We are now in the third month of the COVID-19 outbreak and are beginning to see a number of NZX listed companies providing information in an effort to keep investors informed about material developments associated with COVID-19. In some cases this has involved companies revising or withdrawing their previously issued earnings guidance.
When must companies update the market?
The obligation to disclose material information immediately is a fundamental part of being listed on the NZX. However, this obligation can be difficult to discharge in practice when complicated and uncertain fact scenarios arise, such as those presented by the COVID-19 outbreak. This difficulty is compounded given that continuous disclosure issues are necessarily being assessed in “real time", without a reasonable period to reflect, re-calculate and re-draft.
Generally, bad news affecting a company needs to be announced immediately if it would be expected to have a material effect on its share price (i.e., the news is “material information" and is not covered by the various disclosure exceptions). However, the news in question needs to relate to the particular company, or its shares, rather than companies or shares generally.
COVID-19 is a global phenomenon, as is the period of uncertainty and market volatility that is associated with it. Of themselves, these are not disclosable events for NZX listed companies. Rather, it is the effect of COVID-19 on the listed company and its financial position, performance and prospects, that is relevant and which should be assessed to determine whether disclosure is required. This assessment will involve a company casting the net widely to assess the anticipated effects on its business, including those of a more direct nature, such as the effects on its own workforce (and its productivity), systems, and the impact on consumer demand for its products and services; and also more indirect impacts, such as the impact and resilience of the key components in its inbound and outbound supply chains.
These assessments are difficult given the high level of uncertainty regarding the extent and duration of the COVID-19 outbreak. Unfortunately, the continuous disclosure rules do not allow listed companies to delay making announcements until expected outcomes are certain. While there is an exception to the disclosure obligations if the information is “…matters of supposition or is insufficiently definite…” in the NZX Listing Rules, that exception would not relieve disclosure if the core facts that would be expected to materially impact the company’s share price were known to a reasonable degree, even though all relevant information is not known to that standard. This can lead to difficult drafting exercises and the need for Boards to update disclosures regularly as circumstances change1. Boards are also conscious that painting a “doomsday" scenario (which may be seen to insulate them from criticism if things worsen), is not constructive or in the best interests of shareholders. A balanced approach is therefore needed. Achieving that balance is where the judgment of experienced directors (with good support from capable management teams and effective internal reporting systems) and advisers is most important.
The NZX will now expect that all listed companies are assessing the impact of COVID-19 on their business, particularly where they have announced future performance guidance. The NZX will expect companies to disclose immediately if their assessment is that there is a reasonable expectation that their actual results will differ from guidance and, if such difference (and all relevant circumstances) was announced to the market, the price of the company's shares would be materially impacted.
Review compliance procedures
Most companies will already have in place appropriate systems and processes to enable release of material information after they become aware of it. However, now would be a good time to test the operation of these systems and processes, to ensure that they are “alive" to sudden or unexpected impacts related to COVID-19 that may arise. In particular, given the wide range of impacts the virus may have, managers and employees may need some reminding to be particularly alert to new impacts they haven't seen before. This is particularly important for Boards now that the NZX listing rules include a constructive knowledge test, whereby a continuous disclosure obligation will arise where a director or senior manager has, or ought reasonably to have, come into possession of material information in the performance of their duties.
As we have said before, written policies and procedures can be in place, but these will be ineffective without a culture which encourages honest and open communication and “reporting up" of sometimes negative news.
Companies will also need to think about whether the COVID-19 outbreak will impact their financial reporting timetables. Delays in financial year-end closing processes and additional work and audit procedures necessitated by the impact of the outbreak may create additional challenges in meeting the reporting timetable.
In addition, Boards will need to consider whether the impact of COVID-19 will necessitate specific balance sheet adjustments (including impairments), or post-balance sheet event disclosures, depending on when the relevant year-end falls. Boards will also need to be mindful of the NZX Corporate Governance Code provisions, in particular the need for companies to describe in their annual report the company's “strategy, and associated risks and opportunities, and explain the board's role in addressing and overseeing strategy and the management of risks and opportunities".
Implications for annual shareholders meetings
With the widely publicised postponement and some cancellations of various public events arising from the outbreak of COVID-19, listed companies are beginning to query whether this will also bring disruption to companies' annual shareholders meetings (ASMs).
Companies could consider whether there is any flexibility on their meeting timing, in light of statutory timing requirements. There may be merit in making full use of the full period available to provide as much time as possible for the COVID-19 situation to be resolved before the scheduled meeting date.
There are ways of allowing for meetings to be held, but not requiring everyone to gather in a public meeting space. In many cases, there is no longer a requirement for an ASM to be held as a physical event at all. ASMs can often be held physically, virtually or by a combination of both (a hybrid meeting). Over the last few years we have seen an increasing number of companies adopt a hybrid meeting approach, so practice is becoming more established. Hybrid meetings can allow investors to watch presentations, ask questions and vote from the comfort (and safety) of their own computer. There are, however, some additional logistical and cost considerations, so listed companies should engage with their registry provider early to understand the implications of holding a virtual meeting.
In extreme cases, it may be necessary to defer holding an ASM after the notice has been sent out. This would generally involve opening the meeting on the date and time it is called, but then the Chair adjourning to a later date (or date to be advised), and then closing the meeting. If this was proposed, the company would put out an NZX announcement confirming this intention in advance of the meeting.
How can we help?
If you would like assistance with any of the matters discussed in this update, or any broader issues concerning the impact of COVID-19, please speak to the contacts listed or your usual Bell Gully adviser.
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1 The NZX Guidance Note on Continuous Disclosure acknowledges that there can be situations where a company may receive information over time, and continuous disclosure obligations can only ever be tested against the information that a company has at a given moment in time.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.