RELATED EXPERIENCE

Introduction

Over the past weeks a number of measures and guidelines have been drawn up in response to the COVID-19 pandemic and the actions taken by various governments which will directly or indirectly affect listed companies. This alert serves to provide a summary of some of those measures and how they may affect listed companies.

Corporate Reporting and Filing Accounts

The Financial Conduct Authority (“FCA”), the Financial Reporting Council (“FRC”) and the Prudential Regulation Authority (“PRA”) announced temporary measures with the aim of alleviating pressures that companies and auditors are finding themselves under. Underlining all measures, the FCA, FRC and PRA are acutely aware that whilst capital markets rely on timely, accurate information and investors and other stakeholders rely on financial reporting – backed by high-quality auditing, companies and their auditors currently face unprecedented challenges in preparing and auditing financial information.

Whilst logistical issues when producing accounts for upcoming reporting periods are evident, contingency plans are expected to be put into place in order to minimize any impact. Such plans may include non-prioritization of non-essential parts of their report and reporting cycle.

We advise that a company should continue to endeavour to meet its various continuing obligations. Should the company believe this is not achievable, it should take appropriate advice, contact the FCA and engage with their auditors, (who may in turn decide to contact the FRC).

Importantly, the FCA announced that they will allow listed companies an extra two months (an extension to DTR 4.1.3R from four months to six months) to publish their annual accounts in light of the difficulties that directors and auditors are currently facing.

In addition to this, measures to allow companies and auditors to focus on the delivery of information to investors and the capital markets include:

  • Delaying the filing of accounts by companies - Companies House will permit a delay to the filing of accounts at Companies House. Companies will still have to apply for the 3-month extension to be granted, those citing issues around COVID-19 will be automatically and immediately granted an extension via a fast-tracked process.
  • Postponement of auditor tenders. Companies are encouraged to consider delaying planned tenders for new auditors, even when mandatory rotation is due.
  • Postponement of audit partner rotation. Where there are good reasons, the rotation for audit partners can be extended from 5 years to no more than 7 years (note, this needs to be agreed with the audit committee of any affected entity and does not need to be cleared with or approved by the FRC).
  • Reduction of FRC demands on companies and audit firms. The FRC will, where possible, reduce its demands on companies and audit firms in a number of ways.

It is also expected that the following changes that we are likely to see include:

  1. modified audit opinions where auditors have been unable to gather the necessary audit evidence to complete the audit in full: for example, by limiting the scope of the audit opinion.
  2. more audited financial statements that include disclosures that management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.
  3. changes to timetables for publication of financial information that had been set before the full implications of COVID-19 were clear.

The FRC states that audits should continue to comply with required standards, and additional time may be required to complete audits, even at the risk of delaying company reporting. The FRC specifically recognises that the auditors will need to consider the impact of COVID-19 on:

  • the auditor’s risk assessment, and whether it needs to be revised;
  • how the auditor gathers sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change, and alternative procedures developed, particularly in group audit engagements. The auditor must be able to gather the necessary evidence to be able to report or consider modifying their audit opinion;
  • how the group auditor proposes to review the work of component auditors to meet the requirements in standards, including considering whether alternative procedures can be used: for example, where travel is restricted;
  • the auditor’s assessment of going concern and the prospects of an audited company, given that uncertainty about the global economy and the immediate outlook for many companies has increased;
  • the adequacy of disclosures made by management about the impact on the company of COVID-19, so that users of the financial statements are properly informed, and the company’s prospects and how they might be affected are described, recognising the high degree of uncertainty; and
  • the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management. Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.

It is advised that auditors will also need to engage with the companies they audit to ensure that:

  • the auditor sets clear expectations as to the level of disclosure they expect to see in annual reports to communicate the impact and risk of COVID-19 on the company; and
  • companies, and in particular their audit committees, understand it is vital that auditors have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances – in some cases, this may need companies to reconsider their reporting deadlines. Where auditors are unable to obtain sufficient, appropriate audit evidence to support their audit, they will need to consider necessary modifications to their audit opinion.

The full FRC Guidance specifically targeted at auditors can be found here.

The European Securities and Markets Authority (“ESMA”) has released guidance that, having regard to the difficulties encountered by issuers in preparing financial reports and the challenges faced by auditors in carrying out timely audits of accounts due to the COVID-19 outbreak, it expects the FCA not to prioritise supervisory actions against issuers in respect of the upcoming deadlines set out in the Transparency Directive regarding:

  • Annual financial reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the Transparency Directive deadline.
  • Half-yearly financial reports referring to a reporting period ending on or after 31 December 2019 but before 1 April 2020 for a period of one month following the Transparency Directive deadline.

