For obvious reasons, the finer points of the functioning and regulation of the UK's capital markets and corporate governance are not necessarily at the forefront of the minds of legislators and policy makers while addressing the COVID-19 pandemic, meaning that it is falling on market regulators and practitioners to find appropriate responses to the current challenges. Fundamentally, the existing framework of corporate law and capital markets regulation should be sufficiently robust to cope, but some changes to the pre-COVID 19 world are inevitable. And, while the situation remains fluid, themes are becoming clear from recent regulatory interventions and issuer behaviour. In the main, apart from recognising that personal interactions will be limited for the foreseeable future, the message – at least from a legal and regulatory perspective - is business as usual.
Issuer disclosure requirements
Both the Financial Conduct Authority (FCA) and the London Stock Exchange (in the case of AIM traded companies) have been at pains to remind issuers and their advisers that timely public disclosure of inside information remains key. No latitude will be given to issuers if they fail to comply with their obligations and share price fluctuations should not be used as a reason not to disclose material information.
Ensuring the quality of public information will be a challenge in rapidly changing markets, and continuing focus on underlying business trends as well as pre-existing public disclosures and guidance will be vital. Many issuers in sectors especially affected by COVID-19 have already made some quite specific public disclosures. These have covered business trends, liquidity, capital requirements and other steps being taken to maintain financial help.
As the economic impact of COVID-19 bites, more companies may face specific difficulties. In its "Inside AIM" notice published on 20 March 2020, the London Stock Exchange notes that where an AIM company requires more time to make fully compliant market disclosures, its nominated adviser should approach AIM Regulation to discuss whether a temporary suspension is required. If granted, such a temporary suspension would be for a limited period to enable the AIM company to make a fully compliant notification.
Although keen to ensure that discipline is maintained around corporate disclosures, the FCA has already taken steps to start to address the pressure that COVID-19 related measures are placing on audit resource and ensuring accurate and meaningful financial disclosures. In the first instance, the FCA has requested a moratorium on the issue of preliminary announcements of FY2019 results in advance of the full audited financial statements for at least the two weeks ending on the weekend of 5 and 6 April. The FCA has been careful to state that this is a request, not a requirement (and it is addressed to listed companies and not AIM companies), but it is being accompanied by audit firms considering a delay on the signing off of audit reports to ensure that COVID-19 related work is properly addressed, and the FCA may well take further steps.
It is a little early in the year for delays in the release of FY19 audited financial information to lead to UK statutory or regulatory concerns. But issuers should consider whether they have any other regulatory or contractual obligations to consider if release is delayed longer than in prior years. Further, a delay in releasing audited financial statements does not of itself permit the non-disclosure of any inside information that the financials may contain. Issuers should be very careful during this reporting season to ensure that proper consideration is given to the prompt disclosure of potential inside information that is identified during the preparation of their financial statements.
Perhaps the most visible impact of COVID-19 on corporate law will be on shareholder meetings, especially AGMs. While we are awaiting clarity on whether general meetings are essential public gatherings or not, health concerns have already led many issuers to decide that their 2020 AGM will be held purely to satisfy statutory and regulatory obligations, and not as a showpiece for investor engagement.
A key legal concern in relation to shareholder meetings is that, absent specific new regulation, most UK issuers will be in a position of having to hold a physical meeting if they are to be certain that the meeting is valid. But attendance at meetings will be actively discouraged, if not restricted, and proxy voting will be strongly recommended. The use of technology to facilitate meetings, including internet-based virtual attendance and conference calls, is being explored, but it is likely that many companies will choose to handle investor engagement through separate distance based means, instead of expanding means of non-physical attendance at statutory meetings.
Although market volatility means that it is a little early to see much activity, many companies will be looking to undertake capital raising activities to support their finances.
Raising capital in a lock-down environment will present logistical challenges and issuers and their advisers will need to be prepared, including potentially to address problems arising from resourcing pressures (including at regulators) and shareholder availability (and the ability to obtain shareholder approvals at general meetings). Furthermore, raising capital quickly in turbulent markets can heighten concerns about feasibility, pricing and treating all investors equally.
We expect to see further updates on these topics soon.
Transactions and activism
We also expect to see an upturn in merger and acquisition activity, including as a result of speculative market activism as well as financial distress. It may also be the case – after some recent cautionary examples – that activists see opportunities to exploit.
Companies that believe they may either be involved in, or subject to, potential transactional activity will need to give some thought to the unique challenges that COVID-19 might present. Besides focusing on MAC clauses and similar, there will be more prosaic challenges, including potential availability of personnel, shareholder approval and regulatory availability.
Companies which may be the subject of unwanted advances should give thought to reviewing their defence preparations.
To date, regulators have been at pains to remind issuers and key personnel that all share dealing and disclosure requirements remain fully in place. While directors and key executives may be keen to deal to show support for their companies, it is important to remember that the usual rules continue to apply.
NOMAD and sponsor obligations
The London Stock Exchange notes in its recent Inside AIM notice that it is suspending the requirement for a Nomad to make a site visit to a new client's material place of operations and meet the directors and key managers, provided that the Nomad uses alternative measures that are reasonably available (such as virtual meetings).
Otherwise, sponsors' and Nomads' regulatory obligations remain fully in force. Advance planning will be required to ensure that they can be discharged on a timely basis, given restrictions on travel and potential non-availability of personnel.