The incidence and effect of novel coronavirus and COVID-19 (“Coronavirus”) has undoubtedly reached concerning proportions, already at a great cost to human life. But with an estimated cost to global equity markets of approximately USD7 trillion as of 1 March since 19 February 2020, it is also leading to great financial loss. Associate Matt Caples and Senior Paralegal Maria Tayo explore this.
Fears surrounding the real world difficulties that Coronavirus might cause to the operation of business, and the consequential effect on profit, are mounting. Those fears will be borne out in some but not all instances as businesses find their supply chains disrupted and ability to perform obligations hindered.
Whilst many are focussing on the risks of failure to perform at supply chain level between contracting parties with an emphasis on force majeure and frustration, listed companies need to remain conscious of their reporting obligations whilst investors should be aware of access to recourse when listed companies fall short of required standards. Below we consider more generally the consequences of failure by a listed company to disclose information relating to the impact Coronavirus may have on it and perhaps as importantly a failure to do so promptly.
Reporting obligations for listed companies apply throughout its listing but generally speaking can be separated between those at the time of offering and then on an ongoing basis.
For companies at the offering stages
What effect coronavirus might have on the company presently or in the future may now be information which ought to be included in offering documents. This will be largely fact specific. Offering documents often do set out generic warnings noting that operations now or in the future may be adversely affected by risks outside the company’s control such as epidemics. In some cases, offering documents are now making specific reference to the Coronavirus outbreak or quarantine restrictions.
For companies on an ongoing basis
By way of example:
- There is an obligation to prepare and circulate audited annual accounts (Companies Act 2006, Part 15), and in preparing the same to take all such steps as are reasonably open to it to obtain information reasonably required by auditors from overseas subsidiaries.
- The London Stock Exchange imposes obligations of internal audit on listed companies which are maintained through the application of adequate financial position and prospects procedures.
- Once a listed company has identified inside information which directly concerns the issuer, it is then obliged to inform the public as soon as possible per Article 17(1) of the Market Abuse Regulation and DTR 2 of the FCA Handbook.
With such obligations in mind, the Financial Reporting Council on 17 February 2020 made an announcement in respect of Coronavirus encouraging companies to “consider carefully what disclosures they might need to include in their year-end accounts relating to these events.”
Since the first on 28 January, there have now been 267 regulatory disclosures published by the London Stock Exchange which make reference to the impact of Coronavirus. Whilst in some it is the sole focus of the disclosure in question, in others reference is made in passing in terms similar to the generic warning set out above.
What remains to be seen is whether these warnings by passing comment are sufficient; not least for companies more exposed to Coronavirus related business risk than most, for example those most dependent on supply chains, services rendered or substantial operations in the worst effected regions.
If listed companies, and therefore investors, find themselves suffering significantly financially either directly or indirectly as a result of Coronavirus, a company’s disclosures relating to Coronavirus risk will be scrutinised.
If: (a) inadequate disclosures were made or (b) adequate disclosures were (i) omitted all together or (ii) made later than they ought to have been, investors may find recourse from the following sections of Financial Services and Markets Act 2000 (“FSMA”):
- S.90 for losses arising from statements or omissions made in listing particulars or prospectuses.
- S.90A(a) for losses arising from misleading statements or dishonest omissions in certain published information relating to securities including annual and half yearly reports and management statements to be made public.
- S.90A(b) for losses arising from a dishonest delay in publishing such information.
Chaos of all kinds leads to uncertainty and litigation. The chaos generated by Coronavirus is no different and what we are now experiencing is just another manifestation of the same phenomenon. The only certainty in respect of Coronavirus is that its impact remains uncertain.
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