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Anatomy of a COVID-19 Risk Factor

April 28, 2020

The current pandemic is having an impact on public companies’ current and future financial results, operations and cash flows, as well as the price or value of their securities in the capital markets, leaving many companies asking how to appropriately provide disclosure of the risks associated with COVID-19.


When considering COVID-19 risks disclosure, it is important to understand the purpose and form requirements related to the particular continuous disclosure document. For example, an Annual Information Form (AIF) must comply with Form 51-102F2, which provides at Item 5.2 for disclosure of:

“...risk factors relating to your company and its business, such as cash flow and liquidity problems, if any, experience of management, the general risks inherent in the business carried on by your company, environmental and health risks, reliance on key personnel, regulatory constraints, economic or political conditions and financial history and any other matter that would be most likely to influence an investor’s decision to purchase securities of your company.”
Risk disclosure in an AIF, which is then incorporated by reference into any short form prospectus and nearly identical to the risk disclosure required to be included in a long form prospectus under National Instrument 41-101 – General Prospectus Requirements, is essentially focused on the most serious ways that an investment in the securities of an issuer could lose substantial value. Such disclosure should generally be free of mitigating language and is required to “not be de-emphasized by including excessive caveats or conditions.” Consider:
An investment in our securities involves significant risks. Investors should carefully consider the risks described below, the other information described elsewhere in this document before making an investment decision with respect to our securities. If any of the following or other risks occur, our business, prospects, financial condition, financial performance and cash flows could be materially adversely impacted. In that case, our ability to pay dividends to holders of our shares could be adversely affected, the trading price of our securities could decline, and investors could lose all or part of their investment in such securities.
It is generally this type of risk disclosure that is also included in forward-looking information safe harbours to identify “material risk factors that could cause actual results to differ materially from the forward-looking information.”

The word “risk” appears 21 times in the form requirements for Management’s Discussion and Analysis (MD&A) under Form 51-102F1, including concerning specific enumerated matters and, more generally, as follows:
“...discuss important trends and risks that have affected the financial statements, and trends and risks that are reasonably likely to affect them in the future.”
Risk disclosure in an MD&A should discuss mitigating measures taken by an issuer to reduce the impact of the risk on the financial statements and the likelihood of the risk occurring or in lessening the impact of a risk, should it be realized. Such measures may not only have an impact on expected future financial results, but also carry with them current costs to the issuer. Consider:
We are actively assessing and responding, where possible, to the effects of the COVID-19 pandemic on employees, customers, suppliers and service providers, and evaluating governmental actions being taken to curtail its spread. [We have successfully adopted a mandatory work-from-home program and as substantially all of our day-to-day activities can be fully performed by personnel working remotely, we are able to remain fully operational during this period. <OR> At our facilities that continue to operate, in accordance with applicable laws, we are taking steps to safeguard employees through enhanced administrative controls, employee monitoring strategies, more rigorous cleaning practices, as well as physical distancing and the availability of personal protective equipment in certain circumstances.] We are also taking measures to manage costs, including a reduction of operating expenses and the exploration of applicable government programs.
In fact, in uncertain and unprecedented times such as these, it may be appropriate to focus more on the current efforts being taken by the issuer to mitigate the impact of the COVID-19 pandemic on its operations and financial condition and its outlook than on the historical information that would more typically be the focus of MD&A and earnings releases. This was summed up nicely in a recent public statement issued by the chairman of the Securities and Exchange Commission in the United States that, while not binding on issuers whose primary disclosure documents are based on Canadian requirements, it is nonetheless informative:
“Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”

While many issuers may already have broad risk factor disclosure concerning unexpected, catastrophic events, consideration should be given to expanding the list of such occurrences to add pandemics. Consider:
A catastrophic event where we have our operations, offices or manufacturing facilities, such as an earthquake, tsunami, flood, typhoon, fire, power disruption or other natural or manmade disaster, computer virus, cyber attack, terrorist attack, war, riot, civil unrest or other conflict, or an outbreak of a public health crisis including epidemics, pandemics or outbreaks of new infectious diseases or viruses, as well as related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets…
However, such risk factor disclosure is likely to provide insufficient coverage, on its own, in respect of an identifiable risk, the occurrence of which is ongoing rather than just one among many theoretical, potentially significant “tail events.” Therefore, additional specific COVID-19 pandemic related risk factors and disclosure are recommended, even if an issuer already has existing risk factors in its disclosure documents which generally covers pandemics.

