John Lane
Capital Markets Partner, Linklaters
A number of issues relating to governance, communications, shareholder meetings and investor capital require immediate and ongoing action, as well as wider thoughts about the future.
Long-Term Sustainable Business Success
Governance and investor priorities have been increasingly focussed on long-term sustainability over the last few years. In the current crisis, boards are faced with needing to preserve cash and control costs while doing what is right for society and taking account of the full range of stakeholders in their decision-making.
This is also just a warm-up to the further challenges which lie ahead. The world still faces climate change and fundamental shifts in working practices and business models, as well as the unforeseen burden of reshaping financial plans and balance sheets which have been bent out of shape by this crisis.
Market Transparency And Disclosures
Listed companies have had to think very quickly about the immediate impact of COVID-19 on their financial position and operations and what it means for their market update obligations and preparation and auditing of financial results.
A large number of announcements have been issued, with operational changes, liquidity, covenant compliance and changes in dividend policy as the main themes. This has been a difficult area because of the dynamic environment.
As the economic effects of COVID-19 will persist for some time, companies should continue to be mindful of their obligations regarding announcements and in reporting disclosures. They should continuously assess developments, ensure they have access to the best possible information, update internal planning and modelling and seek advice from brokers and lawyers.
Companies should also be thinking ahead for key reporting disclosures, such as next year’s Section 172 statements which focus attention on how directors have carried out their statutory duty to promote the company’s success with regard to its stakeholders.
Shareholder Returns
The recent need for a large number of companies to cancel or postpone dividends already announced is unprecedented. Companies will need to plan carefully for resuming payments to shareholders
Other types of return, such as share buy-backs, will need to be considered particularly carefully in the new operating environment to avoid government and investor push-back, although, so far, requests for buy-back authorities at 2020 AGMs remain common and, as in 2019, have been approved with very little overt dissent by investors.
Electronic Meetings
The crisis has shown that it is possible for business teams to communicate very effectively using electronic means, such as video calls and meetings. However, it is striking that only a handful of listed companies have this year taken the opportunity to hold their general meetings as “virtual-only” meetings, or as “hybrid meetings” where attendance can be either physical or virtual, although not all are permitted to do so by their constitutions. The technology for largescale interactive meetings is still relatively untested, and in the UK, most companies are not yet confident in holding their general meetings in this way.
New temporary legislation in the recently published Corporate Insolvency and Governance Bill removes the right of members to attend a physical meeting and will facilitate the holding of electronic meetings, even if not currently permitted by a company’s articles. It is likely though that, so long as limits on gatherings remain in force, most companies will choose to hold a “closed AGM”, with only the minimum number of attendees necessary to meet the quorum requirement.
Capital Raisings
The Pre-Emption Group guidelines have been temporarily relaxed to allow for issuances of up to 20% of share capital without a pre-emptive offering and we have seen a number of companies seeking additional capital on an accelerated basis to put themselves in a secure position during the crisis and into the recovery phase.
Other companies have started to think about their longer-term capital structure and opportunities to replace some of the balance sheet debt with an equity issuance in due course. Many of these will be looking at a longer time frame before they are able to announce equity raises because of the need to prepare a prospectus, including the financial and legal work required to underpin that, and the need to obtain FCA approval.
Conclusion
Listed companies will have much to focus on over the coming months and urgent operational needs must, of course, take priority. Whilst regulators and investors are showing their willingness to collaborate and adjust some expectations, itis important for companies to seek to steer a course which is thoughtful as to impact on wider society, and the environment and is able to flex to adjust to the uncertainties of the post COVID environment we will all face.