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How COVID-19 may impact continuous disclosure obligations
COVID-19 is rapidly evolving and significantly impacting the business environment, with continuous disclosure obligations becoming central at these times of uncertainty for many entities.
Tony Zhang
With organisations across the nation feeling the impact of COVID-19, in-house counsel may need to step up and offer more support than ever before, according to Gilbert + Tobin partner Ben Macdonald, special counsel Ebony Keenan-Dunn, and lawyer Stephanie Kolaczkos.
The team of experts says general counsel will need to grasp the state of continuous disclosure obligations, and identify how the coronavirus will impact the organisations they are employed by in this regard.
“In-house counsel should work closely with the management team and/or the board so that the organisation is well prepared to make disclosures quickly,” the G+T team said.
According to the lawyers, this may include undertaking “scenario analysis” at various levels of severity (including “worst case” scenarios) and “actively preparing to make announcements if those scenarios eventuate”.
This means that entities are generally not required to speculate on or predict potential future events and the impact they may have on the business until they arise, and then only if the impact is material.
“In-house counsel should be supported by experienced external legal counsel particularly if there is any uncertainty as to the content and of the disclosure,” partner Mr Macdonald said.
In-house counsel can also play a key role in determining whether a disclosure is necessary, according to the G+T team.
This would require a good understanding of the continuous disclosure obligations, how COVID-19 impacts their organisation and a strong relationship with the management team and the board.
“That being said, entities are not generally required to disclose matters of supposition or which are insufficiently definite to warrant disclosure (other than where there is a false market),” Mr Macdonald said.
As the coronavirus impacts organisations and their earnings, for major organisations, this may also affect the release of earnings guidance although entities may have limited cash reserves or shortages.
Although an entity is not required to release earnings guidance to the market, for GCs, if an entity has provided earnings guidance, and there has been a material change to that position, the entity must update the market to what applies in the current COVID-19 situation.
“Any earnings guidance that does not have a reasonable basis, in fact, is deemed misleading,” according to the lawyers.
Where an entity’s earnings guidance has been negatively impacted, the entity should:
- where there is significant uncertainty as to the impact on earnings, withdraw that guidance
- disclose that there will be material impact, and further update the market once it has updated earnings guidance
- revise down its earnings guidance
“This is a riskier approach and withdrawing may be more prudent,” the G+T team said.
“Where the entity has a cash shortage or is at risk of insolvency, additional disclosure may be required.
“In-house counsels should also make sure that the management team and the board are aware of directors’ and officers’ obligations with respect to insolvency and potential insolvency.”
According to the G+T lawyers, potential impacts which could require disclosure include supply chain disruptions and other operational issues (e.g. delays and counterparty risk), workforce implications, impacts to material contracts (e.g. “force majeure” provisions) and the impact of government regulation and intervention (e.g. non-essential services closures and social distancing measures).
ASX Listing Rules require disclosure to be made immediately, which means promptly and without delay, and any announcement made should contain sufficient detail for investors to understand its ramifications and to assess its impact on the price or value of the entity’s securities.
“It is therefore critical that GCs remain across changing circumstances and business developments, regularly engage with the management team and the board, and prepare as best they can to be ready to make a disclosure if required,” Mr Macdonald said.
Therefore this would mean that if something material occurs which was not anticipated and the impact is uncertain, entities may need to consider applying for a trading halt to enable the board to assess the implications.
