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27 Mar 2020

COVID-19: Reporting and disclosure consequences for listed companies

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Investors in capital markets rely on accurate and timely reporting from the listed companies in which they invest but the unprecedented events of the last couple of weeks caused by the emergence and spread of the coronavirus 2019 ("COVID-19") pandemic mean that the basis on which companies are reporting and planning is changing rapidly and boards of listed companies are fighting to keep up. Directors must proactively consider how they will continue to comply with their reporting and disclosure obligations in the current climate.

This note provides a high-level overview of some of the specific issues confronting boards of listed companies as a result of the COVID-19 crisis and the latest regulatory guidance.

Financial reporting timetable

On 26 March 2020, the Financial Conduct Authority ("FCA"), Financial Reporting Council ("FRC") and the Prudential Regulatory Authority ("PRA") jointly announced a series of actions to protect accurate information flow to investors and to support the continued functioning of the UK’s capital markets.

Preliminary accounts

The FCA has strongly requested all listed companies observe a moratorium on publishing preliminary financial statements for a period of two weeks ending on 5 April 2020.

This moratorium relates to companies with shares listed on the Official List only – it does not relate to AIM companies, although it is clear a number of AIM companies are following this request.

Audited annual financial reports

The FCA has put in place a temporary relaxation of the rules to permit listed companies to delay the publication of their audited annual financial reports from four to six months from the end of the financial year.

AIM Regulation has also confirmed that AIM companies with financial year ends between 30 September 2019 and June 2020 will be able to apply (via their nominated advisers) to AIM Regulation for a 3 month extension to the reporting deadline for the publication of their audited annual accounts.

This temporary relief does not currently extend to half yearly financial reports, which should be published within 3 months of the half year end in accordance with the Disclosure Guidance and Transparency Rules.

Filing accounts

Companies House has similarly published guidance giving companies an additional 3 months to file their accounts with the Registrar.

Companies wishing to take advantage of this will still be required to apply for the 3 month extension but where the reason for requesting the extension is COVID-19 a fast-track process to grant the extension will apply.

From a purely practical perspective, the logistics of finalising, printing and distributing the annual report and accounts may also be adversely affected by COVID-19. Where possible companies will be looking to avail themselves of the option to communicate electronically with shareholders where they have the authority to do so, in order to ensure the timely delivery of information to them.

Additional disclosures in annual reports and accounts

The FRC is urging companies to consider what additional, specific risk disclosures should be included in their year-end accounts and annual reports, taking into account the particular nature of the company and the unique way in which it may be impacted by COVID-19. To the extent that companies are able to mitigate these new risks in any way, those mitigating steps should also be disclosed.

Such disclosures should include specific risks taking into account the particular nature of the company and the unique way in which it may be impacted by COVID-19 and disclosure of judgments and assumptions made by the board of directors which shape the company's outlook for the future. If boards identify possible events or scenarios (other than those with a remote probability of occurring) that could lead to corporate failure, then these should be fully disclosed.

Boards of listed companies that report against the UK Corporate Governance Code should also consider and report on how opportunities and risks to the future success of the business have been addressed by the board and what steps the board has taken, or plans to take, to mitigate the impact of those events.

To be able to make these fuller disclosures boards will need to liaise closely with their management teams or externally appointed managers (as applicable) to receive regular updates as to the status of the company's financial position and prospects. It may also be prudent to establish specific sub-committee(s), to operate alongside the existing audit and risk committees, to coordinate and assess these updates and report back to the full board prior to any decision-making.  

"Inside information" and market abuse

The Disclosure Guidance and Transparency Rules require directors on the boards of listed companies to carefully and continuously monitor whether changes in the company's circumstances give rise to inside information and so trigger an announcement obligation under the Market Abuse Regulation (and under the AIM Rules for Companies for AIM traded companies).

The FCA and FRC have reminded companies of their obligations under the Market Abuse Regulations during this time.  The rapidly changing situation in the markets at the moment caused by the pandemic means that boards may find themselves in possession of inside information as a result of adverse changes to a company's performance (or expected performance) or as a result of any adverse effects on the financial condition of the company and/or stress on debt repayment.

This should be kept under review by the board, or the dedicated Insider Committee if one has been established, and boards should consult with their legal advisers and corporate brokers if in any doubt as to whether a public announcement may be required. 

The London Stock Exchange has also published an Inside AIM update in relation to COVID-19 on 20 March 2020 confirming that AIM companies should continue to meet their disclosure obligations without delay. However, it recognises that an AIM company may face material new developments as a consequence of the restrictions and challenges being caused by COVID-19. Accordingly, where an AIM company requires more time to make a fully compliant notification than would be the case in ordinary circumstances, the nominated adviser should approach AIM Regulation to discuss whether a temporary suspension is required.

Prospectus disclosures

Risk factors

For those boards of companies that are about to undertake further fundraising, a key consideration will be whether the prospectus (or non-prospectus fundraising circular) needs to be updated to incorporate any additional, specific COVID-19 risk factors. Prospective investors and shareholders will be looking for increased reassurance from the board and management team in this regard.

Working capital statement

Our recent experience with the FCA has shown us that they are increasingly challenging whether issuers can, in fact, give a clean working capital statement, as required by the Prospectus Regulation Rules, given the current economic uncertainty. 

Although the requirement to disclose the working capital position for 12 months from the date of the prospectus remains unchanged, the FCA has recently requested that issuers informally confirm to the FCA that they have sufficient working capital for 18 months from the date of the prospectus and, if not, the FCA has indicated that they would expect the disclosures required for a qualified working capital statement to be included in the prospectus. These disclosures would include when the issuer expects to run out of working capital, the shortfall, the issuer's action plan to rectify any shortfall and how confident it is that such plan will be successful, as well as the implications of any of the proposed actions being unsuccessful.

If an issuer does not have sufficient working capital for 18 months they should seek to discuss further with the FCA the extent of disclosure which may be required.

Practical considerations

Listed companies and auditors are facing unprecedented practical challenges in relation to financial reporting as a result of the COVID-19 pandemic and we echo the regulator's advice to boards to take advantage of these more relaxed reporting timetables. In the current climate, no doubt shareholders and other stakeholders would be appreciative of the company taking a little longer to fully understand and analyse the impact of the pandemic on its operation and financial condition.

Boards of listed companies may also wish to:

  • consider delaying any auditor tender process or the rotation of any key audit partner, even if such change is mandatory. Boards should liaise with their audit committees and the FRC to implement extensions to the existing arrangements so that audit quality can be maintained during this turbulent time;
  • hold more regular board meetings (by telephone or video conference, as the company's articles of association may allow) at which key decisions, and the rationale for those decisions, are recorded in detail, particularly where it is felt necessary to depart from the company's usual practice or processes;
  • review stakeholder engagement processes – and consider the use of public relations advisers during this time. Shareholders and other stakeholders will increasingly look to companies to provide reassurance and more regulator updates. A proactive social media strategy may also be helpful in this regard;
  • use your professional advisers. If in any doubt, seek advice from the company's appointed legal, regulatory and tax advisers.

Further updates on matters affecting our clients in the face of COVID-19 can be found on our dedicated COVID-19 page.

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