The Stark Reality: Keep It Simple, Disclose
The NZX has issued extra guidance for listed companies during the Covid-19 crisis. The obligation ‘to disclose material information promptly and without delay’ is always in the forefront of directors’ minds, to ensure that there is no information asymmetry in the market. It should be especially so during this extraordinary and volatile time for the NZX and its issuers say DLA Piper partners.
"This is a different set of circumstances from the GFC. We’re in an age of litigation funding, courts now are more accepting of multi-litigant class action, and down the track that could well include disgruntled shareholders if directors have withheld what they needed to disclose, wittingly or unwittingly. As a board member now,” says DLA Piper managing partner Martin Wiseman, “I would be in constant contact with my CFO and CEO, and getting direct input from my legal advisers."
The NZX notes that many issuers have revised or withdrawn previous financial forecasts or projections in light of Covid-19 developments, but the market should be able to assume that remaining or new forecasts remain valid. DLA Piper partner Rachel Taylor emphasises the vital importance of continuous disclosure - “Trading is volatile,” she says; “directors can be personally liable for losses that result from breaches of the listing rules. These may be substantial, and reputational damage severe. Information not made available to the market concerning prospects, profit and earnings can have major consequences.”
“It’s a very difficult time for directors.” adds partner Iain Thain. “There may be confusion about what constitutes material information that must be disclosed and what does not. The NZX acknowledges that issuers may consider they have insufficient information to provide market updates, but this is exactly the time when directors earn the fees they’re paid. In the cold light of a later court case, what seems understandable now may not be accepted. If deciding not to disclose, directors must be sure that they can rely on one or other of the disclosure exceptions. 20/20 hindsight can be cruel."
“Think of it like a car in the distance on the Desert Road at night,” says Martin Wiseman, “coming at you with its headlights on. You are stranded in the middle of the road, it’s snowing, you don’t know if that car will slow down and stop, hit you, or manage to swerve at the last minute. Many companies are facing huge financial and trading uncertainties. The solution, in simple terms, is to tell everyone you can see that car coming, and you don’t yet know what the outcome will be. So, with potential breaches of financial covenants, even if directors think they will be waived by banks, the safest course of action is to disclose.”
"Longstanding NZX guidance is that information that would have a 5%-10% effect on the share price, may be material requiring disclosure” says Iain Thain. “But these are not calm trading conditions, we are in white water. The updated guidance warns directors against slavishly following the 5-10% guideline. In the present volatile environment, the connection between information and the share price may not be easily identifiable. Everyone understands that, but hindsight is a cruel assessor. Directors can plan, and hope for the best, but they must not rely on optimism or limited disclosure when telling the market what their company’s position is and what its future looks like.”
Rachel Taylor goes on to say, "Similar candour must apply to companies seeking to raise capital to keep themselves solvent. Many issuers will need to raise capital. Investors, and particularly underwriters, must have confidence in any forward-looking information. Achieving that confidence may be difficult given volatility. Companies seeking to raise capital should exercise cautious judgement."
"All of this may seem obvious," adds Martin Wiseman, "but remember Nuplex during the GFC. The directors there disclosed a potential senior debt cover ratio breach at a time which the regulator later alleged was too late. The current NZX guidance on covenant breaches, actual or potential, is couched in sympathetic terms. But in the aftermath of financial crisis, sympathy is in fact seldom applied. And now, it's not just regulators that directors should have in mind. Litigation funders are now well established and standing by to fund the claims of shareholders and other stakeholders."