, time or location of its annual meeting, and the issuer’s ability to use “notice-only” delivery to satisfy its proxy mailing requirement.
The Staff has already noted that, in light of difficulties related to COVID-19, an issuer may want to change the date, time or location of its annual meeting after it has mailed its proxy materials. Prior guidance noted that issuers could notify shareholders of such change without mailing additional soliciting materials or amending previously filed proxy materials if the issuer: (1) disseminates a press release announcing the change; (2) files such announcement as additional soliciting material with the SEC on EDGAR; and (3) takes all necessary steps to notify intermediaries in the proxy process and other market participants of the change to the meeting’s date, time or location.
In its updated guidance, the Staff noted that it expects issuers to take those actions “promptly after making a decision to change the date, time or location of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner.” The Staff further advised that issuers who have not yet mailed or filed their definitive proxy materials should consider including a disclosure in their proxy materials regarding the possibility that COVID-19 may necessitate a change in the date, time or location of the annual meeting. An issuer’s determination of whether to include such a disclosure should be based on its particular facts and circumstances and the reasonable likelihood that such a change will be needed.
SEC Discusses Delays in Printing or Mailing a “Full Set” of Proxy Materials
The updated guidance also provided advice for issuers who are experiencing delays with printing and mailing of their proxy materials. The Staff noted that COVID-19 may cause delays or staffing difficulties at the facilities of an issuer’s proxy service provider or transfer agent that could delay an issuer’s ability to print or mail a “full set” of proxy materials. A full set generally includes a proxy statement or information statement, an annual report if required by either Rule 14a-3(b) or 14c-3(a) under the Securities Exchange Act of 1934 as amended, and a proxy card. Given the potential of these delays, issuers may want to take advantage of the “notice-only” delivery option allowed under Securities Exchange Act Rule 14a-16 — an option many issuers commonly use.
Under the “notice-only” delivery option, rather than delivering physical copies of the full set of proxy materials, an issuer posts its proxy materials to a website and sends a notice of internet availability of proxy materials to shareholders at least 40 calendar days before the meeting. The issuer is still responsible for providing hard copies of these materials to any shareholder who requests them. In its updated guidance, the Staff recognized that an issuer who wants to use this “notice-only” option may have concerns about its ability to comply with the technical requirements of the rule. For example, an issuer may not be able to send the notice of internet availability of proxy materials at least 40 calendar days prior to its meeting date, or an issuer may not be able to respond to a shareholder’s request for hard copies of the proxy materials in a timely manner.
The Staff stated that “[t]he primary goal of the proxy process is allow shareholders to receive material information about the matters to be presented at a shareholder meeting in a timely manner so they can make informed voting decisions.” If an issuer is affected by a delay in printing or mailing process, the issuer should use all reasonable efforts to meet this primary goal of the proxy process without jeopardizing the health or safety of anyone involved. The Staff acknowledged that this may mean delaying a meeting (in accordance with state law and SEC procedures) to ensure that it can provide investors proxy materials on a timely basis.
The Staff agreed, however, that where COVID-19 delays are unavoidable, it will not object to issuers using the “notice-only” delivery method “in a manner that, while not meeting all aspects of the notice and timing requirements of Rule 14a-16, will nonetheless provide shareholders with proxy materials sufficiently in advance of the meeting to review these materials and exercise their voting rights under state law in an informed manner and so long as the issuer announces the change in the delivery method by following the steps described above for announcing a change in the meeting date, time, or location.”
Issuers, therefore, would need to issue a press release announcing this change, file such announcement as additional soliciting material on EDGAR and take all necessary steps to notify intermediaries in the proxy process of the switch to “notice-only” delivery. Finally, the Staff stated that issuers and intermediaries impacted by COVID-19 should still continue to use best efforts to send paper copies of proxy materials and annual reports to shareholders who request them, even if delivery of these materials will be delayed.
ISS Issues Guidance on Its Policy Applications in Light of COVID-19
On April 8, 2020, ISS released guidance on how it intends to apply its proxy voting policies in light of the difficulties caused by the COVID-19 pandemic. The ISS guidance focused on four key areas: (1) annual meeting concerns; (2) poison pills, shareholder rights and boards/directors; (3) compensation issues; and (4) capital structure and payouts.
Annual Meeting Issues
In addition to ISS’ guidance on virtual-only meetings, it should be noted that Glass Lewis has also issued guidance that between March 1, 2020, and June 30, 2020, it will generally not vote against members of a nominating committee of a company that holds a virtual-only annual meeting provided that the company discloses its reasons for holding a virtual-only annual meeting and cites COVID-19 as one such rationale.
Poison Pills, Shareholder Rights and Boards/Directors
Compensation Issues
Capital Structure and Payouts
Next Steps for Public Companies
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For additional guidance on the information in this alert, please contact any of the authors below, any member of McGuireWoods’ securities compliance, securities enforcement or employee benefits teams, or your primary McGuireWoods contact.
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McGuireWoods’ COVID-19 Response Team helps clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic. For assistance, contact a team member listed or send an email to [email protected].
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.