27 mars 2020
The COVID-19 outbreak poses a number of challenges for listed companies, which will need to take practical steps to ensure they can comply with their legal and regulatory requirements. This is especially the case where disclosure of inside information, financial reporting, final dividends and AGMs are concerned. The nationwide lockdown has increased the need for action.
The UK government's social distancing requirements, travel restrictions and the risk that venues may face unexpected closure all have an obvious implication for AGMs. Clearly, any company with an AGM scheduled over the next few weeks will need to assess their ability to postpone or adjourn the AGM. Companies with later AGMs should also review their arrangements.
The UK government announced on 25 March 2020 that it was in close consultation with company representative bodies, legal practitioners, and others to look at solutions for the impact COVID-19 may have on companies' ability to hold AGMs.
While companies await further guidance from the government or possible statutory changes, the Chartered Governance Institute (in conjunction with the Financial Reporting Council (FRC) and Slaughter and May) has published useful guidance for listed companies on the impact of COVID-19 on AGMs, highlighting areas of contingency planning for companies preparing for their AGMs.
Companies have various options, depending on the timing of the AGM and what lockdown restrictions are then in place. Options can include (depending on the articles of association) adapting the basis on which the meeting is held, using a hybrid meeting (a combination of a physical meeting with electronic participation), postponement, adjournment or delay in convening the meeting. As the situation continues to evolve, companies may ultimately have to use more than one of these options.
Companies will need to bear in mind the following when considering postponement, adjournment or, if notices have not been sent, delay in convening the meeting.
A company which has not issued its notice can delay its despatch and potentially change the location of the AGM. The latest date to hold an AGM is 6 months after the financial year end, so this will be a limited option for companies with a 31 December year end.
A company choosing to delay holding its AGM will need to:
Once the AGM notice has been sent out, the company can only postpone the AGM if the articles of association permit it to do so. This may give some flexibility for companies over the next few months. Companies without this provision in their articles may opt for adjournment instead (depending on the articles).
This should only be considered by companies who have issued an AGM notice and do not have postponement power under the articles. A quorate meeting is usually required to be held in order to enable an adjournment.
However, the articles may permit greater flexibility, allowing for adjournment for lack of quorum. The adjourned meeting must be held within 6 months of the company’s financial year end, so companies with a 31 December year end will have relatively little leeway. Companies intending to adjourn will usually announce this intention to the market in advance.
Virtual-only meetings tend not be an option as they can be problematic under English law, and in any event, very few companies have articles which allow general meetings that are entirely electronic. Up to now, they have been unusual in UK practice. Investor guidance has in the past not supported the use of virtual meetings, with some investor groups 'red-topping' any company that amended its articles to enable virtual-only meetings.
That said, if the articles allow it, companies can conduct a hybrid AGM – a combination of a physical and electronic meeting. Even so, companies will still need to consider if they can satisfy the physical requirements under the current lockdown, and be mindful of investor concerns about remote participation impairing investor ability to hold the board to account.
If a company has already issued its AGM notice for a physical-only meeting but its articles allow a hybrid AGM, it is possible to change it to a hybrid AGM. An announcement should be made to reflect this decision and the website updated.
Companies conducting a hybrid AGM should make shareholders aware that they can participate fully in the AGM electronically.
Regarding the meeting itself, there will be practical steps to consider also, such as:
COVID-19 is generating significant uncertainty over companies' future financial performance. There may be a significant change in a company's trading position between the date of publishing an AGM notice and the date of holding the AGM itself. Boards should therefore consider whether it remains appropriate for them to recommend in their notice of AGM that a final dividend be paid, even if it has historically been market expectation that one be paid to shareholders.
A final dividend requires shareholder approval. In order to withdraw a final dividend at short notice, the Chairman would need to seek the consent of the meeting at the AGM to withdraw the resolution approving the dividend, on the basis that it was redundant. To provide more flexibility and to avoid potential difficulties, a company could consider recommending an interim dividend instead which, unlike a final dividend, does not require shareholder approval and can be more easily withdrawn.
