One of the key issues facing all public companies during the COVID-19 crisis is how and when to update necessary market disclosures relating to the risk impact of the pandemic on their business.
History has taught us that prolonged periods of market volatility increase the risks of litigation against both companies and their governing boards, and that the way in which they act now can have long-lasting effects.
Some companies may face severe solvency issues, which will lead to questions around the disclosure of the company’s financial position.
From a regulatory perspective, listed companies will need to disclose inside information ‘as soon as possible’. Although there are limited exceptions to this requirement that may apply where, for example, the financial viability of a company is in grave and imminent danger and negotiations are in progress to ensure recovery, the conditions that must be met are likely to be difficult for companies to fulfil.
In certain jurisdictions, including the US, companies have been required to disclose information specifically related to COVID-19.
In the UK, the Financial Conduct Authority (FCA) has requested that all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks.
The FCA and the Financial Reporting Council (FRC) recognise that the basis on which companies are reporting and planning is changing rapidly and note that it is important that due consideration is given by companies to these events in preparing all reporting.
The FRC is currently encouraging listed companies and their auditors to consider carefully whether they should delay other corporate reports for the next two weeks, such as interim financial statements and final audited financial statements, except where necessary to meet a legal or regulatory requirement.
The FCA, FRC and Prudential Regulatory Authority intend to announce shortly a package of measures aimed at ensuring companies and their auditors take the time they need to prepare appropriate disclosures and to address current practical challenges.
Insurers themselves have notification obligations relating to their own non-compliance with capital requirements under Solvency II. If there are major events that significantly affect the information provided in the annual Solvency and Financial Condition Report (SFCR), firms must ‘publicly disclose appropriate information on the nature and effects of the major development’ immediately.
A significant breach of the solvency capital requirement (SCR) will trigger a public disclosure but only if the firm does not submit its recovery plan within two months.
Any breach of the minimum capital requirement (MCR) will trigger an immediate public disclosure if the firm does not submit its finance plan within a month (or the PRA thinks the firm will not submit its plan within a month).
In addition, in the annual SFCR, firms must disclose the amount of any non-compliance with the MCR and any ‘significant’ non-compliance with the SCR during the reporting period, even if this non-compliance was subsequently resolved. There is therefore limited time for delay or inaction.
COVID-19 has developed quickly and the situation continues to evolve. The uncertainty surrounding this pandemic makes it difficult for companies to assess the current and likely future operating impact from this crisis.
This, coupled with the fact that it is unclear how often disclosures will need to and should be made, potentially opens the door for future D&O claims.
We have already seen event-driven litigation arise from other major catastrophes or incidents (oil spills, cyber breaches, etc) and it is possible that the COVID-19 pandemic and a company’s management of this crisis, including relating to its corporate disclosures, could result in a number of D&O claims.
These claims could relate to alleged mismanagement of the effect of the pandemic or failure to disclose the impact of the current situation that subsequently results in loss.
A number of companies have already issued statements updating their prior guidance and warning that the disruption to their supply chains could affect their operating results.
Thinking about indemnification arrangements and D&O policies with directors and officers might be the last thing on companies’ minds. However, when considering how companies respond to this crisis, both public and private companies will need to ensure their D&O policies protect them from any future claims that management breached their fiduciary duties when responding to this pandemic.
Where companies are required to indemnify directors and officers for COVID-19-related litigation, they will be looking to ensure that those policies provide adequate side A coverage and financial protection.
Whether any future litigation is successful will depend on the disclosures that firms are making now, their compliance with changing government guidance, and their own contingency planning and procedures.
The SARS epidemic had a significant impact on the insurance market, resulting in additional exclusions in other non-D&O policies, such as exclusions for notifiable diseases, pandemics and other specific diseases.
On renewals of D&O policies, we may now see an increase in these types of exclusions in order that insurers limit exposure to COVID-19.