COVID-19 - Issues to consider for listed companies
The outbreak of COVID-19 has brought disruption to daily life and businesses on an unprecedented scale. With the locking down of cities and countries, travel bans, health quarantine and social distancing policies implemented or recommended by governments, the world has come to a standstill with minimal economic activity. People are encouraged to avoid large gatherings. In light of that, we have prepared a list of issues that listed companies should consider.
Preparation of annual accounts
The end of March each year is a busy time for listed companies in Hong Kong with a financial year ending 31 December to release their annual results. However, with the travel restrictions in China still in force, auditors may not be able to efficiently conduct an audit on the accounts of listed companies with operations in China.
On 4 February 2020 and 16 March 2020, the Hong Kong Stock Exchange (the "Exchange") and the Securities and Futures Commission (the "SFC") released guidance for listed companies who are unable to publish preliminary results in accordance with the Listing Rules by 31 March 2020 (the "Joint Statement").
The guidance relating to the publication of preliminary results announcement is as follows:
- If by 31 March 2020 a listed company is able to publish a preliminary results announcement without agreement with its auditors, or its management accounts, then the Exchange will normally not suspend trading in its securities.
- To allow trading in a listed company's securities to continue, the listed company should publish Material Financial Information which includes:
- key financial figures such as assets, liabilities, income and expenses, and changes in shareholders' equity; and
- narrative discussions of its financial position and performance during the year to supplement the financial figures provided, including the impact of any material events and any material transactions that have taken place.
- In all cases, the announcement should also explain how and why the travel and other restrictions have affected the listed company's ability to meet its reporting deadline.
The guidance relating to the publication of annual reports is as follows:
- A listed company may defer the publication of its annual report initially for up to 60 days from the date of this statement if the listed company has published, on or before 31 March 2020, (i) its preliminary results with its auditors' agreement in compliance with the Listing Rules requirements; (ii) its preliminary results without its auditors' agreement pursuant to the Joint Statement; (iii) its management accounts; or (iv) Material Financial Information.
- A listed company deferring the publication of its annual report as outlined above must: (i) announce an estimation of when it expects to publish its annual report with an explanation of the factors that it considered in arriving at such estimation, and (ii) keep the market informed of the expected publication date of its annual report along with other updates as appropriate.
- Applications for a further extension beyond the 60-day period mentioned above would be granted solely on a case-by-case basis having regard to the individual circumstances of the listed company.
Proper disclosure by listed companies of the impact of the outbreak on the company
Part XIVA of the Securities and Futures Ordinance (the "SFO") obliges listed companies to disclose inside information in a timely manner. Although there is no definitive list of what might constitute inside information, the SFC guidelines have specified a number of "common examples" of circumstances where the listed companies should consider whether a disclosure obligation arises and among other things, includes:
S.307B of the SFO provides that a listed company will be obliged to disclose to the public as soon as reasonably practicable any “inside information” that has come to its knowledge. A listed company will have complied with the manner of disclosure if the information is disseminated through the electronic publication system operated by the Exchange for disseminating information to the public.Listed companies and their boards should therefore carefully consider the impact or potential impact of the outbreak (and action being taken in response to the outbreak) on their business. Where there is an expectation or reasonable likelihood that the outbreak will affect the financial performance of the company, boards should consider keeping the market updated, in particular, in circumstances where there would be significant deterioration in their financial performance as compared to previous years, by way of making an inside information announcement.Upcoming MeetingsCompanies with upcoming meetings of shareholders, including AGMs for those companies with a 31 December (or other recent) year end, should consider the logistics for such meetings.While shareholders will still be able to vote by traditional means (including by proxy), a company may wish to consider additional voting processes (such as direct voting and other electronic voting processes) to accommodate shareholders who may ordinarily attend a meeting in person, as well as encourage participation generally. Section 584 of the Companies Ordinance ("CO") permits a general meeting to be held at more than one location by using technology that enables members to listen, speak and vote at the meeting whereas the Listing Rules do not impose any requirements on the format of an AGM. However, the company's constitution will also need to be checked to ensure that such processes can be used.According to the Guide on General Meeting issued by the Exchange (last updated on 30 August 2019), guideline 2.3 stipulates that listed companies may use technology (e.g. webcasts or video conferencing) to hold general meetings in order to maximise shareholder participation. The law does not have any requirement for an AGM to be live and to allow shareholders to ask questions live. However, the Corporate Governance Code in Appendix 14 of the Listing Rules states that the board should be responsible for maintaining an on-going dialogue with shareholders and in particular, use AGMs or other general meetings to communicate with them and encourage their participation. The chairmen of the audit, remuneration, nomination committees and the external auditor should attend the AGM to answer questions from the shareholders. It is advisable for the listed company to check with its share registrar to see if they have the technology to support a live feed conference and to allow participants to ask questions live (either by raising questions verbally or instant messaging, etc.).Companies may also wish to consider whether a meeting that has already been called needs to be postponed, adjourned or potentially cancelled, and, in the case of an AGM, if an extension is required beyond the deadline to hold an AGM (within six months of the end of the relevant financial year). In response to whether a listed company could postpone the date of its AGM beyond six months as a result of the delayed publication of audited financial statements, the Exchange states that it may consider waiving the requirement under Rule 13.46(2)(b) of the Listing Rules for overseas and PRC issuers (i.e. to lay financial statements at AGM within six months after financial year end) on a case-by-case basis. However, listed companies are reminded to observe the relevant requirements under the laws and regulations in their jurisdictions of incorporation and its own articles of association. (Note: PRC, Cayman and Bermuda company laws require companies (other than exempted companies in the Cayman Islands) to hold AGMs at least once every year. The PRC company law also requires listed companies to hold AGMs within six months of the closing of the financial year.) For Hong Kong incorporated listed companies, the CO requires a company to hold its AGM within six months (section 610 of the CO) and directors to lay the listed company's annual financial statements at its AGM within the period of six months after the end of the financial year (section 429 of the CO). While Rule 13.46(1) Note 2 of the Listing Rules also requires Hong Kong incorporated listed companies to lay accounts within six months of its financial year end, the Exchange will not grant any waiver that would result in a contravention with the CO.
- changes in performance, or the expectation of the performance, of the business;
- changes in financial condition, e.g. cashflow crisis, credit crunch;
- reduction of real properties’ values;
- decrease or increase in value of financial instruments in portfolio which include financial assets or liabilities arising from futures contracts, derivatives, warrants, swaps protective hedges, credit default;
- changes in expected earnings or losses; or
- orders received from customers, their cancellation or important changes.
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