COVID-19: Governance implications
From crisis response to recovery, including continuous disclosure obligations and shareholder meetings
COVID-19 has created numerous corporate governance issues. The challenges include continuous disclosure obligations (for listed entities), shareholder and director meetings, financial reporting obligations and impacts on M&A transactions. Entities should carefully consider how to mitigate these issues to ensure compliance and business continuity.
For example, the Treasurer has used his emergency powers to temporarily modify the Corporations Act 2001 (Cth) to facilitate the holding of shareholder meetings without any attendees being physically present in the same place. The modifications, which are valid up to November 2020, go further than the guidance previously provided by ASIC to temporarily change the law and override provisions in a company's constitution. This paves the way for companies to continue to engage with their shareholders in a manner consistent with public health requirements by holding 'virtual' meetings.
The COVID-19 outbreak may result in information coming to light that must be disclosed to the ASX in accordance with a listed entity's continuous disclosure obligations under the ASX Listing Rules.
There are a number of foreseeable circumstances in which COVID-19, or matters relating to COVID-19, may give rise to market-sensitive information concerning a listed entity, such as in relation to earnings forecasts, employees, material contracts and financing arrangements; the supply of, and demand for, its products or services; as well as external considerations, such as government intervention. Such matters should be considered as part of a proper and ongoing assessment of a listed entity's disclosure obligations.
See Allens' Insight on listed entities' continuous disclosure obligations for more information.
There have also been temporary amendments to the continuous disclosure laws under the Corporations Act. See Allens' Insight on these temporary amendments for more information.
On 26 May 2020, the continuous disclosure provisions found in Chapter 6CA of the Corporations Act were temporarily amended. The Treasurer's release states that the changes are designed to enable listed companies to more confidently provide earning's guidance, and other forward-looking statements, to the market during the COVID-19 crisis, without being exposed to the threat of opportunistic class actions if the guidance or other statements are found to be inaccurate.
The modifications are put to the test in the continuous disclosure civil penalty provisions in the Corporations Act, which formerly required entities to disclose non-public information that a reasonable person would expect to have a material effect on the price or value of the entity's securities. Under the temporary test, which applies for six months for the purposes of civil proceedings only, non-public information need only be disclosed if the entity knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of the entity's securities.
The net effect of replacing the reasonable person standard with one of knowledge, recklessness or negligence is to require a higher degree of certainty that the forward-looking information would have the necessary market impact, before it is required to be disclosed under the Corporations Act (for the proposes of civil proceedings only). The changes are designed to make it harder for ASIC or third parties to bring a claim alleging a failure to disclose information against companies and officers’ during the COVID crisis and will be welcomed by disclosing entities.
However, there remains a number of practical reasons why disclosing entities and their directors and officers must continue to exercise caution in relation to their continuous disclosure obligations, including that the modifications do not apply to other market misconduct rules including misleading and deceptive conduct rules, and the unmodified standard continues to apply for certain criminal offences. Accordingly, we think that in practice there is unlikely to be any practical change to existing continuous disclosure policies and practices.
See Allens' Insight on these temporary amendments for more information.
COVID-19 is having a material impact on a number of entities and proving to be a fast-evolving challenge to business continuity. As listed entities navigate the issues and challenges at this time, they should, as always, diligently act to mitigate the risks of insider trading, which may be enhanced in this dynamic and uncertain environment.
In the context of COVID-19, this may involve reinforcing trading policies; considering closed and black-out periods for trading; controlling dissemination of information internally; and ensuring relevant information is publicly announced at the appropriate time, in accordance with the listed entity's disclosure obligations mentioned above.
This is especially important for at-risk businesses that are materially impacted by COVID-19. They may wish to amend trading policies so that they are more proscriptive: eg extending obligations to a wider group of personnel or to increase restrictions that key management personnel are already subject to.
The COVID-19 outbreak may have an impact on a number of provisions in commercial transaction agreements, including:
- conditions precedent;
- the occurrence of material adverse changes;
- force majeure and termination rights;
- repetition of warranties at completion; and
- restrictions on physical meetings.
