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COVID-19: Disclosure issues for UK listed companies under MAR

UPDATED in May 2020 to reflect publication of Market Watch 63

Update March 2020


Introduction

The COVID-19 pandemic continues to have wide ranging and deep effects on companies in all sectors. In this context, publicly traded companies need to consider their ongoing disclosure obligations.

This briefing focuses on disclosure considerations under the EU Market Abuse Regulation (MAR) for companies with shares admitted to the Main Market or AIM.1

Obligation to disclose inside information

Under MAR, issuers are required to announce inside information which directly concerns them to the market as soon as possible. The FCA has made it clear in Primary Market Bulletin 27 (PMB 27) that it expects issuers to continue to comply with this obligation in the context of COVID-19.

Inside information

Although the existence of the pandemic is public knowledge, companies will need to consider whether disclosure is required under MAR in light of the particular impact on their business. For example:

  • Has the outbreak given rise to any material change in financial position? This may be particularly relevant for companies operating in certain sectors where the impact has been more immediate or extensive.
  • Is there a material impact on the company’s prospects that requires an update to the market (for example, to correct any forward looking guidance that may previously have been released or consensus investor expectation)?
  • Is there any other specific impact on the group that would be relevant to investors in making their investment decisions – for example default under, or termination of, material contracts?

In Market Watch 63 (MW 63)2 the FCA makes the point that issuers should carefully judge what information a reasonable investor would now be likely to use as part of their investment decisions3 in the context of COVID-19 and notes some examples of information that could have a significant effect on share price – namely:

  • Detail on future financial performance, such as access to finance and funding – this includes through government schemes, significant changes in cash flow patterns, force majeure or termination rights in material contracts or financial arrangements, and changes to dividends or buy-back schemes.
  • The issuer’s ability to continue or resume business – such as changes in strategy or business plans, business resumption plans, arrangements for staff returning to work, and supply chains.

The FCA also notes that issuers should carefully monitor whether any new information is materially different from previous forecasts, guidance or signals which they have announced publicly and which would now be likely to be misleading to investors – for example, missing previous forecast earnings, revenue or related KPIs. Where this is the case, issuers should consider whether the new information is inside information and whether they are obliged to disclose it to the public as soon as possible (see also the section below on delaying disclosure).

Where companies are taking operational steps to mitigate any adverse impact on the business – for example through temporary business closures, reductions in capital expenditure, workforce adjustments or changes to arrangements with suppliers/other counterparties – thought must be given to whether these may of themselves amount to inside information requiring disclosure. This point is specifically noted by the FCA in PMB 27.

In the context of any mitigating action, the guidance in the FCA’s technical note on assessing and handling inside information (UKLA/TN/521.3) that justifying non-disclosure of information by offsetting negative and positive news is not acceptable should also be considered.

Directors should also keep in mind that, even in circumstances where they are permitted to delay announcement of the company’s annual or half-year results past the usual deadline (see our separate briefing Financial reporting issues: Updated deadlines and guidance for UK companies) they must still comply with MAR. This point is made by the FCA in MW 63 which notes that where financial reporting deadlines have been extended, complying with MAR disclosure obligations will ensure markets remain informed and are not misled. Directors should therefore consider carefully whether the company is in possession of inside information that requires earlier announcement – which might be the case for example where it is anticipated the results will be out of line with previous guidance or consensus investor expectation as discussed above.

When gathering information to make decisions as to whether inside information has arisen, directors should consider whether the FCA could later regard a spreadsheet or other forecasting tool as evidence of the existence of information requiring an announcement (despite arguments around a lack of certainty or that further refinement was needed).

Given the complex and fact specific nature of any assessment as to whether inside information has arisen, directors should seek input from their external advisers in cases of doubt. They should also keep in mind that the definition under MAR (and, in particular the “reasonable investor” test) means that the bar is set at a relatively low level, with companies generally taking a relatively prudent approach to disclosure issues.

Delaying disclosure

It seems unlikely that the disruption caused by COVID-19 in and of itself could be relied upon by issuers to justify delayed disclosure. Under Article 17(4) of MAR, an issuer is only permitted to delay disclosure of inside information where each of the following conditions are met: immediate disclosure is likely to prejudice its legitimate interests; the issuer is able to maintain the confidentiality of the information; and delayed disclosure is not likely to mislead the public. In the context of the last condition, MW 63 reminds issuers of the ESMA guidelines on delayed disclosure and notes that where an issuer has made previous statements or given signals that have created market expectations, it would be likely to mislead the public if it intends to delay disclosure of information that is materially different from those statements or in contrast to those expectations.

In considering any delay, companies also should bear in mind that the FCA does not expect issuers to delay public disclosure of the fact that they are in financial difficulty or of their worsening financial condition even where it may be legitimate to delay disclosure of negotiations to deal with such a situation (DTR2.5.4G).

