COVID-19: How should EU listed companies think about their ongoing disclosure obligations?

In light of the novel coronavirus COVID-19 outbreak, public companies have to think about their disclosure obligations as listed issuers under the European/UK disclosure rules. London-based partner Raj S. Panasar outlines a brief Q&A that deals with the fundamentals and answers those key questions.

Are there any dispensations that companies can make use of in light of what is in essence an act of God with an impact on a global level?

No. Fundamentally, companies continue to be obliged to disclose inside information to the public as soon as possible through the correct regulatory channels. The primary question is whether the company is in possession of information which, if made public, would have a significant impact on the price of the relevant securities. In addition, companies, for example those listed in London, are required to have the systems and controls in place to ensure that they have a proper handle on information that could be price sensitive.

My share price has already fallen quite significantly. Does this dispense with my obligations?

No. Many companies would naturally consider their share price to have already been affected by the coronavirus situation. After all, the existence of the coronavirus and its impact on various sectors appears to be pretty well-known and stock markets all around the world have been battered in light of that knowledge. However, this does not dispense with public companies’ obligations. It is conceivable that a company’s share price has fallen in line with the rest of the sector, but it could be that that company is in fact less susceptible to the impact of coronavirus than the market understands, for example because of its existing inventory levels or because of the diversity of its supply chain. In this situation, companies tempted to believe that they don’t need to make an announcement because their share price is likely to rise if they made an announcement need to reconsider. The obligation to disclose price sensitive information captures upward price changes as well as downward price changes. At the same time, if the company is more susceptible to the impact of coronavirus, for example, because of the specifics of contractual arrangements they have entered into, that may also give rise to a disclosure obligation.

So what questions should I be considering in the context of my business to determine whether I should make an announcement?

The sorts of questions businesses should be considering would be directed at assessing the actual and potential impact of coronavirus, and the reaction to it, on the company’s operations, business, financial performance and prospects, including the next financial period for which the company will be publishing results. These questions might include the following as a basic starting point, but the company will need to consider an exhaustive list tailored to its business:

  • Is the company experiencing, or does it anticipate experiencing, a material impact on sales, taking into account the different channels for sales to be made, including online, if any? Is the level of impact in line with market expectations?
  • What impact is the company experiencing, or does it anticipate experiencing, with respect to cash flow and working capital management? Is there a potential impact on the company’s viability that the market has not appreciated?
  • Is the company experiencing, or does it anticipate experiencing, any material supply chain impact? What alternatives are available to the company for supply? Is the level of impact in line with market expectations?
  • What is the company’s exposure to material counterparties that are being impacted or anticipate being impacted by coronavirus? This would include customers, suppliers, distributors, creditors, and business partners. Impact on shareholders should also be considered. Is there a “knock-on” impact that could be material that the market is not aware of?
  • What is the company’s exposure to jurisdictions suffering from coronavirus? Does the market have sufficient understanding of the company’s geographical segmentation to make its own determination in this regard?
  • To what extent does the company have personnel exposure in respect of coronavirus?  What key person exposure does the company have and what can it do to mitigate the impact on them?
  • Is the company able to manage the coronavirus risk in a way that the market expects and at the same time comply with its legal obligations, for example its obligations under GDPR? 
  • What are the company’s contingency plans in the event of a material impact in any of these respects?
  • Is the company subject to any special risks or mitigants of which the market is not aware?

The key will be to reach, and then maintain, a proper understanding of the impact of coronavirus on the company’s business and consider to what extent, if that information were made public, it would impact the price of its securities, either upward or downward.

How should companies offering securities think about their disclosure obligations?

The fundamental obligations — to include all information in a prospectus that is material to an investment decision, and to ensure that that information is accurate in all material respects — remain. The approach a company should take is very similar to the approach discussed above. First, do the due diligence. Second, disclose the material risks and strengths revealed by that due diligence. The risks should be drafted so that they are specific to the issuer. Boilerplate risks about coronavirus are unlikely to pass muster with a reviewing European regulator, particularly under the new Prospectus Regulation regime. Advisers helping companies raise money through offerings of securities will no doubt have coronavirus risk at the forefront of their minds when conducting their due diligence to help companies. Companies should try to stay ahead of this to make the process as smooth as possible in light of a fast-changing environment. Companies will also need to be alert the interrelationship between the prospectus disclosure and the ability of underwriters to terminate their underwriting obligations under typical underwriting agreements.



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