Depending on the nature and stage of the transaction, proactive steps can be taken to mitigate the impact of COVID-19 by carefully managing the transaction timetable; the due diligence process; in-person meetings with counterparties, advisors and third parties; signings, completions and implementation steps. Parties should seek legal advice on the possibility of engaging regulators in the event of the need for any particular relief.
COVID-19 may have an effect on a company's external audit process, which may be interrupted by travel bans and other restrictions (particularly for on-site components of an audit). This could have a knock-on impact on a company's financial reporting obligations. It will be important to consider timing and ease of access (in accordance with the necessary security protocols) to relevant information and personnel, for external auditors to undertake the external audit process via alternate means, if required.
Helpfully, ASIC has extended the deadline for both listed and unlisted entities to lodge certain financial reports by one month. Listed entities will be able to take one additional month to report for full year and half-year financial reports for 21 February 2020 to 7 July 2020 balance dates (where such deadline has not already passed). Unlisted entities will now be able to take one additional month to lodge financial reports for year ends from 31 December 2019 to 7 July 2020 (where such deadline has not yet passed).
If listed entities rely on the extended period for lodgement, they must inform the market, and ASIC has suggested it may be desirable for listed entities to explain the reasons for relying on the extended deadline. Listed entities are still expected to lodge their Appendix 4E under ASX Listing Rules by the due date.
As noted by ASIC, where possible entities should continue to lodge within the normal statutory deadlines, having regard to the information needs of shareholders, creditors and other users of their financial reports, or meeting borrowing covenants or other obligations.
Boards will need to ensure they are receiving the necessary information to make informed decisions in a timely manner, while ensuring that they do not constrict management's crisis management abilities. This may involve the chairperson, or a member of the risk committee, and CEO working together to disseminate information between management and the board, and the board providing the necessary support to management at this challenging time.
Companies should consider the currency and sufficiency of their insurance coverage, including public liability, building and contents, travel, business interruption and D&O insurance cover. The terms and conditions of such insurance policies should also be considered carefully for potential exclusions (often in relation to viruses and pandemics). The currency and ambit of D&O insurance cover, in particular, should be considered, given an increased risk of directors' and officers' decisions being challenged in the aftermath of COVID-19.
While there is no one-size-fits-all approach, mitigation of business-interruption strategies from a corporate governance perspective that boards should consider implementing include:
- appropriate delegations of authority;
- effective electronic communication channels and the possibility of holding board meetings electronically;
- appropriate contingency plans in the event of unexpected vacancies on the board or board committees; and
- remote working arrangements for all personnel.
Whether a company can cancel, or defer payment of, a dividend will depend on a number of factors, including:
- the powers provided in the company's constitution;
- whether the dividend is an interim dividend or a final dividend;
- whether the board has declared or determined to pay the dividend; and
- the contents of any correspondence or other communications with shareholders or the market.
In general terms:
- if the directors have only 'determined' to pay the dividend at a future date (rather than 'declared' that dividend), the determination does not create a debt until the time fixed for payment arises. It is therefore revocable until that time; and
- if the directors 'declared' the dividend then, an irrevocable debt is created at that time.
- Remember, there are special tests that must be satisfied before a company can pay a dividend.
Listed entities should also comply with their disclosure obligations in relation to dividends. Including, any decision not to pay a dividend where an intention to pay such dividend was previously announced or a dividend was paid in respect to a prior corresponding period, or any decision to cancel or suspend a dividend that has already been determined.
If you are considering cancelling or deferring payment of a dividend you should contact one of our experts to discuss your specific circumstances and available options.
Listed entities should be undertaking a thorough review of all their material financing arrangements, and an assessment of the impact, or likely impact, of COVID-19-related matters on those arrangements.
The occurrence of an event of default under – or other event entitling a financier to terminate, or accelerate repayment of – a material financing facility may constitute market-sensitive information that would need to be notified to the market immediately under ASX Listing Rule 3.1.
The analysis can be more complex when considering potential or anticipated events of default or covenant breaches (and associated negotiations with lenders). These scenarios are usually fact specific, and require careful consideration, advice and monitoring.
Listed entities in these situations should contact one of our experts for advice on their continuous disclosure obligations and the options available under their financing arrangements.
The Treasurer has made a determination  that has the effect of amending the Corporations Act to allow shareholder meetings to be held solely by technology, which would allow a meeting to occur without attendees being physically present in the same place.