Whatever the type of the dividend proposed, close regard will need to be had to general company law considerations, in particular the requirement that a company must have sufficient distributable reserves, not just at the point of recommendation but also up until the point of payment. Relevant factors may include:
Financial reporting in these uncertain times faces its own challenges.
As a result, the FCA announced on 22 March 2020 that it is strongly requesting that all companies listed on the London Stock Exchange observe a moratorium on the publication of preliminary financial statements for at least 2 weeks from that date. The FRC and other regulatory bodies have stated they support the FCA's request.
The purpose of the moratorium is to ensure that listed companies and their boards are not rushed into issuing preliminary financial statements during the fast-changing circumstances presented by COVID-19 and can give due consideration to recent events.
The FRC encourages listed companies and their auditors to carefully consider whether they should delay other corporate reports for the next 2 weeks – such as interim financial statements and final audited financial statements – except where necessary to meet a legal or regulatory requirement.
The FCA confirmed on 26 March 2020 that the moratorium can end on 5 April 2020.
The moratorium does not affect obligations to announce inside information under the Market Abuse Regulation (MAR) which remains in full force.
The moratorium does not relate to companies traded on AIM, either. AIM companies should consult their Nomad on this issue.
The FCA announced on 26 March 2020 that listed companies that need extra time to complete their audited financial statements will be granted an additional 2 months in which to publish them. The relief applies to all listed companies that are required to comply with DTR 4.1.
The purpose of this temporary measure is to grant relief to listed companies that are having to re-think and re-plan their business and operations in light of the challenges posed by COVID-19.
Listed companies are ordinarily required to publish their annual financial reports within 4 months of their financial year-end. Under this relief, an issuer will not face enforcement action for breach of DTR 4.1.3R, so long as it publishes its results within 6 months of its financial year-end.
The FCA has stated that it recognises that some companies may feel it appropriate to maintain its usual 4 month calendar, but urges all companies that feel it appropriate to use the additional 2 months' leeway. The FCA has urged all market participants not to draw undue adverse inferences when companies make use of this extra time on the basis that this may, for many companies, be a sensible decision.
The London Stock Exchange announced on 26 March 2020 that AIM companies that need extra time to complete their audited financial statements in light of COVID-19 may apply for a 3 month extension to their usual reporting deadline under AIM Rule 19. The current position under the AIM Rules is that an AIM company has 6 months after the end of its financial year to publish its annual audited accounts.
Any application for extension must be made to AIM Regulation by an AIM company's NOMAD before such AIM company's current reporting deadline has passed. If an extension application is not made by a NOMAD on behalf of an AIM company then the usual AIM Rule 19 reporting deadline will apply.
The announcement has immediate effect for AIM companies with financial years ending between 30 September 2019 and 30 June 2020.
Listed issuers must continue to comply with their obligations under MAR and other relevant rules. The FCA has stressed that, during this period, it is as important as ever that the market is kept up to date with information.
The FCA has reminded listed issuers that they should be aware that their own operational response to COVID-19 may itself require disclosure under MAR. Although the FCA is conscious that COVID-19 may create challenges in the convening and operation of disclosure committees, it has reinforced the expectation that listed issuers must make every effort to meet their disclosure obligations in a timely fashion.
Listed issuers should continue to assess whether inside information has arisen. For example, they should consider whether COVID-19 has adversely affected its trading performance (or expectations of performance), caused any disruption in any supply chain, or materially changed its strategy or business plan.
Listed issuers may be required to make an announcement even though the underlying reason for any such effects may be publicly known. Conversely, listed issuers should consider whether "good news" that is not reflected by the share price could amount to inside information that will need to be publicly announced.
If a listed issuer does not believe it is able to meet its continuing obligations, it should take appropriate advice and contact the FCA.