In addition to adopting one of more new risk factors addressing COVID-19 directly, issuers should also consider the impact of COVID-19 on their existing risk factors to assess whether these risks are materially heightened in the current environment and, if so, consider specifically highlighting this fact. For example, how are government directives impacting on regulatory regimes, including in different geographies? How is working from home impacting on internal controls? Consider:
Depending on the duration and severity of the current COVID-19 pandemic, it may also have the effect of heightening many of the other risks described in our other disclosure documents, such as risks relating to the successful completion of our growth and expansion projects, including our ability to obtain regulatory approvals on the expected timelines or at all; our ability to maintain our credit ratings; our ability to maintain adequate internal controls in the event that our employees are restricted from accessing our regular offices for a significant period of time; restricted access to capital and increased borrowing costs; our ability to pay dividends and service obligations under its debt securities and other debt obligations; and complying with the covenants contained in the agreements that govern our existing indebtedness.
Typically, disclosure concerning risks is forward-looking since the risk has not occurred. However, it is undeniable that COVID-19 has had some impact on all participants in Canadian capital markets. This is felt directly due to the decrease in the demand for certain products or the ability of such companies to produce or manufacture and sell their products or provide their services, or indirectly due to impacts on financial markets or the availability of labour, capital and supplies. Accordingly, COVID-19 risk disclosure should not just refer to potential impacts of current conditions but also the increasing impacts of such conditions becoming more severe, broadening, lasting longer, etc. Consider:
The transmission of COVID-19 and efforts to contain its spread have recently resulted in international, national and local border closings, travel restrictions, significant disruptions to business operations, supply chains and customer activity and demand, service cancellations, reductions and other changes, and quarantines, as well as considerable general concern and uncertainty.
The impacts of the COVID-19 crisis that may have an effect on us include: a further decrease in short-term and/or long-term demand and/or pricing for our products; further reductions in production levels; further increased costs resulting from our efforts to mitigate the impact of COVID-19; deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in a higher rate of losses on our accounts receivable due to credit defaults; further disruptions to our supply chain; impairments and/or write-downs of assets; and adverse impacts on our information technology systems and our internal control systems as a result of the need to increase remote work arrangements.
A material adverse effect on our employees, customers, suppliers and/or logistics providers could have a material adverse effect on us.

It is important for issuers to give investors and potential investors an idea of the expected impact of COVID-19 on their business and financial results. For example, manufacturers or energy producers should include discussion of production facilities that are not operating or only operating at a fraction of full capacity, or that may have to cease operations in the event of an outbreak at the facility. Retailers should describe their bricks-and-mortar and online capabilities and results, while landlords should explain impacts on rent collections. Oil and gas producers, who have had demand for their products significantly decreased by the COVID-19 pandemic, should explain the impact that decreased prices over the duration of the pandemic and potential production curtailments may have on their production and sales revenues. And nearly all issuers may need to include disclosure of labour impacts and the availability of cash resources, including the ability to draw down on credit facilities. This may initially be a difficult task; however the market’s expectation is that greater certainty be provided as matters develop, come into focus and solidify. If the impacts cannot be reasonably estimated with any precision, disclosure should be drafted to say so rather than staying silent. Consider:
Significant uncertainty remains with respect to the future impact of COVID-19 on our business.

As a result, while we expect that our financial results for 2020 will be negatively impacted by continued COVID-19-related disruptions, we cannot currently estimate the severity of any such impact, which may be material.

The overall severity and duration of COVID-19-related adverse impacts on our business will depend on future developments which cannot currently be predicted, including directives of government and public health authorities, the speed at which our suppliers and logistics providers can return to full production, the status of labour availability, the ability to staff our operations and facilities, and the impact of supplier prioritization of backlog. Even after the COVID-19 outbreak has subsided, we may continue to experience material adverse impacts to our businesses as a result of its global economic impact, including any related recession, as well as lingering impacts on demand for or oversupply of our products, our suppliers, third-party service providers and/or customers.

The impact of COVID-19 on public companies is wide-spread and deep, but the ultimate extent remains unknown at this time. Issuers should consider the matters discussed in this bulletin, but are cautioned that context is key; boilerplate disclosure copied from a source such as a bulletin or another issuer may not be appropriate for an issuer or even misleading, providing it with imperfect protection and risking exposure to claims and losses for misrepresentations.

For further information, please contact:

Matthew Merkley         416-863-3328
Jeff Bakker                  403-860-1914
Jeremy Ozier              416-863-5824

or any member of our Capital Markets group.

Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.