Member Article

PUBLICATION OF TWO ORDINANCES OF MARCH 25, 2020 CONCERNING THE DELIBERATION OF THE CORPORATE BODIES AND THE APPROVAL OF THE ANNUAL ACCOUNTS

Two ordinances were published on March 25, 2020, in order to allow (i) shareholders’ meetings to be held behind closed doors, (ii) boards of directors or supervisory boards to meet remotely even for the purpose of approving the annual accounts or without any provision in this respect in the by-laws, and (iii) an extension of the deadlines for approving the annual accounts. Information concerning the content of these ordinances and the implementation of these different measures is included in this article.

 

 

PUBLICATION OF A NEW AMF PRESS RELEASE ON ONGOING AND PERIODIC INFORMATION

In a press release of March 23, 2020, the AMF reminds and completes its communication of February 28, 2020 concerning ongoing and periodic communications by issuers. The AMF reminds issuers that they should “periodically reassess the interest of a communication on estimated and anticipated impact of this health crisis on their company’s activity, financial situation and outlook”. However, this communication must be based on precise and/or quantified information which may have a significant impact on the share price.

The AMF specifies that this assessment must be done while the universal registration document (URD) is filed, particularly in the “Risk Factors” section, but also in the section on the company’s outlook, which must be assessed on the date of the URD’s publication. These assessments should also be mentioned by companies that only publish an annual financial report.

As a reminder, risk factors described in the URD must be only those that are focused on the company, its business and its clients, and must be significant, specific and corroborated. The disclosure of the risk must establish a clear and direct link between the risk factor and the issuer. Issuers must therefore disclose the specific uncertainties that relate to them, due to their activities, geographical areas or main customers or suppliers, and the potential impact of the risk factor. The impact, whether estimated or anticipated, and the risk management measures that have been taken or will be taken, must be mentioned if it is sufficiently precise.

The AMF will check the overall consistency of the information included in the URD between the risks described and the prospective information given. Indeed, in accordance with paragraph 5.4 of Annex 1 of the Delegated Regulation (EU) No. 2019/980, the URD must contain the objectives, forecasts and any other prospective information previously disclosed to the market.

In the same press release of March 23, 2020, the AMF also reminds the importance to disclose to the market as soon as possible any inside information and to assess the interest to disclose or not any unusual cash management arrangements. In practice, information about impacts and assessment of risks should always be qualified as inside information, because it may be of interest for any reasonable investors.

Nevertheless, the AMF says it is “aware of the difficulties that issuers may currently face in implementing financial reporting regulations in a changing and uncertain environment” and invites issuers to contact the AMF’s Issuers Department to discuss their situation if necessary.

However, the AMF’s “recommendations”, which are not binding^[1]so that listed companies are therefore allowed to disregard them, have the effect of encouraging issuers to enter into a particularly dangerous vicious circle.

Indeed, there is no legal obligation to estimate the accounting and financial impact of an international health crisis – no more than there is to make “forecasts” or to set “objectives”.

On the other hand, as long as listed companies have this type of information available internally, it prohibits them – as well as their executives and all other “insiders” on a list made available to the AMF – from making acquisitions or disposals of securities based on knowledge of such inside information.

They should nevertheless be able to suspend the public disclosure of such privileged information, which validly falls within the scope of “business secrecy” and is therefore intended to remain confidential, but only if such silence is not “misleading” to the public, which assumes that the public has no expectations on the basis of the issuer’s official communication.

Under these conditions, inviting listed companies to communicate on the impact (even if not quantified) of the epidemic on their activities/performance/outlooks will not only lead them to have to – continuously – check that these indications remain relevant (otherwise the slightest delay in correction will expose them to administrative sanctions), but also to have to refrain (as well as all persons on the “insider list”) from any intervention in the market for their securities until the situation has stabilized and the definitive impact of the coronavirus is known.

Lastly, the requirement for listed companies to publish an annual financial report within four months from the end of the financial year is based on the European Transparency Directive No. 2004/109/EC of December 15, 2004. Therefore, the ordinances of March 25, 2020 did not rule on its postponement, as this is not a matter of French law. However, the AMF should take these exceptional circumstances into account when assessing non-compliance with this deadline, for instance if the issuer can justify a delay in drafting its annual financial report due to continuous or repeated absences of its staff (because of a quarantine measure or contamination).

 

HOW TO REACT TO THE VERY HIGH VOLATILITY OF STOCK MARKET PRICES?

The drastic drop of the economic activity, resulting from the quarantine measures and the closing of borders, caused a real stock market crash on the markets of the entire world, and in particular on Euronext Paris.

In response, the European Securities and Markets Authority (ESMA) published a decision on March 16, 2020 requiring all holders of net short positions in shares traded on a European Union regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital, instead of the 0.2% threshold provided in Regulation No. 236/2012, in order to limit speculative orders.

To contain the massive drop in share prices, the AMF’s Chairman wanted to go further and announced on March 17, 2020 that he took measures to ban short selling, pursuant to Article L. 421-16 II of the French Monetary and Financial Code, for an initial period of 20 days, already extended by a further 10 days (the maximum period may exceed three months). On March 23, 2020 the AMF then published a more educational press release explaining these measures and their consequences, particularly for retail investors. The AMF considers that when short selling is carried out on a large scale, it can threaten investor confidence and that, in the current context of very wide variations in securities, short positions should be temporarily banned “in order to calm the game and stem downward spirals”. Finally, in a new press release of March 24, 2020, the AMF has set up an FAQ (Frequently Asked Questions) file that provides answers to practical questions that investors may have. For instance, it reminds investors that the ban of short selling does not apply to convertible bonds or subscription rights[2].

