COVID-19: Issues for consideration
Issue
What to consider
Proper disclosure by public companies of the impact of the outbreak on the company
Listed companies and their boards should carefully consider the impact or potential impacts 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 forecasts are not expected to be met. Updated guidance should be considered if and when there is an appropriate level of certainty to ensure the updated guidance is meaningful.
Upcoming meetings (including AGMs)
Companies 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 further voting processes (such as direct voting and other electronic voting processes) to accommodate shareholders that may ordinarily attend a meeting in person, as well as encourage participation generally. The company constitution will need to be checked to ensure that such processes can be used. 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 deadline allowed to hold an AGM (within five months of the end of the relevant financial year) – noting ASIC will typically only grant such an extension in exceptional circumstances.
Companies may also wish to provide a facility to livestream a meeting of shareholders (including an AGM).
We recommend engaging with your share registry (and other service providers) as soon as possible on the above considerations and other logistics for the meeting.
Proactive and appropriate allocation of risk in sale agreements that are currently under negotiation
For those clients who find themselves in the midst of negotiating M&A transactions or equity investments, we recommend a close consideration of the levers which affect risk allocation between buyer and seller. In particular:
- due diligence – thorough and robust due diligence on target companies and businesses will become more important than ever. The economic conditions which are predicted to be brought about by the onset of the virus may eventually lead to M&A opportunities but buyers will need to be vigilant about properly understanding target businesses and the risks that arise as a result of the pandemic.
- conditions precedent – consider what impact the pandemic may have on the time it takes to obtain regulatory and third party approvals. Authorities are under pressure making decisions to protect the health and safety of the public and we expect this will lead to a delay in approvals being given by the Foreign Investment Review Board and other regulatory bodies.
- termination rights – the parties should carefully consider any proposed termination rights in a sale agreement exercisable in the period between signing and completion. Sellers should be arguing against the inclusion of any material adverse change provisions. Although the true impacts of the virus are not yet known it is still a known risk and sellers should avoid taking any risk of the buyer attempting to rely on the impacts of the virus as a means to terminate the agreement. Buyers should seek rights to terminate the agreement in circumstances where the sellers have not properly disclosed the existing impact of the pandemic on their business.
- warranties and indemnities – as a seller, closely consider the impact of the COVID-19 virus on your business and make full disclosure of any existing or potential impacts. Consider limiting the scope of warranties and indemnities given and avoid giving any assurances regarding the impact of the virus on your business. For buyers, seek specific warranties relating to the impact of the virus on the target to date to ensure you have all available information in making a decision whether to proceed with the transaction.
- warranty and indemnity insurance – W&I insurance has become an increasingly common part of the deal landscape in Australia. Insurers in all sectors are already scrambling to understand the impact of claims on their liability to insured parties. It will likely be very difficult to obtain W&I coverage during this period and we understand insurers are likely to require a specific exclusion in relation to the impacts of COVID-19.
Impact on completion of deals that are currently conditional
For clients who have entered into a sale agreement to buy or sell a target company or business which is subject to conditions which are yet to be satisfied, there are several key issues which may become relevant in the circumstances:
- material adverse change – as a buyer you may have negotiated a material adverse change or “MAC” clause which enables you to terminate the sale agreement and walk away from the deal in certain circumstances. These circumstances wouldn’t generally expressly include types of events such as the COVID-19 pandemic but rather address the impact of external events on the assets and liabilities or earnings of the target company or business.
- disclosure – to the extent sellers have the right to provide additional disclosure against warranties and representations following execution of the sale agreement they should do so. Even in circumstances where the sale agreement doesn’t provide an express right to deliver an additional disclosure letter or otherwise provide additional disclosure, sellers should still consider making formal disclosure of circumstances affecting the target to give themselves the best chance of defending any potential warranty claims following completion. In these circumstances sellers may be able to form an argument that any losses claimed by the buyer could have been avoided or mitigated given the disclosures made by the seller.
Directors duties
All company directors will need to carefully consider the impacts of COVID-19 on their business and develop contingency plans where necessary, including in relation to the following areas:
- insolvent trading – companies whose trade is significantly impacted by the pandemic will have cause to consider the impact of economic conditions on their ability to continue trading: Insolvency occurs when a company is unable to pay its debts as and when they fall due. Directors have a duty to prevent a company trading while it is insolvent or where there are reasonable grounds for suspecting that a company is insolvent or will become insolvent if the company incurs a particular debt. A director who breaches this duty can be held personally liable to pay compensation to the company.
- safe harbour – the safe harbour laws (found in sections 588GA and 588GB of the Corporations Act) operate to protect a director from liability associated with insolvent trading during the ‘safe harbour’ period. A director can use the safe harbour provisions in defence to a claim by a liquidator that they traded the company whilst insolvent. The safe harbour will start to apply from the time a director, after beginning to suspect that the company may become insolvent, starts developing one or more courses of action which are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator. In the context of an insolvent company, a better outcome for the company equates to a better return for its creditors. One of the requirements for relying on the safe harbour provisions is to obtain advice from an appropriate qualified entity. For larger companies, an appropriately qualified adviser would be a turnaround/restructuring professional skilled in turnaround of large businesses. For a smaller company, the company accountant may suffice as an appropriately qualified adviser. Whoever is chosen, the person should be experienced enough to assist in working out whether the course of action contemplated or adopted would lead to a better outcome for creditors than an immediate appointment of an administrator or liquidator.
- compliance with health and safety regulations – boards will need to consider the health and wellbeing of their employees, clients and customers during the crisis. This will include developing contingency plans which meet the requirements of all health and safety laws.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.