06 March 2020
Company directors need to be proactive about new risks, such as coronavirus (COVID-19). What should directors be considering in order to mitigate the risks to companies caused by COVID-19 and to meet their disclosure obligations?
COVID-19 has already had a significant impact on many Australian companies, as evidenced by the Australian stockmarket falling almost 10% from its recent highs.
As the pathogen continues to spread, it raises a number of issues for company directors and may trigger disclosure obligations for ASX-listed companies. In light of this, ASIC Chairman James Shipton recently told the Australian Financial Review that the corporate regulator was “monitoring corporate contingency plans in case the virus spread locally and was checking that listed companies were disclosing to investors any material impact on their profits.”
In a world where the risks faced by a company are constantly changing and new risks such as COVID-19 emerge, directors need to constantly assess the foreseeable risk of harm to a company, including non-financial risks such as reputational harm and compliance with laws, to satisfy their directors’ duties. This includes testing risk frameworks periodically to ensure their practical effectiveness.
COVID-19 presents companies with a number of possible financial and non-financial risks, such as:
Boards and management teams will need to understand the impact of COVID-19 risks on their business and, where relevant, develop and implement contingency plans. For example, consideration should be given to the following areas:
Many corporate transactions are also likely to be disrupted by COVID-19, for example:
More broadly, market uncertainty and volatility may also have a negative influence on M&A and equity capital market activity levels.
Directors of listed companies will also need to consider the continuous disclosure ramifications of COVID-19.
Like many global companies, some ASX-listed companies have already made market announcements about the impact of COVID-19 on their business and underlying earnings. One company’s shares fell almost 10% after announcing that the company’s business performance in February and March would be heavily impacted by COVID-19 and noting that the rate of recovery was unclear. On the other hand, increased demand for certain products has resulted in COVID-19 leading to increased revenue for some companies, such as a2 Milk which reported sales ahead of expectations.
A failure to make disclosures required under the ASX Listing Rules could lead to liability for both the company and its directors, including under the ‘stepping stones’ approach described above. Class actions might also follow for companies which fail to make timely and accurate disclosures in accordance with their obligations.
Regulators, courts and corporate laws have lifted the bar regarding expectations of directors. Failing to properly consider relevant risks can lead to serious consequences, with ASIC taking a more aggressive approach to enforcement and class actions becoming more prevalent.
So what practical steps should boards be taking to protect their businesses as well as discharge their directors’ duties?
This article is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.