Member Article

Issuers need to make transparent the effects of the COVID-19 pandemic on their companies. The International Organization of Securities Commissions (IOSCO) emphasized the importance and obligation of timely and transparent disclosure of “high-quality information” in a recent statement issued on May 29, 2020. It recalled the corresponding obligation for issuers to report on important matters and encourages companies to comply with their disclosure obligations. Shortly before, in a Public Statement of May 20, 2020, European Securities and Markets Authority ESMA had already called on issuers to transparently present in the upcoming half-yearly financial reports how the corona pandemic would affect their business (see Update Corporate Law No. 7/2020).

Fines of up to EUR 2 million, and possibly even fines or imprisonment, may be imposed for violations.

In its statement, IOSCO confirms its commitment to the enforcement of high-quality reporting standards and disclosure regulations. These are critical to the proper functioning of the capital markets. The pandemic (and the uncertainty it has caused) would have material implications on issuers’ financial reporting, auditing, and disclosures of current and reliable information. The corona crisis has a material impact on investment decisions. Therefore, the relevance of high-quality disclosure of information increases significantly. For investors and other stakeholders, it is important to have high-quality information on the specific effects on issuers’ operating performance, financial position, and prospects. This applies even if the current circumstances make disclosures outside the financial statements challenging. It is precisely because of the environment of heightened uncertainty that disclosures should be entity-specific and transparent, particularly when involving significant judgements and estimates. In this context, IOSCO encourages issuers to balance the flexibility provided by regulators extending the period to file financial information with the responsibility outlined above to provide timely and comprehensive financial information that includes reasonable and supportable judgements.

ESMA had already issued a similar call for transparency in its Public Statement published shortly prior. It highlighted the importance for issuers to provide relevant and reliable information (see in more detail Update Corporate Law No. 7/2020).

NOTE FOR USE IN PRACTICE

Securities regulators agree: despite (or perhaps because of!) the difficult circumstances and uncertainties associated with the COVID-19 pandemic, disclosure requirements under capital market law must be strictly adhered to.

As a matter of principle, issuers of financial instruments need to comply with numerous information and disclosure obligations under the European Market Abuse Regulation (MAR) and the German Securities Trading Act for capital market participants to receive timely and material information about the companies whose securities they are holding or are interested in acquiring. Listed companies, for instance, need to comply with the obligations under Sections 114 et seqq. Securities Trading Act and publish annual and half-yearly financial reports and, where applicable, payment reports. In particular, data that is of material importance for the performance of the respective investment, whether short or long-term, is to be made accessible to the public.

The requirements placed on the relevant legally required information and publications by issuers have increased against the backdrop of the current uncertain situation in connection with the COVID-19 pandemic, according to the above-mentioned publications of ESMA and IOSCO. In particular, the effects of the pandemic on issuers and their (operating) performance should be communicated in a timely manner – in other words, not be unreasonably delayed – and be well-founded.

If issuers fail to comply with the existing information and disclosure obligations to the required extent, they may face heavy fines, both the responsible individuals and the companies. In the worst case, criminal proceedings for information-supported market manipulation may be instituted. Against this backdrop, issuers will need to ensure that these obligations relating to the information mentioned above are met despite the difficult circumstances. In any event, it should be avoided to mislead investors with the information – even if only theoretically. This also applies in relation with potential subsequent insolvency proceedings.