The COVID-19 outbreak is unlike any previous crisis, and listed entities face a constantly evolving situation. In this update, we discuss some of the key regulatory issues facing directors, the most immediate being continuous disclosure, and provide some recent market examples.
Continuous disclosure
As the global pandemic deepens, listed entities must ensure that they are able to comply with their continuous disclosure obligations (ASX Listing Rule 3.1).
An entity would generally not be expected to disclose publicly available information about external events or circumstances brought on by COVID-19 that affect all entities in the market or in a particular sector in the same way. However, the impacts of COVID-19 will undoubtedly bring about market sensitive information concerning listed entities that require disclosure to the market. By way of example, circumstances requiring disclosure may include:
- Operations – where an entity’s operations are significantly hindered due to government measures designed to restrict the spread of COVID-19, including travel restrictions and isolation measures. A significant reduction of operations or capacity to operate would likely require disclosure;
- Earnings guidance – where an entity becomes aware that its earnings for the current period will differ from previously published earnings guidance such that a ‘market sensitive earnings surprise’ announcement is required. ASX recently updated its guidance in this regard. Where the expected variation in earnings compared to published guidance is between 5% and 10%, an entity needs to judge whether it is material. Entities inside the ASX 300 should consider applying a materiality threshold of 5% whereas entities outside the ASX 300 that have relatively variable earnings may consider it more appropriate to apply a materiality threshold of 10%;
- Material contracts – where a counterparty to a material contract terminates the agreement in reliance on a material adverse change clause, or relies upon ‘force majeure’ provisions for non-performance.
Conversely, entities entering into new material contracts for COVID-19 related products or services need to be mindful of ASX’s position on the naming of counterparties. ASX’s position is that entities should generally name counterparties in announcements as it allows the market to assess the standing and quality of the counterparty and the quality of the revenue it is earning from them. Listed entities should be aware of the need to name counterparties, for example, in announcing a new material contract such as a supply agreement for in-demand products related to COVID-19. Otherwise, entities are likely to find themselves having to request a trading halt or face a suspension while it addresses ASX’s concerns about not having disclosed material information about the contract. There are very limited circumstances where non-disclosure of a counterparty will be accepted by ASX, and in these cases entities are encouraged to engage with ASX early to discuss the issue; - Financing arrangements – entities should closely monitor covenant compliance, engage financiers early to discuss implications and update the market accordingly where waivers from financiers are obtained or material breaches occur;
- Decreased supply or demand for products and services – sudden decreased supply for goods or services due to major disruptions to supply chains or decreased demand for goods or services due to decreased customer interaction; or
- Workforce – liabilities arising from workers or third parties who are infected or otherwise affected from COVID-19 in the course of their employment.
ASX’s guidance provides that if an entity is not in a position to disclose the financial impact of information that it knows to be market sensitive, it should announce whatever information is in its possession immediately and signal that it will make a further announcement when it has had the opportunity to assess the financial impact of the information. As such, listed entities will need to continue to use the common tools available to manage continuous disclosure, such as requesting a trading halt (and possibly a suspension) to allow more time to fully assess the operational and financial impacts of COVID-19. We note there are presently dozens of entities who have voluntarily suspended trading to undertake capital raisings.
A recent example using a halt and suspension is Air New Zealand Limited (ASX:AIZ). AIZ first released an announcement on Monday, 9 March 2020 in which it withdrew its full year 2020 earnings guidance previously issued to the market, and described the preliminary steps taken to mitigate the impact and reduced demand resulting from COVID-19, noting that it would provide an update on earnings expectations when appropriate. AIZ then requested a trading halt on Monday, 16 March 2020 to allow itself more time to fully assess the operational and financial impacts of global travel restrictions. Whilst still in the trading halt, AIZ released an announcement describing its immediate capacity reductions undertaken, and after requesting a further voluntary suspension on 18 March 2020, AIZ then released an announcement on 20 March 2020 regarding a new debt funding agreement with the New Zealand Government. The steps taken by AIZ demonstrate the ability to use commonly available tools to manage continuous disclosure during a time where the longer term impacts of COVID-19 are still largely unknown.
