Governments, health care providers and individuals face enormous challenges to contain the outbreak, deliver timely and sufficient medical care, and overcome the huge disruptions that have resulted to all aspects of our lives.
In the midst of all this, corporate directors and officers must deal with conditions around the world, government orders, and business interruptions that seem to change daily (and may often feel like hourly).
Despite all of those tremendous obstacles, directors and officers still must fulfill their fiduciary duties to their corporations. And the question is how to do so without running afoul of securities laws.
To that end, the U.S. Securities and Exchange Commission recently offered both some relief on filing deadlines and guidance on how to address the impacts from COVID-19 in required disclosures:
1. Registrants can take an additional 45 days after the original filing deadline to make required filings with the SEC, provided that notice of intent to do so is filed with the SEC by the later of March 16 or the original filing deadline for the report, schedule or form.
2. Registrants must disclose material risks from COVID-19 on their business and operations and to address their plans for and responses to those risks.
Whether these requirements, particularly the material risk disclosure requirement, have been met may become the subject of shareholder litigation and potential SEC enforcement action, with the benefit of hindsight. In those circumstances, directors and officers will want to ensure their D&O insurance policies will provide coverage and that the exclusionary language relating to claims for bodily injury — which insurers may try to invoke based on COVID-19 — are as narrow as possible.
SEC Relief, Guidance, Along With Potential Litigation and How to Avoid It
In a press release issued on March 4, SEC Chairman Jay Clayton joined the fray of government officials presenting relief measures to address the deepening COVID-19 crisis. Clayton acknowledged the challenges COVID-19 has presented, and will likely continue to present, to U.S. companies with significant operations in affected areas and other companies located in those areas — which has become a rapidly broadening territory since the date of the press release.
To that end, the SEC issued an order under the Securities Exchange Act, which, subject to certain conditions, grants qualifying companies additional time to file certain disclosure reports and soliciting companies relief from certain delivery requirements.
The order applies to registrants subject to Exchange Act Section 13(a) or 15(d) and persons required to make filings with respect to those registrants. The order also provides relief to registrants or other persons who under Exchange Act Sections 14(a) and 14(c) and related regulations, and Exchange Act Rule 14f-1 must mail proxy statements, annual reports, other soliciting materials to investors provided that, among other conditions, registrants make good faith efforts to otherwise furnish such material to investors.
The order sets forth conditions under which the SEC grants relief, including, but not limited to:
1. An affected party is not able to timely file due to circumstances related to COVID-19.
2. By the later of March 16, or the original filing deadline of the relevant report, schedule or form, the registrant relying on the order must furnish to the SEC a Form 8-K or Form 6-K (if eligible) which must state (1) that the registrant is relying on the order; (2) why it could not timely file the required report, schedule or form; (3) the estimated date by which it expects to furnish the required report, schedule or form; and (4) if appropriate, a risk factor explaining, if material, COVID-19’s impact on its business.
3. An affected party must furnish its required filing to the SEC no later than 45 days after the original filing deadline.
The relief period under the order, March 1 to April 30, may be extended by the SEC, as it deems necessary. In addition to conditional regulatory relief under the order, Clayton committed to case-by-case assistance from the SEC for companies that face additional or different administrative difficulties stemming from the crisis.
Whether the SEC, in light of its own challenges to protect its employees and implement continuity plans, has ample resources to keep up with any substantial increase in demand for assistance remains to be seen.
The SEC makes clear in the order that it sought to balance the relief granted to qualifying companies with the SEC’s fundamental interest in a transparent capital market where investors have access to meaningful and timely information that could materially impact a decision to invest. Such insight may appear in risk factor discussions, management’s discussion and analysis sections and earnings discussions among other financial disclosures in Form 10-K, Form 10-Q and Form 8-K.
Not only must a company’s officers and directors ensure that the timing and nature of disclosures not run afoul of the SEC’s requirements, they should proactively address the potential for liability exposure from shareholder litigation for inadequate disclosures or failure to timely update disclosure to reflect the ever changing economic impact on business operations.
Although relatively few securities litigation cases resulted from the SARS outbreak, COVID-19 might have a more significant impact on corporations and the markets. We anticipate that the uncertainties created by the current outbreak of COVID-19 and its impact on companies across industries, might result in event-driven securities litigation.
On March 12, investors had already filed a class action suit in the U.S. District Court for the Southern District of Florida against Norwegian Cruise Lines, its CEO and chief financial officer.
Investors allege that despite the COVID-19 outbreak, Norwegian gave a positive outlook of the company and touted procedures it had implemented to protect passengers and crew members in its Form 8-K filed and Form 10-K filed in February 2020. Plaintiffs allege that the statements were materially false and misleading.
The claims are further bolstered by leaked emails in which the company is alleged to have directed its sales staff to lie to customers about COVID-19 in the interest of retaining bookings. Following negative news coverage, the company’s share price fell — resulting in losses for investors.