Where issuers reasonably anticipate that publication of their financial reports will be delayed beyond the deadline set out in the Transparency Directive, ESMA expects them to inform the FCA of this, as well as informing the market of the delay, the reasons for it and, to the extent possible, the estimated publication date.

AIM has published an Inside AIM newsletter setting out temporary measures regarding the publication of annual audited accounts that will be implemented during the COVID-19 pandemic.

An AIM company’s obligation to publish annual audited accounts in accordance with the AIM Rules have been temporarily amended, as follows:

  • AIM companies with financial year ends between 30 September 2019 to June 2020 will also be able to apply to AIM Regulation for a three-month extension (“Extension”) to the reporting deadline for the publication of its annual audited accounts pursuant to AIM Rule 19.
  • The request for an Extension must be made to AIM Regulation by the nominated adviser, prior to the company’s current AIM Rules reporting deadline.
  • Note: AIM Regulation are making it a condition to obtaining the Extension that issuers have also applied for and received the automatic extension for filing their accounts at Companies House.

Dividend Timetable

LSE announced that they have made temporary changes to the Dividend Procedure Timetable 2020.

The LSE will permit a deferral period of up to 30 business days for payment of a dividend, but no more than 60 business days after the record date.

Any deferral of a dividend payment by an issuer must be notified to the Stock Situations Team without delay.

After the deferral period has expired the dividend must be paid or cancelled, and the issuer should notify any cancellation without delay.

Local law requirements should also be checked to ensure compliance thereof if a delay to the payment of dividends is being considered.

How to Conduct AGMs

All UK listed companies must hold an AGM under the Companies Act in the period of six months beginning with the day following its accounting reference date.

A company’s articles of association may also make provision as to the holding of its AGM in which case both the articles and the statutory provisions must be complied with.

At present, there has been no relaxation of these requirements and companies will need to comply with applicable timing requirements.

Further current guidance emphasises the importance of the AGM for shareholders and, given the uncertainty surrounding the current situation, it is likely many companies will both need to hold their AGM and also refresh current authorities to facilitate capital raisings or other transactions in the near future.

There have been many new measures and recommendations with respect to the holding of AGMs during the period of social distancing and lockdown measures which prohibit, among other things, public gatherings of more than two people. It is stated that shareholders will not be able to attend general meetings while the stay at home measures are in force: it is considered that their attendance (other than as required to form a quorum) will not fall within the "essential for work purposes" exception to the prohibition.

Measures that are being encouraged are:

  • increased proxy voting;
  • establishing an online shareholder Q&A for the AGM;
  • live streaming the AGM;
  • if not all directors can attend, enabling them to be available for questions via video link;
  • delaying convening the AGM, if notice has not yet been issued;
  • postponing the AGM, if permitted under the articles;
  • adjourning the AGM if it has issued its AGM notice and has no postponement provisions in its articles.;
  • conducting a hybrid AGM, if permitted under the articles;
  • companies should make clear in their notice of meeting, or by RIS announcement and updating the information on their website where the notice has been published, that shareholders may not attend in person, will be refused entry and should vote by proxy; and
  • information should also be offered about how they can remain engaged through voting and ask questions of directors.

Due to the government prohibitions on public gatherings, the company can prevent shareholders and proxies from attending under the chair's common law powers, likely to be backed up in the company’s articles.

A quorum should be able to be satisfied by two director and/or employee shareholders attending, with resolutions passed by proxy votes (or by appointing one of those employees as a corporate representative) and the votes of those in attendance. If the physical presence of more than two is required, the number should be kept to the minimum.

The proxy form should appoint the chair of the meeting (not the chair of the board or a specific director who may be unable to attend) as proxy. Where shareholders have already appointed someone other than the chair of the meeting, they should be encouraged to submit a new form.

If a meeting has already been convened for a venue that has become unavailable, and the articles allow the board to postpone the meeting or move it, they should consider moving it to a more controlled venue. Companies that do not have such articles should adjourn the meeting to an alternative venue, which could be achieved by the employees/others who plan to form a quorum attending the planned venue and adjourning to another venue. Where this is not practicable, companies should take advice.

The ISS 202 Proxy Voting Guidelines have been further updated and include, amongst other measures, the following:

  • ISS shall adjust its policies relating to board composition to allow boards to have broad discretion to ensure they have the right team in place
  • Boards are encouraged to provide contemporaneous disclosure to shareholders of their rationales for making any changes to performance metrics, goals or targets used in short-term compensation plans.
  • ISS has stated that they will generally continue to recommend in favour of repurchase authorities within customary limits.
  • ISS's existing policy framework will be applied to general authorisation and share issuance requests, adapted to take account of regulatory relaxations or new guidance as a result of the crisis.

