(Left to right) David Frost, Thomas Fung and Peter Quon, McCarthy Tetrault LLP
The purpose of disclosure obligations under Canadian securities laws is to keep the public informed about material information and material developments that affect a public issuer’s business, financial condition and results of operations, including external events that have a direct effect on the affairs of the issuer that is both material and uncharacteristic of the effect generally experienced by other issuers in the same industry or business. The COVID-19 pandemic has rattled markets and significantly impacted various aspects of the day-to-day operations of many issuers, such as labour force, consumer demand and supply chains. Crises like the current pandemic are significant external events that require an issuer to carefully consider how its business, financial condition and operations are impacted so that applicable disclosure obligations, such as those outlined below, can be satisfied.
Material Change
If a material change occurs, a Canadian issuer has an obligation to disclose the material change in a timely manner by issuing a news release and filing a material change report. A material change is any change in the issuer’s business, operations or capital that amounts to a material fact (i.e. a fact that would reasonably be expected to have a significant effect on the market price or value of any of the issuer’s securities). Although crises often involve a significant degree of uncertainty, an issuer should remain diligent and frequently assess during such times whether a material change has occurred. A material change may occur due to general economic trends, such as changes in consumer demand or decreased access to capital. In some circumstances, such as the current crisis, governments may take certain measures that disrupt the operations of an issuer, including the ability to assemble its workforce, to keep storefronts open to the public or to purchase required goods from suppliers. An issuer should continuously review how such economic trends or government decisions are affecting its business, operations and financial condition in order to determine whether or not a material change has occurred.
Management Discussion and Analysis
An issuer’s management discussion and analysis (MD&A) is particularly important during critical times as it provides the public with management’s view of the issuer’s performance and financial condition in light of the crisis. MD&A also informs investors of material crisis-related information that may not be fully reflected in the financial statements, such as debt or contractual issues. Further, if the crisis is reasonably likely to continue having an effect on its business, an issuer should address in its MD&A both the impact of the crisis on the current reporting period and the anticipated impact going forward. An issuer should work closely with its auditors to ensure that key assumptions underlying critical accounting estimates are reasonable given the circumstances.
Risk Factors
During times of crisis, an issuer should review the risk factors disclosed in its most recent filings in order to determine which risk factors should be updated to reflect shifting trends or new effects caused by the crisis. Certain risk factors, which were initially relatively general in nature due to the uncertainty associated with the crisis, may need to be updated with more specific disclosure if an issuer learns of new material financial or operational information. An issuer should also review whether some of the risks previously disclosed have already occurred. While it may be helpful to review the crisis-related risk factors disclosed by peer issuers, an issuer should adjust its risk factors to its circumstances at the time and avoid generic or boilerplate disclosure.
Guidance
Providing any guidance, earnings or otherwise, during a crisis is often difficult due to the unpredictable and sometimes unprecedented nature of the crisis. As a result, an issuer may end up in a position where its actual results differ materially from its previously issued guidance. If an issuer finds itself in such circumstances, it may be advisable to provide an update to such guidance prior to the end of the quarter by issuing a news release. When issuing new guidance, an issuer should keep in mind that financial guidance must be based on assumptions that are reasonable under the current circumstances. Following the credit crisis in 2008, the Canadian Securities Administrators (CSA) published a notice summarizing the results of their continuous disclosure review program in which they noted that multiple issuers had to be reminded of the obligation to update previously disclosed material forward-looking information.
Insider Trading and Selective Disclosure
Certain effects of a crisis may become common knowledge, such as a sharp decline in the price of a particular commodity or a general decreased ability to access credit. An issuer does not need to disclose such general facts. However, a crisis may materially affect an issuer in a manner that is not known to the public. In order to comply with insider trading laws and avoid potential misrepresentation claims, an issuer should ensure that it has disclosed material facts publicly before it or any of its insiders trade in the securities of the issuer. Similarly, an issuer must ensure that it discloses material facts to the public at the same time in order to avoid selective disclosure.
Guidance from the U.S. Securities and Exchange Commission
While the CSA has not yet issued specific guidance to Canadian issuers regarding the current pandemic, the U.S. Securities and Exchange Commission (SEC) released guidance on this matter, which is informative for the current crisis and for crises in general. The SEC recommends that an issuer provide as much information as practicable with respect to its current operating status, as well as future operating plans under various crisis mitigation conditions. Further, an issuer should discuss in detail its current liquidity position and expected financial requirements. The SEC also notes that where an issuer has received financial assistance from crisis-related government programs, it should disclose the nature, amounts and effects of the assistance. Finally, the SEC recognizes the difficulty of forward-looking disclosure during the crisis. Nonetheless, the SEC recommends that issuers not resort to generic or boilerplate disclosures and that each issuer instead disclose issuer-specific status, strategies and risks.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Thomas Fung (Associate) and Peter Quon (Articling Student) at McCarthy Tétrault LLP in Vancouver.