Coronavirus Abounds In Risk Disclosures As Disease Spreads

By Tom Zanki
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Law360 (February 28, 2020, 7:14 PM EST) -- Public companies are rapidly updating their risk disclosures in response to business threats posed by the deadly spread of the coronavirus, creating challenges for issuers and their attorneys alike as they try to navigate uncharted waters.

As of Friday, 606 public companies have mentioned the new coronavirus in the "risk factors" section of their periodic reports and prospectuses, Securities and Exchange Commission filing data from Intelligize show. Many have come in the last few days, as Monday is an SEC deadline for certain large companies to file their annual 10-K reports, though some companies have until later in March. Intelligize is also owned by Law360 parent company Lexis Nexis.

SEC rules require that public companies warn investors of plausible business or legal risks that could affect their operations without being overly boilerplate. Failure to provide adequate "risk factor" disclosures could invite litigation from investors in the event of a stock drop.

Characterizing risks from ongoing and unpredictable events can be dicey to begin with for a company, which seeks to disclose information without sounding needlessly scary. Lawyers note that the threat posed by the coronavirus is in many ways distinct given the rapid spread of the disease and steady flow of new revelations, which have roiled global financial markets for days.

"It is a fluid situation, like nothing I have seen before," Skadden Arps Slate Meagher & Flom LLP partner Brian Breheny said.

On Friday, the World Health Organization upgraded its global risk assessment of the outbreak to "very high" — the highest level of its four-stage alert system. The WHO reports 82,294 global cases of the virus so far, including 78,630 cases and 2,747 deaths in China alone, though deadly cases of the disease have spread to South Korea, Japan, Italy, Iran and other countries.

SEC-reporting companies across a swath of industries are trying to assess how their businesses will be affected by any macroeconomic fallout, given chain reactions that can follow government lockdowns and travel restrictions in China and elsewhere.

"Clients are reaching out because they want to make sure they are not acting hysterically, but also not acting too conservatively," Alston & Bird LLP partner Dave Brown said.

The SEC has encouraged companies to factor how the coronavirus may impact their operations through their disclosures, while acknowledging such events are hard to predict. Relevant companies extend beyond those directly operating in China or nearby. It also includes those with supply chains, distributors and customers in the region — thus casting a wide net.

"We in the U.S. and many public companies have simply become so dependent on suppliers and on a distribution chain that turns on China," Mayer Brown LLP partner Anna Pinedo said. "We have lots of very different industry segments that are affected."

Apparel giant Levi Strauss & Co., whose fiscal 2019 ended in November, was among the first companies to disclose coronavirus risks in late January. The jean maker said it closed stores in China and experienced a "decrease in consumer traffic" there, according to its annual report.

Travel and leisure-related industries are also taking a hit, spanning from airlines to casinos and hotel and restaurant chains. United Airlines Holdings Inc. has suspended flights to and from Beijing, Chengdu, Shanghai and Hong Kong until April 24, amounting to 5% of the airline's planned 2020 capacity. Apart from a 100% decline in near-term demand to China, United said it expects about a 75% decline in near-term demand on the rest of its trans-Pacific routes.

"If traffic on the company's trans-Pacific routes were to remain at these levels for an extended period … our results of operations for full year 2020 may be materially adversely affected," United said in an annual report filed Tuesday with the SEC.

Norwegian Cruise Line Holdings Ltd. and Royal Caribbean Cruises Ltd. say they have canceled cruises because of the outbreak, while Papa John's International Inc. said Tuesday it shut 50 franchised stories in China. Automotive and semiconductor companies have also been affected, given their far-flung manufacturing operations and supply chains, and pharmaceutical companies have warned of potential disruptions to their clinical trials.

Given uncertainty over how long it will take for health authorities to contain the virus, and the potential for further economic fallout, lawyers say companies may need to issue subsequent updates to their quarterly and annual filings to keep their information current.

Companies generally report on their financial performance on a quarterly basis but are required to provide the SEC with interim disclosures, known as 8-K filings, if material events happen in between quarters. Lawyers say that is possible given unfolding coronavirus events.

"It's a constantly moving target," Breheny said. "With some clients, we are getting almost daily, if not every other day, updates of what they think is happening and what the impact might be."

The practice of issuing guidance to investors regarding a company's projected financial performance is another potential landmine. Brown points out that companies should take care not to inadvertently confirm or provide updated guidance with select shareholders if economic circumstances change, which would violate SEC disclosure rules against selective disclosure.

Lawyers note that companies should also be careful not to be overly broad in their disclosure as to make them meaningless. The SEC said it is willing to provide guidance to companies.

"We are trying to convince companies, instead of stating a generic sort of epidemic or pandemic risk, to be focused and more specific about what the actual consequence is," Pinedo said.

Events around coronavirus also differ from past developments that triggered a wave of risk disclosures, such as the United Kingdom's Brexit referendum in 2016, in that political votes happen once and it is then up to companies and investors to sort the impact.

Because coronavirus news continues to develop daily, Brown noted there is some similarity with the financial crisis of the late 2000s. Current circumstances are not as severe, but he said companies are closely monitoring matters each day rather than taking a wait-and-see approach.

"There is not a panic, but there is definitely an acknowledgement that this is different than your normal situation," Brown said.

--Editing by Philip Shea.

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