Continuing Disclosure Obligations

The FCA has reminded issuers and advisers that Market Abuse Regime ("MAR") continues to apply as normal and companies are still required to fulfil their obligations concerning the identification, handling, and disclosure of inside information. The FCA also expects persons discharging managerial responsibilities (“PDMRs”) and ‘persons (who are) closely associated’ and ' to continue to meet notification requirements under MAR within the prescribed time frame.

Crucially, in the context of recapitalisation this will include sharing inside information in accordance with MAR and maintaining appropriate insider lists.

It is worth remembering the provisions as they relate to inside information and MAR in the Disclosure Guidance and Transparency Rules (“DGTRs”) in particular DGTR 2.2.

During the current situation, many companies may have periods where they must carefully consider whether inside information exists due to market, sector, or issuer specific events. Any developments or events which occur as a result of COVID-19 which may amount to inside information (for example disruption to supply chains, reduction in customer demand restrictions on travel or  use of the company’s physical facilities which leads to a material adverse effect on the company’s business performance or outlook) will need to be notified to the market.

Senior management and staff need to be reminded of their obligations, not only as to inside information, but also more generally with regard to commercially sensitive or confidential information. Whether it is inside information will be at the judgement of the directors. Note, steps to contain any possible effects may also amount to inside information. 

As a reminder, some of the relevant provisions are:

  • 17(1) MAR: an issuer must inform the public as soon as possible of inside information which directly concerns it.
  • 18 MAR: issuers must produce and maintain insider lists. Note that AIM companies are exempt from the requirement to draw up an insider list, provided that it:
    • it takes all reasonable steps to ensure that any person with access to inside information acknowledges the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information; and
    • it is able to provide the FCA, upon request, with an insider list.
  • AIM Rule 11: AIM Rule 11, which applies in addition to the obligations under MAR, provides that an issuer must issue notification without delay of any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its securities.
  • DGTR 2.2.8G: requires directors of issuers to carefully and continuously monitor any changes in the company’s circumstances, to determine whether an announcement is required under MAR.
  • DGTR 2.6.1G: issuers must have a framework for the control of inside information and establish effective arrangements to deny access to inside information to persons other than those who require it for the exercise of their functions within the issuer.

ESMA has issued a public statement making recommendations in light of the continuing impact of the COVID-19 outbreak, as follows:

  • Issuers should disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with MAR; and
  • Issuers should also provide transparency on the actual and potential impacts of COVID-19 in their 2019 year-end financial report (if not already finalised), alternatively in their interim reports. Where possible, disclosures should be based on both a qualitative and quantitative assessment of the impact on the issuer's business activities, financial situation and economic performance.

AIM has recognised that in the face of recent circumstances, an AIM company may require more time to make a fully compliant notification. In this instance, AIM may, at its discretion, decide to invoke a temporary suspension for a limited period to enable the AIM Company to make a fully compliant notification. The Nomad should approach AIM Regulation to discuss if this is required.

Be aware that from AIM’s and the FCA’s perspective, there is no relaxation in the application of MAR, and issuers are expected to continue meeting their announcement obligations. It is recognised that there will be challenges in the convening of disclosure committees, however, it is expected that listed companies make every effort to meet their disclosure obligations in a timely fashion.

Pre Emption Group Guidance

With the aim to allow companies to access capital more expeditiously and maintain their solvency during the COVID-19 pandemic, the UK Pre-Emption Group (PEG) has issued a statement recommending investors consider, on a case-by-case basis, supporting listed companies seeking to issue up to a further 20 per cent of their issued share capital, rather than the 5% for general corporate purposes with an additional 5% for specified acquisitions or investments, without a formal rights issue or open offer to existing shareholders. The recommendation will be in place on a temporary basis until 30 September 2020.

The Statement of Principles already permits companies to seek permission from shareholders for a specific disapplication of their pre-emptive rights outside of the normal thresholds, and this process should continue to be respected.

The FCA noted that if PEG’s guidance and the additional flexibility is sought:

  • The particular circumstances of the company should be fully explained, including how they are supporting their stakeholders;
  • Proper consultation with a representative sample of the company’s major shareholders should be undertaken;
  • As far as possible, the issue should be made on a soft pre-emptive basis (i.e.) where the bookrunner seeks to allocates shares to investors in such a way that it replicates the existing shareholder base); and Company management should be involved in the allocation process.
  • In addition to disclosures expected in the Annual Report and Accounts, companies are also expected to disclose alongside the issuance, information about the consultation undertaken prior to the issuance and the efforts made to respect pre-emptive rights, given the time available.
  • Existing share awards should not be normalised to negate the dilutive effect of the extended issuance and the directors of the company will be held accountable for their decisions at the AGM following its use.