The modification broadly amends all relevant provisions of the Corporations Act that require or permit a meeting to be held, or regulate giving notice of a meeting or the conduct of a meeting. It also modifies any provisions of the Corporations Act that give effect to, or provide a means of enforcing, a provision of the company's constitution that might provide otherwise, effectively overriding it. The amendments are effective from 6 May 2020 and are valid for six months.
In order to have the benefit of the modification, companies must make sure:
- the notice of meeting includes information about how the meeting will be held;
- the meeting is held using technology that gives all attendees a reasonable opportunity to participate in the meeting (specific reference is made to the ability to ask questions); and
- all resolutions at the meeting are decided on a poll.
Technology may also be used in communicating with shareholders to provide notice or supplementary details of the meeting and facilitating the appointment of proxies.
Special rules apply for companies that have already called a meeting and are now seeking to hold their meeting virtually. Please contact us if this impacts you.
 Corporations (Coronavirus Economic Response) Determination (No. 1) 2020
Earlier in March 2020, ASIC provided guidance to the market in relation to the holding of annual general meetings for entities with a 31 December financial year end. ASIC said that it will take no action against those companies where:
- their AGM is postponed up to the end of July;
- their AGM is held as a 'virtual meeting' (discussed further below); and
- supplementary notices are issued to shareholders up to two business days before the scheduled date of the meeting that provide further instructions for regarding online participation.
On 13 May 2020, ASIC then amended its guidance to go further and apply to entities with a financial year end between December 31 and 7 July where those entities may hold their AGM up to seven months after their financial year end. ASIC's no-action also applies where an AGM is held up to February 2021 where a public company would otherwise breach the requirement to hold an AGM once every calendar year (though ASIC has advised those entities should not hold their AGM during the Christmas and New Year period).
In taking a 'no-action' position, ASIC acknowledged it was limited from alleviating otherwise mandatory requirements of the Corporations Act and provided its own significant health warning: its position would not stop other parties taking their own action or the court making a finding otherwise. ASIC would also be open to amending or revoking its position.
The Treasurer's modification goes further in applying to all entities and directly addressing the underlying legal position as to what the law and a company's constitution permits regarding the use of technology.
The modifications will be helpful for companies looking to hold a shareholder meeting in the next six months; however, for entities that have already held their AGM before the modifications becoming effective or are intending to hold their AGM after the Treasurer's modification is due to expire in November 2020, ASIC's position will be still be a source of comfort. It is also encouraging to see the regulator acknowledging the difficulties being faced by Australian companies at this time, and that it intends to be facilitative in working with them through this period and to continue to update its position as the circumstances change.
A 'virtual' meeting is one that is held entirely online. No physical place for the meeting is specified. Instead, all attendees, including the chair, participate from their own satellite locations using technology that allows them to, among other things, be counted in a quorum and vote and ask questions in real time.
Up until the Corporations Act was temporarily modified, the prevailing view was that virtual meetings were not permissible under Australian law, given the interpretation of the legislation required at least one physical location for company meeting.
In providing its guidance, ASIC noted there was 'some doubt' in this area, but nonetheless suggested that it will not object to companies with a financial year end between 31 December and 7 July from holding their AGMs in this way. The Treasurer's modification goes further and paves the way for all companies to hold meetings virtually up to November 2020, regardless of what the Corporations Act or their constitution might otherwise require.
The modification requires that the meeting be conducted in a way that gives all attendees a reasonable opportunity to participate. Specifically, the legislative instrument refers to providing the means such that those who are entitled to do so may vote and ask questions during the meeting. In preparing for a meeting, companies should be aware that the technology to be used must be specified in the notice of meeting.
ASIC has also issued guidance setting out its views – and flagging its concerns – on the appropriate use of technology and approach to shareholder engagement (particularly asking questions and voting at meetings) where a meeting is held pursuant to the modification. The regulator has advised that it is undertaking a 'program of observation' for shareholder meetings held during the period that the modification is in force and may provide further guidance if it feels it is necessary.