ASX may agree to suspend quotation on an entity’s securities where it is satisfied that the entity is in genuine financial difficulty and continued trading in its securities is likely to be material prejudicial to its ability to complete a transaction critical to its continued financial viability. Further guidance of the circumstances in which these suspensions may be granted is set out in ASX Guidance Notes 8 and 16, but it remains to be seen whether ASX will permit such suspensions when such a large number of listed entities are in the same boat. With uncertainty as to when this will all end, entities looking to suspend trading in their securities for a prolonged period should be mindful of ASX’s long term suspended entities policy, and are reminded that suspended entities must still comply with their continuous disclosure obligations.
Raising further capital and solvency
In considering the need to raise further capital, listed entities should be aware that any significant reduction in share price caused by recent market volatility will reduce the amount of funds that can be raised where entities are looking to rely on their existing 15% or 10% placement capacities under Listing Rules 7.1 or 7.1A respectively.
Entities should note if placement capacity is an issue there are various other structures that can be considered, including but not limited to entitlement offers, share purchase plans and two-tranche placements.
It follows that, if entities are facing dire financial consequences, directors should take urgent advice on how they can seek sanctuary from personal liability under the ‘safe harbour’ regime. Our insolvency team published a note on 23 March 2020 which can be found here.
Technology and health companies
ASX-listed health and bio-tech companies with COVID-19 related products must assess whether any new information regarding those products may trigger their continuous disclosure obligations, and be careful to include sufficient information in respect of new products or developments.
TBG Diagnostics Limited (ASX:TDL) announced a product of an investee company in which TDL holds 46% interest, being a COVID-19 diagnostic test kit, had been approved for sale in Europe on 18 March 2020. Following queries from ASX, TDL confirmed it had received informal news of the approval on Saturday, 14 March 2020 and formal notification prior to the market opening on Tuesday, 17 March 2020. Between this time and the trading halt entered into at 12pm on Tuesday, 17 March 2020, TDL’s share price and trade volume increased significantly. TDL remains suspended by ASX pending further queries.
The inclusion of vague or brief statements regarding COVID-19 related products in periodic reports in the absence of otherwise fulsome and timely disclosure will also bear scrutiny. ASX has questioned Skin Elements Limited (ASX:SKN) concerning a statement made in its half year report concerning the release of a new product (an antimicrobial liquid hand sanitiser) being brought forward due to the impact of COVID-19. SKN’s share price and trading volume increased significantly shortly after release of the half year report on Monday, 2 March 2020 until going into a trading halt and suspension a few days later to respond to ASX queries. SKN responded to those queries but it appears the suspension was not lifted until SKN released a further update on the new product.
Mining and exploration companies
Mining and exploration companies will also be impacted by COVID-19. By way of example, the measures being imposed to control the spread of COVID-19 such as self-isolation or social distancing may result in the closure of mining operations, assay labs or other important facilities. Such events may require mining and exploration entities to provide an update to the market regarding any significant revised timing of expected completion of drilling programs or other mining operations, particularly where a previous time-frame communicated to the market is longer achievable.
Annual general meetings and financial reporting requirements
COVID-19 may also impact on the ability for entities to hold an annual general meeting (AGM), particularly those that are required to hold an AGM by 31 May 2020.
See the note authored by our colleagues here.
Conclusion
Boards will appreciate that the situation is evolving every day. This requires constant re-assessment of COVID-19’s impact on the particular circumstances of their company. Regulators are showing some sympathy, demonstrated by ASIC’s ‘no-action’ position in respect of upcoming AGMs, however, as long as markets continue to operate, the regulators will continue to closely monitor listed entities’ compliance with continuous disclosure.
Our team is available to advise on all regulatory and compliance issues. Please contact us if you have any queries on your continuous disclosure obligations, future capital raisings, directors’ personal liabilities, and AGM and financial reporting requirements.
This article was written by Bryn Hardcastle, Partner, Dave Filov, Partner and Nick Harrison, Solicitor.