The FCA noted that for Companies issuing up to 20 per cent of their capital, they are expected to disclose, alongside the issuance, information about the consultation undertaken prior to the issuance and the efforts made to respect pre-emptive rights, given the time available, in addition to the disclosures expected in the next annual report and accounts, as outlined in the PEG's Appendix of Best Practice in Engagement and Disclosure.

It is stated that existing share awards should not be normalised to negate the dilutive effect of the extended issuance and the company's directors will be held accountable for their decisions at the next AGM.

The recommendation will be in place until 30 September 2020.

It is noted that, for the avoidance of doubt, the statement does not signify an intention by the PEG to consider an extension beyond the 5+5% threshold applicable in normal circumstances.

PEGs recommendations are welcome and allow for additional flexibility required in the current circumstances and will provide companies with opportunity to urgently to raise equity finance. It is important to highlight the caveats: (1) companies must consult major shareholders, (2) the issue should be made on a soft pre-emption basis, and (3) make sure the market is fully informed of why they are seeking to take advantage of PEGs recommendations. A company that has not yet issued its notice of AGM should consider seeking this additional headroom. It is noted that the Investment Association supports these recommendations provided by the PEG.

Aim Guidance

AIM has stated that it will apply discretion to the adherence to certain AIM Rules for Companies and AIM Rules for Nomads in order to be flexible in the response to COVD19. They state three particular areas where this may apply (this is constantly under review):

1.  Temporary Suspension of Trading

AIM companies have various disclosure obligations and must make certain notifications to the market without delay. As noted above, it is recognised that companies may face material new challenges as a consequence of the restrictions being caused by COVID-19. As such, where more time than usual is required to make a fully compliant notification, the Nomad should approach AIM Regulation to discuss whether a temporary suspension is required.

2.  Suspended AIM Companies

Under AIM Rule 41, where an AIM company has been suspended for more than six months, the company’s securities will be cancelled.  AIM Regulation will be using discretion to extend the period to 12 months for any AIM company that has been suspended between 30 September 2019 and 1 July 2020 if, due to logistical reasons, this extra time is required to resolve the reason for suspension.

3.  Engagement Responsibilities of NOMADs

Nomads shall be given flexibility to make better use of telecommunications in their dealings with AIM Companies such as virtual site visits when engaging a new client and director education by remote communications instead of physical meetings.

Until further notice, AIM Regulation will continue to keep the situation under review, in particular the potential impact on financial reporting and will provide further guidance as necessary.

These concessions are welcome, but be aware that using the COVID-19 pandemic as an excuse will not be acceptable or considered a legitimate ‘excuse’ for delayed disclosure or failure to consult with your Nomad.  Recent disciplinary actions by AIM Regulation have focused on companies who have delayed disclosure and/or not kept their Nomads properly informed, or sought advice from Nomads where appropriate.

FCA Guidance

In light of recent events, the FCA has provided guidance in a policy statement aimed at facilitating the raising of new share capital.

The measures set out in the statement of policy and technical supplements include:

  • The FCA will continue to consider requests from issuers to suspend trading in certain securities in line with existing rules and practice, meaning it will challenge the need for suspension where it thinks the situation would be more appropriately addressed by an announcement to the market. It is important that issuers ensure they have thoroughly examined the justification before submitting a request for suspension.
  • PDMRs and 'persons (who are) closely associated' should continue to meet notification requirements under MAR within the prescribed time frame.
  • AGMs and other communications between shareholders and the issuer may need to be adjusted and involve the use of virtual methods so as to ensure the effective exercise of shareholders’ rights.
  • The FCA will continue reviewing documentation for corporate transactions in line with its established principles. Where issuers are looking to carry out urgent transactions they should, in the first instance, engage with their relevant sponsor firm or adviser.
  • Issuers are urged to review and consider the PEG’s recommendations (see above).
  • For share issues where a prospectus is required, issuers are encouraged to use the simplified prospectus regime for secondary issues introduced under the Prospectus Regulation, if available.
  • Whilst the requirement to provide a working capital statement (either qualified or unqualified) stating the company’s position for the 12 months from the date of the prospectus remains unchanged, key assumptions in relation to business disruption during the COVID-19 crisis underpinning the company's reasonable worst-case scenario will be permitted to be disclosed in an unqualified working capital statement in a prospectus or circular.
  • The FCA has also, on an informal basis, requested that issuers confirm that they have sufficient working capital for 18 months from the date of the prospectus. Where this cannot be confirmed, further discussion with the FCA in encouraged to ensure adequate disclosure is included. The FCA have published a technical supplement which can be found here.
  • Companies may apply to the FCA for a dispensation from the Listing Rule requirement to hold a general meeting for a class 1 transaction or related party transaction.
  • If an issuer does not believe it is able to meet its continuing obligations it should take appropriate advice and contact the FCA. Issuers should engage with their auditors, who should contact the FRC, as appropriate.

Useful Sources:

The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.