Indirect consequences of Novel Coronavirus for UK listed companies

The continued global spread of Novel Coronavirus (“COVID-19”) and the consequent travel restrictions imposed within, into and out of China may indirectly result in certain legal risks arising for UK listed companies. In this LawNow we review some of the potential indirect consequences of the continued spread of COVID-19 for listed companies and what can be done now to prepare to navigate such risks amidst uncertainty.

Audit Risk

The UK’s major audit firms are being consulted by the Financial Reporting Council (“FRC”) in respect of its concerns that multinational corporations in the UK with substantial Chinese operations may be at risk of delay to the sign off of their financial accounts as an indirect consequence of the continued global spread of COVID-19.

UK listed companies are required by the Companies Act 2006 (the “Act”) to prepare and audit their annual accounts for each financial year, and to file them with the Registrar of Companies, together with a copy of the auditors’ report in respect of them, within six months after the end of the relevant accounting reference period. Ensuring that the company’s auditor has all the relevant information required to finalise the financial accounts for such publication within the requisite time is therefore very important.

In preparing their audit report, auditors have a statutory duty to carry out such investigations as are necessary to enable them to form an opinion as to whether, amongst other things, they have been able to review adequate evidence of returns for the purpose of the audit in respect of branches of the company that were not visited by the auditor. If the evidence received is not adequate, the auditor has a duty to state that fact in their report. The FRC is reportedly concerned that restrictions on the transmission or remote viewing of Chinese company information under Chinese data protection laws typically mean that auditors have to complete their work in respect of Chinese companies by travelling to China. However considering the imposition of temporary travel restrictions into and out of China, and presumably auditors’ general obligations to their employees to ensure they are not sent into workplaces which may be harmful to their health and wellbeing, auditors will almost certainly have to find another way to complete the audit of Chinese subsidiaries of UK companies, at least in the short term.

Possible alternative arrangements may involve appointing a separate Chinese auditor temporarily and/or imposing a requirement on companies to include a section in their annual reports addressing the impacts of the COVID-19 outbreak on their business. The FRC has also issued an advice note to companies and auditors regarding risk disclosures relating to the possible impact of COVID-19 on their businesses

UK listed companies with substantial operations in China whose accounts are due to be published in the next few months may, if requested by their auditor, be required pursuant to section 500 of the Act to take all such steps as are reasonably open to it to obtain any information or explanations the auditor deems necessary to discharge its statutory duties, and any failure to comply with such request would result in an offence being committed by the company and every officer of the company in default.

It is anticipated that the FRC will make a public announcement in respect of their concerns, but in the meantime, UK listed companies should undertake a risk assessment as to whether and when they may be impacted by the audit risk highlighted above, and to consider what steps (if any) they need to take to ensure they can comply with their legal obligations if so required by their auditors.

Indirect Supply Chain Consequences

Another indirect consequence of the global spread of COVID-19, is that the travel restrictions and quarantine measures imposed by the Chinese and various other governments have led to supply chain disruptions to companies within China as well as global companies reliant on these businesses. Such supply chain disruptions may have far reaching consequences for companies operating on a global basis. For example, US headquartered Apple, which makes most of its iPhones and other products in China, has announced that it was cutting its sales expectations for Q1 2020 as the spread of COVID-19 had forced it to temporarily stop production and close down retail outlets in China. Following this announcement, Apple’s share price fell but, more importantly for the purposes of this note, so did the share prices for a number of its component suppliers. If conditions continue in this way or escalate in the coming weeks, we are likely to see UK companies being indirectly impacted in the same way.

Corporate Governance

UK listed companies are generally under a continuing obligation to monitor and maintain the ongoing application of adequate financial position and prospects (“FPP”) procedures to ensure that they have established procedures in place that enable the directors to be informed on a regular basis as to (a) the FPP of the company and its group; (b) the projected profitability, cashflow and funding requirements for the group based on realistic assumptions of factors that would reasonably be expected to have a material impact on the business; and (c) any changes to either of the foregoing.

Companies should consider whether travel restrictions imposed by governments (or an unwillingness of personnel to travel to the region) could lead to a lowering of oversight procedures (such as internal audit) or increased risk of reporting procedures failing. Internal travel restrictions, with employees being advised to stay at home and not travel to work may also increase risk to the robustness of financial reporting procedures.

Although the focus with COVID-19 is very much on China (including Hong Kong), the spread of the virus is starting to raise similar concerns for businesses around the South East Asia region, such as in Japan and Thailand, where cases of the virus have been reported and some public events are being curtailed or cancelled.

Companies may therefore need to consider any impact on the FPP and other governance procedures caused by the COVID-19 virus including the likes of:

• whether directors can identify the information necessary to monitor and manage business risks stemming from the spread of COVID-19 or any other such external event which could have a material financial impact on the business;
• how to absorb the impact of any identified risks that may have implications for FPP information and governance more generally; and
• ensuring that the board receives timely information in respect of any events that might have a material financial impact on the business.

General reporting requirements – Market Abuse Regulation (“MAR”)

As well as specific risks such as those highlighted around audit, FPP procedures and governance, listed companies should also continue to be mindful about their continuing general disclosure obligations under MAR.

Article 17 of MAR requires an issuer to inform the public as soon as possible of any inside information which directly concerns that issuer. Whether or not information is “inside information” is determined by reference to a variety of factors, including whether the information would be likely to have a significant effect on the price of financial instruments issued by the issuer and the likelihood that a reasonable investor would make investment decisions relating to the relevant financial instrument to maximise his economic self-interest. This is likely to include information which affects the performance or the expectation of the performance of or any major new developments in, the listed company’s business, such as any material adverse effect directly or indirectly linked to COVID-19.