COVID-19 Legal Update: Ad hoc disclosure obligations of listed companies

20 March 2020 – need2know

The economic effects of the COVID 19 pandemic caused depressed stock markets. The crisis and its general economic effects (such as the danger of recession) are clearly no inside information.

However, concrete company-specific crisis measures or effects must be continuously monitored by issuers (of shares, bonds, etc.) and assessed to determine whether they contain inside information that must be publicly disclosed (ad hoc announcement). This fact has also been pointed out by ESMA.

Issuers may have to deal with, among other things, necessary dividend cuts, deteriorated business forecasts (“profit warnings”), widespread employee layoffs (quarantine), plant or business closures and insolvency scenarios. Positive information would be, for example, a breakthrough with a vaccine.

The article provides general guidelines. Inside information, ad-hoc reporting requirements and a delay of the disclosure must be assessed on a case-by-case basis and the concrete circumstances of given issuer.

Legal basis

  • Ad-hoc reporting obligation: Issuers with financial instruments (essentially shares, bonds) are obliged to inform the public as soon as possible of inside information (Art 17 Market Abuse Regulation (MAR)).
  • Inside information: information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instrument (price-sensitive) (Art 7 MAR).
  • Delay of disclosure: Issuers may delay disclosure if (a) immediate disclosure is likely to prejudice the legitimate interests of the issuer (b) delay of disclosure is not likely to mislead the public; (c) the issuer is able to ensure the confidentiality of that information (Art 17 MAR). See also the ESMA MAR Guidelines on Deferment of Disclosure of Inside Information.

General market developments – recession

The current market developments as a result of the COVID 19 epidemic, legal measures, risk of recession, support measures by states, etc., do not directly trigger any ad hoc disclosure obligation. Although the information is clearly share price relevant, but it is also publicly known.

Delay, reduction/absence of dividend distributions

With regard to dividend distribution for the last financial year (2019), the following, among others, may constitute insider information triggering disclosure obligation:

  • Delay in dividend payments due to postponement of the Annual General MeetingAt present, there is practically a ban on events. Issuers are forced to cancel and postpone annual general meetings (AGMs) for the time being (see for general current developments).
    : The “Corporate COVID-19 Act – COVID-19-GesG“, which is supposed to allow purely virtual general meetings, has just been introduced in the National Council. Details will be regulated in an ordinance of the Federal Minister of Justice.The AGM has to decide on the appropriation of profits (distribution of a dividend). In the event of cancellation/postponement, the payment of dividends will also be delayed.
  • Reductions or cut of dividendsDue to changes in business development and prospects, it may be necessary to reduce or completely cancel the dividend for financing and/or capital reasons.

Reducing/cutting a dividend that has been announced or is expected on the market is regularly inside information that must be disclosed. However, also a mere delayed dividend payment could also require an ad-hoc announcement if the AGM is postponed.

Profit expectations/business forecasts (“profit warnings”)

General market developments, and possibly also effects on specific markets, are publicly known. However, the concrete effects on the business results of an issuer cannot usually be derived directly. If forecasts expected on the market (including analysts’ consensus) or communicated by the issuer, in particular sales and earnings expectations, may probably no longer be achieved.

The Management Board must constantly check whether published forecasts for current and future business periods can be maintained. Anticipated deviations/changes in forecasts are usually trigger an ad-hoc obligation:

  • The previous forecast must then be adjusted by communicating the newly determined forecast. Since reliable new forecast figures will often be objectively impossible given the current uncertainties, it is sufficient to state that the old forecast (reference to the relevant key figures) is no longer maintained.
  • If a failure to meet the communicated forecast already corresponds to the relevant market expectation anyway, the “correction” by an ad hoc announcement is not mandatory.

It should be noted that not only the adjustment of published forecasts may qualify as inside information, but under certain circumstances also expected sales/profit declines. Although there is a corresponding general market expectation due to the COVID-19 crisis, the specific effects on an issuer’s business activity – usually also Europe-wide and international – cannot be directly derived directly from this.

It should be noted that in connection with business forecasts, a delay of publication (see above) is generally not permitted.

Impairment of business operations

The business operations of issuers may be significantly affected by different effects of the COVID‑19 pandemic, such effects may also be unrelated to each other. These circumstances alone – in addition to or unrelated to business forecasts (see above) – may be subject to a reporting requirement.

The following factors, for example, could have price relevance for issuers:

  • A direct and immediate impact can be caused, for example, by the infection of a large number of employees which leads to production bottlenecks or downtimes, or as a result of the closure of production facilities ordered by the authorities or the start of short-time working.
  • Indirectly affected may be, for example, due to restrictions on public transport, bottlenecks at suppliers (e.g. from regions with a high prevalence of SARS-CoV-2 (coronavirus)), disruptions in the supply and logistics chain or (expected) lack of orders from customers, etc.

It must be assessed for each individual case whether inside information and ad-hoc reporting obligations (especially price relevance) exist or whether the information is already publicly known anyway.

Loss of managerial staff/key employees

A disclosure obligation may also arise, if a COVID-19 infection affects members of the management (executive board or supervisory board) or of executives or key employees – i.e. persons who have a significant influence on the course of business – even if this does not directly affect the operative business (see above).

Financial difficulties – Termination/repayment of financing, payment hold-ups, liquidity bottlenecks, impending insolvency

Termination/repayment of major financing lines (e.g. due to breach of financial covenants), insolvency incidents such as payment stops, liquidity bottlenecks, or imminent insolvency generally constitute inside information relevant to the share price.

Disclosure to the public often leads to a deterioration of the situation. In this case, a delay of disclosure should be considered if measures/negotiations intended to financially rescue/recover the issuer are thwarted. This may also apply with respect to recourse to government support.

Authors: Daniel Reiter, Roland Juill, Christoph Nauer

Please contact us if you have any questions:
Christoph Nauer
Elke Napokoj
Daniel Reiter
Roland Juill

Practice group:

Capital Markets, Banking & Finance

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