Addressing the impacts of COVID-19 under continuous disclosure obligations is incredibly challenging. Consider that since the market closed on Friday, the Federal government stopped “non-essential” gatherings of 500 people or more, France and Spain entered an Italy-style shutdown, New Zealand then Australia introduced strict traveller quarantines, the US banned flights from the UK and then apparently China continued lifting its restrictions. All this since 4pm Friday.
During this period of deep uncertainty and with everything they have going on operationally, listed entities need to confront the challenge of managing their obligation to keep the market informed of price sensitive information arising from the impact of this event.
And let there be no doubt that the corporate regulator is watching. ASIC Chairman, James Shipton, has signalled that the corporate regulator is “monitoring corporate contingency plans in case the virus spreads locally and is checking that listed companies are disclosing to investors any material impact on their profits.”
COVID-19 and disclosure “concerning” the entity
To meet that obligation, every listed entity needs to put themselves into a position to disclose to ASX any implications arising from the spread of COVID-19 and government and private actions taken in response, which a reasonable person would expect to have a material effect on the price or value of their securities (subject to the carve outs)
This requires each entity to carefully consider the impact in a dynamic way, ensuring that constantly changing circumstances are considered and analysis updated. Many of our clients are undertaking “scenario analysis” to consider the potential differing effects of the disease at various levels of severity (including “worst case” scenarios).
Potential impacts include:
- supply chain disruptions and other major operational issues, including delays and counterparty risk;
- changes in consumption and demand for products and services;
- implications for its workforce;
- impacts to material contracts (including whether the entity or its counterparties may be able to rely on “force majeure” provisions to escape liability for non-performance), insurance and financing arrangements; and
- the impact of government intervention and new regulatory obligations (for example, quarantining and restrictions on public gatherings) and even changes in private behaviour (i.e. voluntary self-confinement to mitigate the risks of transmission).
The issue is particularly acute for entities that have published earnings guidance. Those entities each must consider whether the impacts of the crisis adversely affect its ability to meet that guidance. ASX has recently updated Guidance Note 8 to say that entities in the ASX300 or that normally have very stable or predictable earnings should consider applying a materiality threshold closer to 5% than to 10% in determining whether to announce an “earnings surprise”.
In addition, listed entities with limited cash reserves and limited access to existing debt financing also need to assess whether the crisis might adversely affect the business's ability to meet its operating and capital expenses, now and in the medium to long term. Inevitably this also requires consideration of how future expenditure plans can be modified, what alternative funding options are available (capacity in existing facilities? asset sales?) and even whether there is a prospect that the entity might need to raise additional capital (and if so, how soon). Entities who have suffered significant share price declines in this period of market volatility also need to take that into account in assessing the nature and extent of short-term funding options (where a capital raising is required). For example, the amount of capital that can be raised in an institutional placement will be dramatically reduced where share prices have fallen significantly (due to the 15%/25% cap imposed by Listing Rules 7.1/7.1A).
How do you think about such a volatile issue in the context of the exception to Listing Rule 3.1 for matters of supposition or insufficiently definite information?
Entities do not need to disclose information if it is insufficiently definite or is a matter of supposition (as it falls within an exception to Listing Rule 3.1).
However, in circumstances where an entity knows the impact will be material but cannot forecast the extent or magnitude of the impact at this time due to the uncertainty, the appropriate course (and one which many companies in the market have already taken) is to announce the broader picture immediately and signal that a further announcement will follow once the real impact is properly ascertained. A number of companies have done this by announcing that their guidance no longer holds, but they’re not currently in a position to give any updated guidance.
For entities that have secure balance sheets and a reasonable basis for considering that they will be able to weather the storm, this is an appropriate approach.
However, for those entities that are at risk of suffering a cash shortage, or who need to make material changes to their business plan to survive, more may be required. How much is said will depend on how certain it is that changes are needed, or new capital required; the level of certainty about what those changes or transactions look like, how long until they may need to be made and their expected impact on the entity and its securityholders.
Where to from here?
While the last few days have shown it is difficult to predict the effects of COVID-19, given the evolving situation, ASX-listed entities will need to remain proactive as new information arises to assess whether their continuous disclosure obligations are triggered and if so, what is needed to discharge them.
Entities cannot rely on the market pricing in the impact of these matters (even where substantial share price falls have already transpired). Although there will be a degree of sympathy shown (given the universally acknowledged difficulties of assessing the impact of the crisis), as usual things will be judged with 20:20 hindsight. Entities which misread the situation and don’t warn early enough may later be subject to scrutiny and potentially in extreme cases, adverse legal and regulatory action.