Navigating the impact of COVID-19
How to manage corporate governance and securities issues
The impact of the COVID-19 outbreak on the global economy has had significant repercussions for many companies, including those participating in the capital markets.
Companies should expect an increased emphasis on good corporate governance as they deal with the pandemic and consequent market volatility.
In addition, companies with listed securities, whether equity or debt, will need to understand how the crisis could impact their ability to comply with the ongoing public disclosure, financial reporting and other obligations to which they are subject.
Looking further ahead, such issuers may also wish to explore how the capital markets could play a role in the recapitalisation and refinancing of their business.
Looking ahead - recapitalisation and refinancing
As the crisis evolves, companies with ongoing finance requirements may wish to utilise the debt and equity capital markets, both public and private. In the short term, government schemes may be available to repurchase debt, while future needs may require the issue of equity (to existing or new investors) or new debt (for example through a standalone bond or under an issuance programme).
In jurisdictions with pre-emption rights, placings of shares to a limited pool of investors on a non-pre-emptive basis may be attractive to companies looking to recapitalise quickly.
Although typically subject to size and discount restrictions, placings usually do not require a formal prospectus or similar disclosure document. As such they can raise capital on an expedited timetable, allowing companies to make use of windows of opportunity in volatile markets.
While investor sentiment generally prefers non-pre-emptive offers to be limited in size to minimise dilution to existing shareholdings, expectations may be revised during the crisis as investors acknowledge companies require greater flexibility to raise capital quickly.
Larger equity offerings provide rights of pre-emption to existing shareholders and are accordingly subject to fewer (or no) size and discount restrictions. They do typically require a prospectus or similar disclosure document to reach an extended shareholder base and operate on a longer timetable, making them more appropriate for companies with significant funding needs.
A key challenge for companies making such an offer will be ensuring the accuracy of required disclosures in a fast-changing environment.
Ongoing public disclosure obligations
Companies with listed securities are commonly required to disclose price sensitive inside information to the market as soon as possible, subject only to limited rights to delay.
Regulators have emphasised the importance of meeting these disclosure obligations in a timely fashion, so that markets remain fully informed and able to function.
The global pandemic and policy responses to it may alter the nature of information that is material to the prospects of a business. Companies should continue to assess carefully what information constitutes inside information and be aware that their own operational response to COVID-19 may meet the requirements for disclosure.
In addition, companies with listed securities entering into discussions with third parties must ensure that selective disclosure of sensitive information is not made prior to public notification.
It is important that in this fast-changing environment the established procedures for evaluating and dealing with inside information are followed.
Issuers should ensure that internal processes are robust and able to function without, for example, in-person disclosure committee meetings. Disclosure committees should consider holding regular calls to assess the impact of COVID-19 and market volatility on the business, and to consider whether any disclosures under relevant regulations are required.
In these fast-moving times, companies should be aware that disclosures may subsequently prove incomplete or inaccurate and, as a result, give rise to securities claims.
Particular care should be taken with forward-looking statements and, where possible, management should clearly flag opinion statements, which are usually afforded protections not given to pure statements of fact.
Significant developments in the COVID-19 outbreak coincided with reporting periods for a number of companies, requiring them to make judgements about what disclosures were necessary to address the potential impact of the pandemic on their operations.
Companies with a 31 December year-end would typically expect to publish their annual financial report in the coming months, and the outbreak has created a variety of challenges for this process.
All companies will need to ensure the disclosure in their annual report provides an accurate picture of their operations and prospects at the date of publication. Disclosure will require fine judgements to be made to ensure up-to-date information is provided on the impact of the outbreak on operations, potentially across multiple jurisdictions at different stages of their response.
Social distancing and self-isolation requirements have reduced capacity in the finance teams of many groups at a key point in the reporting cycle, with similar constraints applicable to external audit teams. Auditors may be unable to complete elements of their work that involve physical inspection. Early engagement will be key to ensuring processes can move forward with minimal delay.
Listing regimes typically impose shorter deadlines for the publication of the financial reports of listed companies than apply to unlisted companies. Companies failing to meet these deadlines would in normal circumstances expect their securities to be suspended pending publication of the relevant report, to ensure the market has all the information required to function correctly.
