Just in Time for Year-End — A COVID-19 Disclosure Enforcement Action
By: George Wilson
In its first COVID-19 disclosure enforcement case, on December 4, 2020, the SEC announced a settled administrative proceeding against The Cheesecake Factory, Inc.
Underlying the case is a March 23, 2020 Item 7.01 Form 8-K. In this Form 8-K, The Cheesecake Factory withdrew its financial guidance for 2020. The accompanying five-paragraph press release included this incremental disclosure:
“All of the Company’s restaurants have transitioned to an off-premise operating model as required by state and local officials. The Cheesecake Factory restaurants have a long-standing business in the off-premise channel, with historical sales volumes approaching the size of many stand-alone restaurants, which is enabling the Company’s restaurants to operate sustainably at present under this model.”
Before the March 23 Form 8-K was furnished, The Cheesecake Factory initiated efforts to conserve and raise cash. On March 18, 2020, as part of its efforts to reduce cash outflows, the company sent letters to its landlords informing them that it would not pay April 2020 restaurant rents. In its capital raising efforts, again before the March 23 Form 8-K was filed, the company disclosed to potential private equity investors and lenders that it was losing $6 million in cash each week and estimated its cash and other sources of liquidity would last approximately 16 weeks.
The SEC’s Order found that neither of these facts was disclosed to the public on a timely basis. Two days after the March 23, 2020 Form 8-K, the letters to landlords were reported in the press. On March 25, 2020, two days after the newspaper articles, the company furnished a Form 8-K disclosing that it was not planning to pay April rent and was engaged in discussions with its landlords. Later, on April 20, 2020, the company announced a $200 million subscription agreement with a private investor for the sale of convertible preferred stock.
The message in this case is clear — be forthright and complete as you discuss the impact of COVID-19 on your business this year-end. To support this process, the enforcement Press Release includes a link to this April 8, 2020 Statement by Chairman Clayton and CorpFin Director Hinman about the importance of disclosure in this period of disruption and uncertainty.
As always, your thoughts and comments are welcome!