Ten Questions to Ask When Drafting a Coronavirus Disclosure

By Joshua Schneiderman and Helen Goldstein

Public companies, particularly those in the process of preparing 10-Ks and similar public filings, are now facing the question of what to say about the impact of coronavirus on their business. Below we summarize 10 questions companies should ask as they evaluate the need for a coronavirus disclosure and draft a new risk factor, and we provide some examples of how others have framed the issues.

1. Is this disclosure going to become the “new normal” for your company? If so, should you consider drafting a broad introduction to cover “health epidemics” then transition into a specific discussion of COVID-19?
2. Do you have critical or significant activities in highly affected locations, such as China, that have already been negatively impacted?
3. Have you taken steps to respond to the crisis, such as cancelling travel or instituting work from home policies? Has this or will this have a negative impact on your operations?
4. Has your company been named in publicity related to the virus? Could this have a negative impact on your public relations or your customers’ confidence (e.g., a case of exposure at a company location open to the public)?
5. Are you operating in an industry that could be affected in a particularly severe way (e.g., travel, mass events, work with particularly vulnerable populations)?
6. Will this have a significant impact on your vendors?
7. Will this have a significant impact on your customers?
8. Are you in the midst of a large transaction or experiencing an event that is outside of the ordinary course of your business (e.g., a merger or acquisition, securing new financing) where a disruption could have a disproportionate impact?
9. Are your company’s products or services of particular use in responding to the virus (e.g., hand sanitizer, face masks)? How are you managing the demand and associated publicity?
10. If company leadership believes that the virus will have minimal or no impact on your operations, should you consider disclosures that, at a minimum, acknowledge the risk and justify your leadership’s belief?

Here are some examples of how answers to these questions have played out in some of the most comprehensive disclosures we have seen to date.

Generally, many disclosures place the issue in the wider context of a health epidemic or pandemic:

“Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 (coronavirus) outbreak, in regions where we or third parties on which we rely have manufacturing or other business operations. In addition, if COVID-19 becomes a pandemic, it could materially affect our operations globally, including at our headquarters in [location] and at our [critical operations sites (e.g., factories)] throughout the globe.”

Disclosures have described COVID-19 in the following way:

“Beginning in late 2019, China, as well as several other countries, experienced an outbreak of a highly contagious form of an upper respiratory infection caused by COVID-19, a novel coronavirus strain commonly referred to as coronavirus. On January 30, 2020, the World Health Organization declared this outbreak a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19.”

Entities that have experienced or expect a significant effect have stated:

“The outbreak has severely restricted the level of economic activity in affected areas and may have an adverse impact on sales, manufacturing and distribution, particularly in China and throughout Asia. The effects could include restrictions on our ability to travel to support our operations in China or our customers located there, or disruptions in our ability to operate. Disruption to our operations and/or to the operations of our suppliers or customers in the region would likely have a negative impact on our business, operating results and financial condition."

Some entities have also included specific examples of projects that have been particularly impacted. Entities that have experienced severe harm, such as those in the travel industry, have crafted even more specialized and extensive disclosures.

Entities that do not believe that there will be a significant impact on operations have stated:

“Our annual revenues in Asia typically represent not more than approximately 5% of our total revenues. However, business interruptions that are sustained for an extended time period due to the outbreak could have a material negative impact on our business and operations. The supply chains of our contract manufacturers and many of our vendors may source products, parts or components from China, countries near China and the region.”

Those that have already implemented measures to combat the disease reported that “Our COVID-19 response measures have already disrupted business travel, customer visits and various company events.” 

Those considering measures stated: “We may need to limit operations or implement limitations, including work from home policies.”

Many stressed the severity of the situation by stating:

"The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control the spread of the virus have been ineffective. If the COVID-19 outbreak continues to spread, the effect on the economy and on the public may be severe. There is a risk that some countries or regions may be less effective at containing COVID-19, or it may be more difficult to contain if the outbreak reaches a larger population or broader geography, in which case the risks described herein could be elevated significantly.”

Entities have also made it clear that this is an unprecedented event and, as such, predicting the impact is almost impossible:

“There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.”

Even though there are certain disclosure language trends as identified above, it is quickly becoming clear that this likely cannot be a “one size fits all” disclosure. Each business will be uniquely affected by COVID-19 and disclosures should be customized based on specific impacts and other circumstances, such as if a company has an ongoing offering. Companies should consult with counsel on their legal obligation to disclose and the form of disclosure required.