Where disclosure is delayed, companies should ensure that they are in a position to publish the inside information as soon as possible in circumstances where the conditions for delay are no longer met, including preparing a holding announcement (in accordance with DTR2.6.3G) that can be released in the event of an actual or likely breach of confidence. As noted in MW 63, given market uncertainties and changed working arrangements issuers should be extra vigilant about the possibility of leaks or rumours. See also the guidance on delaying disclosure and dealing with leaks and rumours set out in FCA Technical Note 520.2.

Decision making and internal procedures

In many cases, the assessment of whether disclosure is required is likely to involve finely balanced judgements by the directors - in particular given the fast-moving nature of the situation and current uncertainty. As a practical matter, it is therefore important for companies to ensure that directors remain appropriately briefed on the requirements of MAR and are engaging with the company’s external advisers as appropriate.

In PMB 27, the FCA notes that it is aware COVID-19 may create challenges in the convening and operation of disclosure committees but that it still expects issuers to make every effort to meet their disclosure obligations in a timely fashion. In this context, companies may want to review the composition of their disclosure committee (or other relevant decision making group) to ensure that it is comprised in a way that enables meetings to take place on very short notice. Arrangements for holding committee meetings remotely should be considered if these are not already in place for any reason and care should be taken to ensure that the way in which meetings are held does not impact on the integrity of the decision-making, allowing full participation, discussion and challenge to the same extent as if the discussion was in person (for further information on this topic, see our separate blog post Practical governance: top tips for conference calls/virtual meetings).

Where a decision is ultimately taken that disclosure is not required, appropriate contemporaneous records should be kept showing the chronology of events, the basis for the decision and the substance of any external advice received. Arrangements should also be put in place to keep the situation under review going forward – this is particularly relevant given the fast-moving nature of current circumstances. Companies should also consider whether to create a daily log which records the factors that have changed, why they do/do not impact on the decision reached and the source of information relied upon, particularly where decisions are based on a number of internal and external factors (such as news articles or speeches which may be difficult to trace at a later date).

Internal records will be key in any regulatory investigation or enquiry as a detailed timetable or chronology of discussions, actions and decisions is likely to be one of the first things requested by the FCA. As noted in MW 63, where judgment is used and the FCA has questions on the decision reached, issuers that maintain contemporaneous and complete records of decisions and actions regarding the disclosure of inside information will find it easier to reconstruct and justify their approach.

Directors and other individuals should keep in mind that communications with internal and external legal advisers and other related material may be protected by legal professional privilege and should be marked accordingly and kept confidential. Legal advice should be sought before any such material is circulated internally or provided to a regulator or any other party.

Conclusion

COVID-19 is having an unprecedented impact on businesses in all sectors, and it is critical for companies and their boards to ensure that arrangements are in place to ensure timely escalation, consideration and release of information to the market. Where a company believes it may not be able to meet its continuing obligations it should promptly seek advice from its external advisers who will be able to assist it in any discussions with the FCA.

The FCA expects companies to continue to comply with their disclosure obligations under MAR and, as a practical matter, it will ultimately have the benefit of looking at events with hindsight when deciding whether to take any enforcement action for perceived breaches of the rules in this area.

As discussed above, it is therefore key for companies to ensure that directors are up-to-date in their understanding of the disclosure requirements of MAR and that appropriate contemporaneous records are kept of decisions made and any external advice obtained.

How we can help

  • Extensive experience of advising companies on complex disclosure issues under MAR and of advising on internal policies and procedures in this area.
  • Regularly provide training (including refresher training) on this topic to boards and disclosure committees.
  • We also advise companies in relation to FCA investigations and disciplinary matters, including in relation to disclosure issues and so we are well placed to provide input as to the FCA’s approach and expectations.


Footnotes

1  

AIM companies must also consider their obligations under AIM Rule 11, which applies in addition to the MAR disclosure obligations described in this briefing.

2  

See also our separate briefing Market Abuse Regulation: UK FCA sets out expectations of market conduct in light of COVID-19 in relation to other MAR related topics covered in MW 63.

3  

In summary, MAR defines inside information as information that: (1) is of a precise nature (the definition also sets out when information will be treated as precise for these purposes); (2) has not been made public; and (3) if it were made public would be likely to have a significant effect on the price of the relevant financial instruments. For the purpose of (3) MAR notes that information which would be likely to have a significant effect on price means information a reasonable investor would be likely to use as part of the basis of his/her investment decisions – this is commonly referred to as the “reasonable investor” test. For these purposes a reasonable investor is a hypothetical investor that is rational and economically motivated (i.e. it would take into account information likely to have a significant effect on price but would not take into account information which would have no, or only an insignificant or trivial, effect on price). Whilst a significant effect can be contrasted with an insignificant (in the sense of trivial) effect, what is or is not trivial will depend on the circumstances and significance must be assessed in the context of the issuer concerned. The FCA is clear that there is no figure (percentage change or otherwise) that can be set when determining what constitutes a significant effect on price as this will vary from issuer to issuer (DTR2.2.4G). Determining whether information is inside information is invariably complex and fact specific and tailored guidance should therefore always be sought in cases of any doubt.



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