As the situation in the UK and around the world evolves rapidly, many businesses will be focussed on the immediate and practical steps that they need to take at an operational level. Amid that activity, directors and in-house lawyers should not lose sight of the obligations and implications in relation to disclosure obligations, corporate transactions and directors' duties.
Listed company disclosure obligations
For publicly traded companies, boards will need to be mindful of their responsibilities to disclose unpublished price sensitive (or “inside”) information under the EU Market Abuse Regulation, and, for AIM companies, broadly parallel obligations under the AIM Rules for Companies. Relevant inside information may include adverse changes in a company’s trading performance (or expectations of performance) arising from the specific impacts on an issuer of the coronavirus outbreak (such as disruption of supply chains or suppression of customer demand), even where the root cause of the issue is publicly known. For example, a number of listed airlines have updated the market on the impact of the outbreak on passenger numbers.
It is not only listed companies that need to consider their disclosure obligations. The Financial Reporting Council, the body responsible for the oversight of corporate reporting in the UK, has recently written to companies reminding them of the need to make appropriate meaningful disclosures in annual reports relating to the disclosure of principal risks and uncertainties affecting a company’s business model.
These considerations apply to all companies required to prepare a strategic report (both listed and unlisted) under the UK financial reporting framework. In addition, the FRC has reminded boards that they will need to consider whether the impact of coronavirus will necessitate specific balance sheets adjustments (including impairments), or post-balance sheet event disclosures, depending on when the relevant year-end falls.
Additionally, listed companies subject to the UK Corporate Governance Code should be mindful of relevant Code provisions, in particular the need for issuers to describe in their annual report how opportunities and risks to the future success of the business have been considered and addressed.
Parties to ongoing M&A transactions will need to consider how to approach coronavirus risks. For transactions currently in the gap between exchange and completion, any termination rights (including material adverse change (MAC) clauses) will need to be reviewed. Many English-style MACs will likely exclude the impact of macroeconomic events (such as coronavirus) which affect the market generally, but this may vary, particularly for cross-border transactions.
For transactions in the pre-exchange phase, bespoke risk allocation provisions (including termination rights) may be necessary to cater for material coronavirus impacts on the target. However, the reality is that, certainly for industries with particular exposure to coronavirus impacts, both buyers and sellers are likely to choose to defer transactions, given the present uncertainty.
More broadly, general economic uncertainty tends to have a chilling effect on the M&A market and so we expect transaction volumes (at least in the short term) to reduce. Equally, restrictions on travel may affect the deal pipeline going forward – sellers at the marketing phase of a transaction often value face-to-face meetings with potential buyers to enable them to clearly communicate investment opportunities and build relationships with potential counterparties.
At present we are not seeing current transactions affected by general coronavirus fallout, but investors will be closely assessing investee business models for susceptibility to the knock-on effects of coronavirus.
Should the crisis continue to deepen, we expect PE and VC investment activity to potentially reduce in the short term, with general macroeconomic uncertainty weighing on investors.
Equity capital markets
Current volatility in the capital markets will result in primary (and, to a lesser extent, secondary) fundraisings being postponed.
Directors’ statutory duties
Company directors will need to carefully consider how to address coronavirus risks within their own businesses. In addition to specific regulatory obligations under health and safety law, the proper discharge of a director’s statutory duty under section 172 Companies Act 2006 to promote the success of the company requires the director to consider, amongst other factors, the long-term impact of decision making and the interests of employees.
This is almost certain to align with generally prudent decision making during the current coronavirus outbreak – for example electing to restrict foreign travel by employees. While this will have a short-term adverse impact, it is likely to promote the longer-term success of the company through safeguarding the workforce, reducing the likelihood of having to close business premises in less affected areas, and avoiding adverse publicity.
Managing a deterioration in financial condition
Companies experiencing a deterioration in financial condition as a result of the outbreak will need to consider the impact on existing debt arrangements, including the ability to meet scheduled repayments and covenant tests (usually assessed quarterly) and potentially enter into a dialogue with lenders to restructure payments or flex covenant testing in the short term while solutions are explored. Deterioration in financial condition and/or stress on debt repayment is also potentially disclosable by listed companies as inside information.