In a welcome move, some regulators have responded to the outbreak by moving to provide temporary relief to issuers, allowing additional time in which to finalise reports without the threat of suspension.
While listed companies typically seek to adhere to previously published timetables for investor communications, it is to be expected that the challenging circumstances arising from the pandemic will mitigate any undue market reaction where companies make use of extra time made available by regulators.
Companies should ensure that trading in their listed securities by directors, senior management and employees complies with relevant regulations and any internal securities policy.
Given the fast-moving nature of the situation, and the fact or perception that those seeking to deal may have access to information the market does not, it may be difficult to approve share dealings.
Where approval is given, dealing notifications are likely to be required under relevant regulation and these should be filed within the prescribed time frame.
The coronavirus pandemic is causing companies of all types to re-think and re-plan many aspects of their business and operations.
As these decisions are made, directors should remain mindful of their corporate law obligations, including those that require promotion of the success of the company for the benefit of its members as a whole.
Relevant factors in decision-making may include the likely consequences of any decision in the long-term, the interests of the company’s employees and the need to act fairly as between members of the company.
Should a company encounter financial difficulties, directors must ensure they take a broader account of creditors’ interests. It may be appropriate to seek advice in such circumstances, including with respect to the impact of corporate actions on the individual duties of each director.
Where companies are required to hold an annual meeting of shareholders during the current crisis, a physical meeting may not be compatible with social distancing or quarantine requirements.
Options available to companies will depend on the legal and constitutional framework under which they are operating, as well as practical issues such as the availability and robustness of technological solutions.
Early engagement with advisers will allow companies to keep up-to-date with any regulatory alleviations and evolving best practice.
Directors should ensure they have good oversight of the impact of the crisis on the business and the steps being taken to understand and mitigate such impact.
This may include the changing cash and funding needs of the business, access to financing, demand for products and services, supply chain security, defence planning and interaction with regulators and pension trustees.
Sustainability remains key for stakeholders.
In challenging times, directors should seek to demonstrate that they can take the company forward sustainably, with a clear focus on long term objectives.
Safety and wellbeing of stakeholders
Given the public health issues involved in the current situation, there will be increased focus on directors’ engagement with, and oversight of the safety and wellbeing of, the company’s employees and its other stakeholders.
Directors should ensure the company has an effective communication strategy in place.
Corporate governance is increasingly focused on risk assessment.
- carry out a robust assessment of the company’s emerging and principal risks and monitor the company’s risk management and internal control systems; and
- consider the extent to which its risk assessment and systems and controls should be updated in light of the current environment.
Issuers of debt securities should confirm whether any covenants contained in the terms and conditions of those securities are a concern in light of the ongoing crisis.
Although bond terms and conditions typically operate on an incurrence basis, awareness will be key as corporates look to refinance and recapitalise.
Issuers may also be subject to contractual ongoing obligations, for example to provide syndicate banks with financial reports that may be delayed.
Stock exchanges often impose timetables on the payment of dividends, for example requiring payment within a defined period of the record date that determines eligible holders. Issuers wishing to defer payment should confirm whether alleviations have been put in place for the period of the outbreak.
In these unusual times, companies with listed securities may find that administrative aspects of their ongoing obligations can also cause unexpected difficulties.
For example, listing regimes sometimes require documents of interest to shareholders to be made physically available for inspection prior to a shareholder vote. Such requirements may be incompatible with social distancing measures that have led many businesses to close their premises.
Early engagement with advisers and, where appropriate, discussions with regulators will help avoid last minute hurdles that might otherwise jeopardise corporate actions.
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If you would like to discuss these issues in more detail, please speak to your usual Freshfields contact or one of the lawyers listed below who can direct your query.
James Kennedy Partner
Ali Sallaway Partner
Dimitri Lecat Partner
Georgia Dawson Senior Partner
Grace Huang Partner
Julian Makin Partner
Pamela L. Marcogliese Head of US Transactions
New York, Silicon Valley
Dr. Stephan Pachinger Partner
Vienna, Frankfurt am Main