As we begin the third year of the COVID-19 pandemic, the inevitable question arises with each reporting cycle: “Should we keep our COVID-19 pandemic risk factor and, if so, how should we update it?”
In response to the onset of the pandemic and the Staff’s guidance, many companies have included a separate, detailed risk factor about the pandemic in their periodic reports and registration statements. The risk factor recounts the various risks for companies arising from the pandemic and the measures that have been taken to prevent the spread of the COVID-19 virus. But as with many of the other complications arising from the pandemic, magical thinking pushes us to want to put COVID-19 into the rearview mirror, even in the disclosure realm.
While the outcome depends very much on the individual circumstances of the particular company, my general advice is that it is still too early to get rid of the COVID-19 risk factor in its entirety. Undoubtedly, there are elements of the disclosure that can be updated from period-to-period as public health measures evolve and the risk profile changes, but unfortunately we do not seem to be past a number of key risks arising from the pandemic, even though we may be experiencing more “normal” in our daily lives. For example, companies with operations in China or with elements of business dependent on goods and service from China are still at risk from the impact of lockdowns (as evidenced by reports that residents in Shanghai were being fenced into their apartment buildings over the weekend), while that risk now seems to be more remote in the United States. At the same time, risk factor disclosure about the risks associated with vaccine mandates may now be obsolete as the government’s priorities appear to have shifted on that front (at least for now).
One further consideration is the disclosure of risks arising from supply chain problems, which in the earlier days of the pandemic were very much intertwined with the impact of the pandemic and the resulting public health measures. Today, supply chain risks have taken on a life of their own apart from the pandemic, and as a result those risks in many cases warrant their own separate risk factor discussion. We now have a wide variety of factors contributing to the supply chain problems, including, for example, the impact of the pandemic and public health measures worldwide, economic disruption, rising prices, labor shortages, materials shortages and the war in Ukraine. For those companies with operations impacted by the supply chain issues, a frequently updated, dedicated risk factor is likely a good idea given the focus of investors on this area.
The bottom line? Even though you are not required to wear a mask on a plane or at Starbucks, the pandemic is not over and certain risks remain a reality.
— Dave Lynn, TheCorporateCounsel.net April 25, 2022