However, some issuers consider that this measure is not enough and would like a total suspension of trading, as it has been done for a few days on the Chinese markets. They indeed consider that the suspension of trading would better protect investors by avoiding a sudden drop in the share price to a level such that the market capitalisation of companies no longer reflects their intrinsic value.

In the past, markets have been closed for a certain period due to exceptional circumstances, such as oil shocks or the attacks of September 11, 2001. However, in this latter case, the New York Stock Exchange was closed for technical reasons, linked to the absence of major market operators based in one of the towers of the World Trade Centre (when the markets were not yet digitalised) and not because of the instability of the market itself.

The Philippine government decided the shutdown of its stock exchange on March 17, 2020 qualifying the coronavirus crisis as an exceptional event.

So, to what extent could trading of certain securities be suspended?

 

• Global trading suspension on trading platform by the AMF

Article L. 421-16 I of the French Monetary and Financial Code provides that the Chairman of the AMF may decide, “when an exceptional event disrupts the regular operation of a trading platform”, to suspend all or part of trading. This suspension applies to all platforms under the AMF’s jurisdiction, including Euronext, Euronext Growth and Euronext Access. However, it will not be possible to suspend trading of the securities of French companies listed abroad (like in the London Stock Exchange, where almost half of French securities are traded, according to the Chairman of the AMF, Robert Ophèle).

Furthermore, this possibility is limited to a maximum of two consecutive trading days. Beyond this period, the suspension must be pronounced by an order of the Minister of the Economy, issued on the proposal of the Chairman of the AMF.

In the event of a suspension of more than two consecutive days, trades outstanding on the suspension date may be cleared and liquidated under the conditions set out in the Market Rules.

At this stage, the AMF does not plan a global trading suspension. Indeed, Robert Ophèle, Chairman of the AMF, stated on March 17, 2020 that despite that share prices have fallen sharply with extreme volatility, “these markets have remained liquid, with exceptionally high trading volumes and prices and there is no indication that they are unrelated to the current economic uncertainties”. He considers that “the markets are working”.

Indeed, it can be understood that the AMF is reluctant to suspend trading if there is no major malfunction, when some investors, especially retail investors, need to be able to sell their shares and thus obtain cash in these difficult times.

In addition, the AMF published an article on March 19, 2020 reminding to market operators the importance of complying with their obligations, despite teleworking measures, to ensure the continuity of market activities, and assures that it will give market participants some extra time for non-critical obligations, subject to notifying them immediately (in particular the reporting of transactions under EMIR and MiFID 2). The AMF thus maintains its position not to suspend trading.

Finally, in the event that the AMF would change its position, the global trading suspension could only be effective if, during this shutdown, an institution or group such as the G7, would communicate to reassure investors so that when the markets reopen, they would not open downwards.

 

• Temporary suspension of trading sessions by Euronext

In addition to the possibility of trading suspension of a particular issuer if it fails to comply with the market rules, the Euronext market operator has a system of temporary suspension of trading sessions (“circuit breaker” system) under Article 4403/2 of Euronext’s harmonised market rules and Article 3.4.1 of the Trading Manual.

For CAC 40 listings, this system consists of a temporary suspension when the price falls by 8% (10% for the rest of the SBF 120). The duration of the suspension is 3 minutes when this threshold is reached for the first time, then 10 minutes if it is reached again after the resumption of trading. And if 20% of the index’s values are affected, the entire trading of the index would be suspended. This allows the high price volatility to be capped to a lesser extent. However, the effect of this system remains limited.

Finally, Euronext stated that it has made every effort to ensure the proper functioning of the market and has implemented its Business Continuity Plan, in particular by introducing teleworking for all of its employees, with the exception of critical teams relating to market surveillance and IT systems.

 

• Trading suspensions at the discretion of issuers

An issuer may also request Euronext, in accordance with Article 4403/2 of the Euronext harmonised market rules, to suspend trading of its securities in order to prevent “halt disorderly market conditions “. In practice, the issuer may ask Euronext to do so when an event that could have an impact on the price of its securities occurs. This may include the publication of the results of a sensitive study concerning a company product, the publication of a financial press release, the announcement of an insolvency proceeding or when a rumour is circulating.

As an example, Artmarket, a company listed on the regulated market of Euronext Paris, announced in a press release of March 20, 2020, that it had requested the suspension of trading of its shares because it was unable to obtain information relating to a distribution contract entered into with a partner company in China, which represents a significant portion of its sales, and was therefore unable to close its 2019 annual financial statements.

Indeed, Artmarket explained that the lack of information on the company’s turnover, and more generally on the annual results had a negative impact on the share price, both for the shareholders and for the company itself, and that the resulting uncertainty justified the suspension.

To conclude, it is not sure that issuers, that would be hardly impacted by the coronavirus crisis, could ask for the trading suspension of their shares in order to limit excessive devaluation, and protect themselves from an hostile takeover.

Unless of course, at the first attempt, which receives some media coverage (like Pepsi’s attempt on Danone in 2006), the supporters of economic patriotism suddenly wake up to join the camp of dissident economists , those who denounce the blatant disconnection that has clearly emerged between the real economy, which has virtually come to a standstill since the announcement of the quarantine measures, and financial speculation, which has never been better, even if it is playing a rather downward role.

 

 

 

Footnotes: [1] « Principes d’organisation et de publication de la doctrine de l’AMF » – published on February 2, 2018 [2] Q.12 of the Frequently asked questions on the Decisions taken by the AMF on 17 March 2020 pursuant to Article L. 421-16 II of the French Monetary and Financial Code: Ban on net short positions