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March 23, 2020

Key considerations for corporate entities

The COVID-19 pandemic is a disruptive force for business rarely seen in the history of the modern economy. Insecurity of supply chains, uncertain availability of workforces, market volatility, and an evolving landscape of public and private sector responses to the pandemic are combining to test the governance of corporations of every size.

These are key considerations for executives and directors to keep in mind as they navigate the rapidly-evolving situation.

Disclosure, Investor and Securities Matters

On March 18, the Canadian Securities Administrators has announced a 45-day extension for any periodic filings by issuers, funds, registrants, and rating organizations required to be filed on or before June 1, 2020. Issuers relying on the extension period do not need to file applications for management cease trade orders.

Disclosure requirements relevant to an entity’s COVID-19 exposure and its market consequences will require frequent and regular consider. Earnings expectations and risk factors in disclosure will require reconsideration. Market volatility, regardless of the cause, encourages vigilant attention to a public entity’s disclosure requirements, as the range of material events may widen with insecurity in the marketplace.

Equity and asset values notionally or temporarily depressed by the pandemic have simultaneously created an opportunity for management trading in securities and corporate securities buybacks, while also multiplying the quantity and distribution of material non-public information. Strict adherence to insider reporting, combined with heightened scrutiny of all trading activity by the entity and its senior management or directors must be considered in the circumstances of the moment.

Finally, investors will require good communications throughout the pandemic, particularly if the corporate entity is susceptible to cash flow interruption or workforce insecurity. Depressed equity prices might render certain corporate entities with solid assets or sources of liquidity vulnerable to acquisition. The importance of good corporate relations is elevated in times of crisis.

Meetings, Audit and Oversight

Boards and senior management will be meeting remotely and working from home. Aside from the obvious information security concerns, the absence of senior management from the workplace, depending on the comfort level of the entity’s management hierarchy with remote working, could create weaknesses in control of the enterprise.

The closure of premises and the importance of social distancing might prevent regulators and auditors from accessing corporate records or performing supervisory functions. Senior Management should consider its ordinary-course regulatory relationship and usual audit practices in a timely manner to proactively propose alternatives and adjustments as needed.

Executive compensation tied to performance metrics or involving equity awards may beg for reconsideration by board compensation committees to incentivize the long-term preservation of the business. A rebalancing of the overall compensation profile to favour critical support personnel (in IT or logistics, for example) might also be worthy of consideration.

Annual General Meetings

Management should consider what form of alternative meeting their bylaws permit. If a physical meeting is required, a court order could be necessary (pursuant to s. 138 of The Corporations Act (Manitoba), if a Manitoba company) to vary or dispense with aspects of the meeting requirements. Postponement is also a possibility if the corporation’s usual disclosures and financial statements are prepared in good order. The current situation of court availability is such that any entity seeking an order to amend their Annual General Meeting procedure should contact us promptly. Corporations of various sizes have sought this relief in several provinces. We are equipped to assist with such a court order, if needed.

Virtual Annual General Meetings to conduct significant business are notionally possible, but technology and service providers will become increasingly busy in the upcoming weeks and months. The CSA has released guidance on Annual General Meetings in light of the pandemic, noting that, in its view, no exemptive relief is required from section 2.15 of National Instrument 54-101 (Communication with Beneficial Owners of Securities of a Reporting Issuer) provided reporting issuers treat registered and beneficial holders equitably in respect of information released on changes to the holding of the Annual General Meeting.

Financing Considerations

A likely course of conduct for many corporations will be to rely on available credit facilities and short- to medium-term lending to cover liquidity shortfalls from decreased revenue while the pandemic persists. Corporate entities should carefully consider whether the pandemic and its effects have impacted the terms of the relevant credit agreement, including whether material adverse effects could permit the creditor to limit or rescind borrowing. Decreasing values of securities positioned as collateral and assignments of account could also pose previously unforeseen challenges.

We are available.

We recognize the significant economic and personal consequences facing our clients at this time. All our lawyers are available and we’ll do everything we can to help.

Key contacts for securities law matters are:

Peter Davey

Wes Burrows

Brandon Barnes Trickett

Resource posted on March 23, 2020.