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25 March 2020
The crisis caused by the current pandemic presents a particular challenge for publicly listed companies, which have to reconcile their regulatory disclosure obligations with uncertainty about their business and outlook.
Listed companies are under an obligation to disclose, as soon as possible, inside information that directly relates to them, i.e. non-public information of a sufficiently precise nature that a reasonable investor would likely take into account in its investment decision.
Furthermore, the rules for delaying the publication of inside information are very restrictive. As a result, issuers must regularly update the market on significant changes in their activities and prospects, without being able to wait for the next periodic reporting.
The current crisis does not release issuers of their obligations in this regard. It must also be taken into account for their annual results and outlook publication.
On 28 February - at a time when the crisis was mainly affecting Asia and air travel-related activities - the AMF[1] invited issuers to communicate without delay, by means of a press release, on the impact of the epidemic on business, performance or prospects, and recommended that issuers periodically reassess the actual and anticipated impact of the crisis on business and prospects as to its materiality and/or amount.
Similarly, ESMA, in its communication of 12 March, reminded issuers that, pursuant to applicable regulations, they should publish as soon as possible all relevant information relating to the impact of COVID-19 on their financial position and prospects.
The AMF seemed to show a certain tolerance for this information to be shared when results will be published[2]. The AMF press release stated: "Due to the new sensitivity of certain information (geographical areas of activity, production, subcontracting, supply, employees concerned), issuers are recommended to disclose this information when presenting their annual results".
The prevailing practice of issuers has been to communicate about cost-saving plans and their liquidity in order to reassure the market. Several issuers have also decided to suspend their guidance pending a detailed presentation of the impact of the crisis at the time of their results and outlook announcement in the context of the publication of their annual results. Many issuers have chosen to communicate on the impact of the crisis.
Communication must be adapted on a case.
Communication must be adapted on a case-by-case basis in order to bring the market up to speed as soon as possible without creating panic. It should be noted that active public communication will make it possible to maintain a constant dialogue with investors and analysts, whereas a silent communication strategy will largely condemn investor relations teams to a "no comment" policy in order to avoid the risk of selective disclosure.
With regard to the financial statements, the impact of this pandemic must also be considered, if necessary in the financial statements at December 31, 2019, as a post-closing event requiring disclosure.
Publicly listed companies that closed their financial statements as of December 31, 2019 must file, before April 30, 2020, their annual financial report, including their management report, which must include a description of the main risks and uncertainties facing the company. In this respect, issuers are invited to include the information that they deem appropriate considering the state of the coronavirus epidemic as of the filing of their annual financial report. For issuers preparing a universal registration document, the "Risk Factors" section should, where necessary, address more precisely the economic exposure of the listed group to this epidemic, as well as any measures taken.
Similarly, ESMA has specified that issuers must be transparent about the actual and potential impact of COVID-19 on the basis of a quantitative and qualitative analysis of their business, financial situation and economic performance as part of their annual financial publication (or interim report if the annual report has not been finalized).
In its press release of 23 March, the AMF reiterated that the risk factors and outlook previously announced should be reassessed in light of the current environment.
In particular, the AMF warned issuers against the temptation to hide behind "one size fits all" formulas in the face of crisis uncertainty. As the impact of the crisis could be very different from one company to another, depending on its business and customers, and on the resources of issuers, the information provided in this regard must be detailed and tailored to each specific situation.
The AMF asks that the impacts that have been observed or expected to be material and sufficiently precise be mentioned, along with the risk management measures implemented and the assumptions made in the communications on estimated impacts.
Regarding the outlook, the AMF issued a reminder that disclosure to the market relating the business and performance outlook for the current year should be accompanied by a description of the main underlying assumptions. Thus, even in the absence of precise information to be disclosed, issuers disclosing a 2020 outlook to the market are invited to indicate which assumptions were used in their preparation, taking into account the potential impacts of the epidemic.
Pursuant to the Prospectus Regulation, current profit forecasts or estimates must be included in the URD. As indicated by the AMF in its press release of 23 March, the URD must include, for previously published forecasts or estimates that are no longer valid, a statement that they are no longer valid, either by including a new forecast with a description of the underlying assumptions or, where applicable, by indicating that a new forecast cannot be provided in the immediate future given the general uncertainty. The AMF emphasises that changes to forecasts made at the time of the URD must publish a press release on the subject.
At a time when issuers' business, financial results and outlook are faced with the uncertainty associated with the impact of the pandemic, it is essential for companies to be careful in managing inside information and to ensure that they do not pass on to certain investors information that could be considered ex post facto as such.
Similarly, persons who, by virtue of their functions, could be considered as potentially in possession of inside information must be prudent before entering into any financial transaction. Prohibition to use of inside information applies irrespective of the likely effect that inside information could have if it were made public, as well as if it is impossible to reasonably conclude on the way it would play out.
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[1] The French securities regulator
[2] The AMF's position is based on the assumption that most issuers are closing their accounts. For companies with a non-calendar year-end, this position should include their closest publication of interim results.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.
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