COVID-19: Governance

News / / COVID-19: Governance

Company directors will need to prudently assess how to manage coronavirus risks within their businesses.

As a company director what should I be considering at this time?

As well as particular regulatory obligations (under health and safety and employment law and financial services regulation) directors must take into account their:

 duties under section 172 Companies Act 2006 to act in the way that they consider, in good faith, will promote the success of the company (and in doing so, have regard to (amongst other matters) factors including the:

  • long-term impact of decision making;
  • interests of the company’s employees;
  • need to foster business relationships with suppliers/customers/others;
  • impact of the company’s operations on community and environment
  • desirability of the company maintaining a reputation for high standards of business conduct; and
  • requirement to act fairly between members of the company

 duty under section 174 Companies Act 2006 to exercise reasonable care, skill and diligence.

What practical steps should I consider?

The factors highlighted above will allow you to undertake pragmatic decision making during this crucial time. Immediate practical steps may include restriction of foreign travel by employees, revising and updating business continuity plans, agile/remote/rota working arrangements, relocating staff, systems testing etc.

Whilst such measures might have unfavourable short-term impact, for the long-term, it is likely to support the livelihood and survival of the company through:

  • safeguarding the workforce;
  • decreasing the probability of having to close business premises in less affected areas; and
  • reducing the likelihood of harmful or adverse publicity to the business.

What should we, as directors do if the company starts to face cash flow pressures and/or insolvency?

If the solvency of a company appears uncertain, the emphasis of the directors’ duties must shift from promoting the success of the company to acting in the best interests of the creditors of the company as a whole. Directors should take immediate professional advice as soon as possible where the solvency of the company comes into question. Seeking professional advice will allow the directors to be advised of their duties and the actions they can and cannot take to avoid for example wrongful trading and the potential for personal liability. Please consider our article ‘Considering solvency issues in light of the Coronavirus’ here for a more detailed look at how to plan for trading difficulties and the duties of directors.

What are the disclosure obligations of a listed company in the context of COVID-19?

Listed companies will need to continue to observe developments and make sure that they are providing the necessary disclosures to their shareholders when they arise and when preparing their year-end reports.

Unpublished price sensitive (or “inside”) information must be disclosed by a listed company pursuant to the EU Market Abuse Regulation, and, for AIM companies, the largely equivalent obligations under the AIM Rules for Companies.

In the context of COVID-19 relevant inside information may include:

  • The company having significant operations in or a dependence on supply chains located in areas materially impacted by COVID-19;
  • adverse changes in a company’s trading performance (or expectations of performance) arising from the a reduction in customer demand, refunds and/or cancellations, deterioration in financial condition, stress on debt repayment or any other issues effecting company performance as a result of COVID-19;
  • a material change in the company’s strategy, business plan or policy in response to COVID-19;
  • the cancellation or undefined delay of a company transaction due to COVID-19.

Directors must exercise their judgement as to whether the impact of COVID-19 on the business or whether steps taken to mitigate COVID-19 amount to inside information. Once the directors have established that it is inside information they must announce it as quickly as possible unless the company can lawfully delay public disclosure.

What about Financial Reporting? 

The Financial Reporting Council (FRC) has published guidance for companies on disclosure of risks and other reporting consequences arising from COVID-19. The guidance suggests that companies should assess whether they ought to comment on the possible impact of COVID-19 on their business in their reporting of principal risks and uncertainties. In the event mitigating actions can be taken, it is considered that these should be described together with an explanation of the risk itself. The risk will of

course be dependent on the nature of the company’s business and circumstances. Business circumstances identified by the FRC include companies who manufacture out of or have extensive operations in China. The FRC have also commented that the spread of the virus may mean that even those companies that do not have a physical presence in China but have links with China through their supply chain are likely to face disruption and be subject to risk.

Listed companies that are subject to the UK Corporate Governance Code must also consider carefully relevant Code provisions. More specifically the requirement for issuers to explain in their annual report how opportunities and risks regarding the future success of the business have been looked at and dealt with.

We are concerned about our upcoming AGM – should we adjourn or postpone?

If it is possible to go ahead with your AGM you should try to do so, since COVID -19 may have an impact over several months and the company needs to comply with its legal deadlines.

Boards should consider now, how the coronavirus may affect upcoming AGMs. In particular is the company able to rely on electronic communications? Electronic meetings? Does it have the necessary requirements in place to do this? The articles of association should be reviewed and amended if need be to allow for these measures. If electronic communications are not possible due to a lack of individual shareholder consent, ensure that printing of notices etc. is undertaken early to account for any delays from service providers. Ensure also that AGM communications are sent as soon as possible to prepare for any postal delays that may arise.

Both director and shareholder quorums should also be checked. Quarantine/self-isolation requirements may impact this so it would be prudent to see who may be willing and able to attend the meeting - albeit virtually. Consider how this may be implemented for example online portals for board queries, live streaming etc.

The above does not constitute legal advice nor does it consider a complete list of corporate governance issues to consider in the context of COVID-19. Should you have any queries, please do not hesitate to contact the author of this article or your usual contact at Ince.

Mona Patel

Mona Patel Partner

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