Although the viability of COVID-19 related shareholder litigation is unknown, recent event-driven and climate change shareholder litigation still working their way through the dockets might be instructive of things to come.
In Vataj v. Johnson et al, a class action in the U.S. District Court for the Northern District of California related to the California wildfires, investors sued three Pacific Gas and Electric Co. executives alleging that they made false and misleading statements regarding the company's business, operational and compliance policies such as wildfire prevention and safety protocols, some of which were purportedly inadequate to meet the challenges for which they were designed — all to the detriment of shareholders.
In 2018, in Ramirez v. Exxon Mobil et al, the court concluded that plaintiffs could proceed with their suit against Exxon Mobil Corp. and several executives. In this instance, plaintiffs brought a class action in the U.S. District Court for the Northern District of Texas, alleging that Exxon and certain officers failed to properly account for climate change impact on the business, and, due to misleading public statements investors suffered losses from falling share prices.
While the onset and economic impact of COVID-19 might not have been predictable, the urgency and thoughtfulness with which companies react to stem fallout from the spread of the virus will work to undercut the viability of a shareholder’s claim. Keen attention to the drafting of disclosures can help avoid potential liability.
In particular, companies should pay close attention to updating risk factors and forward-looking statements in order to maximize the protections of the Private Securities Litigation Reform Act’s safe harbor.
Practical Advice for Clients
If COVID-19 has impacted a company’s operations and forces a delay in making required SEC filings, be sure to meet the deadlines set forth in the SEC’s March 4 order for filing a Form 8K (or 6K) and include all of the required detail to support the reasons for that delay. .
Companies must use their disclosures (management's discussion and analysis, and risk disclosures) to engage shareholders around their responsiveness to developing responses related to the pandemic.
Additionally, companies should identify potential trends, uncertainties and projections regarding the expected impact of the outbreak on future periods. If companies are experiencing actual impacts, inform investors clearly of those events actually occurring, rather than using language that they might or could occur.
The SEC has emphasized that companies should discuss how their boards oversee the management of these material risks. Accordingly, we expect that companies experiencing a material impact due to the coronavirus outbreak will address the board of directors’ oversight.
Companies are encouraged to consult with their audit committees, auditors and legal advisers as they continue to evaluate their obligations to provide accurate and complete disclosures on COVID-19’s disruption.
Potential D&O Insurance Issues Due to COVID-19
D&O insurance should respond to claims that a company’s directors or officers engaged in mismanagement concerning COVID-19 related issues, or that the company’s disclosures violated SEC requirements or were misleading to or insufficient for investors.
D&O insurance policies generally cover claims against a company’s directors and officers for their wrongful acts (typically defined broadly to include any error, misstatement, misleading statement, act, omission, neglect, or breach of duty) and against the entity for securities claims (typically defined to include any violation of any U.S. securities law in connection with the company’s securities).
One issue that may come into play with coronavirus-related claims is the policy’s bodily-injury exclusion. D&O policies typically exclude coverage for claims for bodily injury or sickness, in order to channel insurer exposure to such liabilities to other types of liability insurance policies, such as commercial general liability.
A typical bodily-injury exclusion will apply to “bodily injury, violation of any right of privacy, mental anguish, humiliation, emotional distress, sickness, disease or death of any person or damage to or destruction of any tangible property, including loss of use thereof, whether or not it is damaged or destroyed.”
Most policies provide that the policy does not cover claims “for ... bodily injury, [etc.].” Under this language, application of the exclusion is limited to circumstances where a claimant has asserted, or is threatening to assert, a cause of action for bodily injury, such as negligence or wrongful death.
However, some policies contain broader language, sometimes referred to as absolute bodily injury exclusions. These policies may exclude any claim “arising out of, directly or indirectly resulting from or in consequence of, or in any way involving” bodily injury, or use similar language.
Practical Advice for Clients
Directors and officers should be mindful that insurers may argue that broader exclusionary language of “arising out of … or in any involving” defeats coverage for otherwise-covered D&O claims simply because the claims are in some way connected to COVID-19.
Courts, however, almost universally construe exclusions in insurance policies narrowly and in favor of the policyholder.
In addition, courts have tended to reject similar arguments by D&O insurers in related contexts. For example, in Philadelphia Indemnity Insurance Co. v. Maryland Yacht Club Inc., a D&O insurer with an absolute bodily injury exclusion denied coverage for a wrongful discharge suit by a former employee who claimed he was fired on account of a leg injury.
The court rejected the insurer’s argument that the leg injury brought the claim within the bodily injury exclusion, finding that the nexus between the leg injury and the wrongful discharge claim was too attenuated to invoke the exclusion.
Randall Lehner is a partner, Wendy Clarke is a senior associate and Cameron Argetsinger is special counsel at Kelley Drye & Warren LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Philadelphia Indemnity Insurance Co. v. Maryland Yacht Club Inc. , 742 A.2d 79 (Md. Ct. Spec. App. 1999).
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