The Treasurer's modification to the Corporations Act allows for supplementary notices to be provided to shareholders setting out the details of how they can participate using technology if certain conditions are met. This overrides any other provisions in the Corporations Act or the company's constitution regarding how notice must be given.
Please contact one of our experts if you have already called a meeting of shareholders and would prefer to switch to a virtual meeting.
A public company with more than one member would ordinarily be required to hold an annual general meeting within five months after the end of its financial year and at least once in each calendar year. A public company that is yet to call its AGM may consider delaying the timing of the meeting, particularly if it intends to rely on ASIC's no-action position (described earlier in the section titled 'What does this mean for ASIC's guidance?'), which extends the period to seven months and into the 2021 calendar year if required.
A public company may apply to ASIC to extend the period within which it must hold an AGM. The application must be lodged before the last date on which the AGM must otherwise be held. ASIC will consider each application on its merits, and has indicated in its regulatory guidance that it will usually be inclined to grant an extension of time if:
- the inability of a company to hold its AGM on time is due to factors beyond its control; or
- ASIC is persuaded that it is in the interests of the shareholders to do so.ASIC's guidance notes that ASIC doesn't have the power to modify the relevant provisions of the Corporations Act, and so isn't in a position to negate the requirement to hold a meeting or provide class order relief to avoid needing to apply for an exemption on a case-by-case basis. However, ASIC has adopted a two-month period of 'no objection' for certain entities that delay their AGMs.
- The Treasurer's modification of the Corporation Act only considers the manner in which a meeting may be held, not the timing of the meeting, so isn't strictly relevant. However, companies, including those that fall outside of the class of companies to which ASIC's guidance applies, may feel that the acute need to delay a meeting may no longer be required, given the modification takes away the legal uncertainty that a meeting can be held virtually in the current circumstances.
- ASIC's assessment is guided by judicial principles that the obligation to hold an AGM 'should be relaxed only for good cause shown'. In the current environment, we expect ASIC will consider each application on a case-by-case basis, having regard to matters including timing, travel restrictions, the recommendations being made by other government agencies, and the availability of technology (as described below). However, given the uncertainty surrounding the likely duration of the COVID-19 outbreak, delaying the meeting may not be the best option.
 Corporations Act 2001 (Cth), section 250N.
 Corporations Act 2001 (Cth), section 250P.
 Chief Justice Bowen in Re Gem Explorations and Minerals Ltd  2 NSWLR 584.
There is no provision under the Corporations Act or common law power that would allow a public company to postpone or cancel a meeting once it has been convened. Any postponement requires an express provision in the company's constitution.
If a company's constitution specifically permits the postponement or cancellation of a meeting after it has been convened but before it is held, further notification will need to be provided to all persons who received notice of the meeting. Companies should consider any specific notice requirements set out in their constitutions.
Both the Treasurer's modification to the Corporations Act and ASIC's guidance contemplate giving supplementary details regarding the manner in which a meeting will be held, but not postponing the meeting itself. We discuss this in more detail in the section titled 'Can a public company that has already called a meeting switch to holding a 'virtual' meeting?.
ASIC has indicated that its position is under continuous review. As the various federal and state authorities put in place policies and strategies to respond to COVID-19, and ASIC continues its 'program of observation', the regulator may continue to develop its position.
The modifications to the Corporations Act to facilitate virtual meetings will automatically be repealed in November 2020. Further, ASIC's current position only applies to annual general meetings, and not meetings that may need to be held in the period, such as scheme meetings.
Given government and health authorities are advising that COVID-19 may cause disruption for many months to come, both the Treasurer and ASIC may have cause to revisit both the scope and period of their temporary relief to manage the fallout from COVID-19.
Ultimately, these emergency measures are an acknowledgment of the limitations under the existing regime. The Treasurer's and ASIC's support for the use of technology in company meetings, which is not otherwise clearly enshrined in the legislation, demonstrates that need for future regulatory reform. Once the response to COVID-19 stabilises and the Federal Government is in a position to conduct a consultation on the issue, there will be good reason to consider adopting a clearer approach for companies to utilise technology to hold shareholder meetings.
We have worked with many companies and their registry and technology providers during this period of uncertainty brought about by COVID-19 to plan for and hold virtual AGMs. Please contact us if you would like to discuss the options that are available to your organisation.