Impact of COVID-19 on Business Transactions and Financial Recordings
Under the EU Market Abuse Regulation (MAR) and AIM Rules for Companies, publicly traded companies have specific disclosure obligations regarding the impact of COVID-19 on their trading performance and related financial reporting.
EU Market Abuse Regulation (MAR)
The EU Market Abuse Regulation (MAR) requires issuers to disclose inside information that would likely have a significant effect on the price of their financial instruments as soon as possible. This includes any precise, non-public, and potentially market-moving information about the impact of COVID-19 on a company’s trading performance, financial position, or outlook. Companies must provide timely and accurate updates regarding the material effects of the pandemic on their business operations and financial results to ensure market transparency and prevent market abuse.
AIM Rules for Companies
AIM-listed companies must comply with immediate disclosure of price-sensitive information under the AIM Rules. This means that companies must promptly announce material information relating to their financial performance, including the effects of COVID-19 on trading and other financial matters. This includes any significant changes in revenue, profits, assets, liabilities, or any other material financial metrics related to the pandemic. Additionally, companies must ensure that such disclosures are fair, clear, and not misleading.
While the search results do not provide detailed texts specifically connecting COVID-19-related disclosure requirements under MAR or AIM Rules, the general principles of transparency in market abuse and AIM Rules apply equally to pandemic-related impacts. Companies listed on EU markets or AIM are expected to:
- Assess the material impact of COVID-19 on their financial performance and outlook.
- Disclose such impacts timely as inside information (under MAR) or price-sensitive information (under AIM).
- Update the market regularly if ongoing developments continue to affect performance materially.
In addition to these disclosure obligations, companies may need to consider additional financial reporting adjustments or sustainability-related disclosures (such as under the Sustainable Finance Disclosure Regulation, SFDR), but these are separate frameworks mostly unrelated to MAR and AIM direct disclosure obligations.
For precise compliance steps, companies should review regulatory guidance from ESMA and AIM market authorities. The FRC has also reminded boards to consider whether the impact of coronavirus will necessitate specific balance sheets adjustments or post-balance sheet event disclosures.
In the current volatile capital markets, primary and secondary fundraisings are being postponed. Relevant inside information may include disruption of supply chains or suppression of customer demand due to the coronavirus outbreak. PE and VC investors are closely assessing investee business models for susceptibility to the knock-on effects of coronavirus.
Deterioration in financial condition and/or stress on debt repayment is potentially disclosable by listed companies as inside information. Listed companies subject to the UK Corporate Governance Code should consider how opportunities and risks to the future success of the business have been considered and addressed in their annual report.
Parties to ongoing M&A transactions will need to review termination rights, including material adverse change (MAC) clauses, in light of coronavirus risks. Companies experiencing a deterioration in financial condition as a result of the outbreak will need to consider the impact on existing debt arrangements and potentially enter into a dialogue with lenders to restructure payments or flex covenant testing in the short term.
Company directors need to carefully consider how to address coronavirus risks within their own businesses, including the long-term impact of decision making and the interests of employees. The Financial Reporting Council has reminded all companies, especially those required to prepare a strategic report, to make appropriate meaningful disclosures in annual reports relating to the disclosure of principal risks and uncertainties affecting a company's business model.
Restricting foreign travel by employees is a prudent decision during the current coronavirus outbreak, as it helps safeguard the workforce, reduces the likelihood of having to close business premises in less affected areas, and avoids adverse publicity. Companies experiencing a deterioration in financial condition as a result of the outbreak will need to consider the impact on existing debt arrangements and potentially enter into a dialogue with lenders to restructure payments or flex covenant testing in the short term.
In the short term, PE and VC investment activity may potentially reduce due to general macroeconomic uncertainty. Given the present uncertainty, both buyers and sellers are likely to choose to defer transactions in industries with particular exposure to coronavirus impacts. For transactions in the pre-exchange phase, bespoke risk allocation provisions (including termination rights) may be necessary to cater for material coronavirus impacts on the target.
The proper discharge of a director's statutory duty under section 172 Companies Act 2006 to promote the success of the company requires the director to consider, amongst other factors, the long-term impact of decision making and the interests of employees. Given the present circumstances, it is crucial for companies to adhere to their disclosure obligations under MAR and AIM Rules to maintain market transparency and integrity.
- Companies listed on EU markets or AIM must disclose the impact of COVID-19 on their financial performance and outlook, and regularly update the market if ongoing developments continue to affect their performance materially, as part of their compliance with the EU Market Abuse Regulation (MAR) and AIM Rules.
- AIM-listed companies should also promptly announce any significant changes in revenue, profits, assets, liabilities, or other material financial metrics related to the pandemic, and ensure such disclosures are fair, clear, and not misleading, in order to maintain market transparency and prevent market abuse.
