The current outbreak of coronavirus and its consequences for Swedish companies has in a palpable way raised the question in which cases there is an obligation for listed companies to issue a so-called profit warning or otherwise inform the market. This article provides an overview of the regulations on profit warnings and information disclosure, some of the matter of judgement issues that arise in this context and the European Securities and Markets Authority’s recently issued recommendations regarding information disclosure.*
Companies that have financial instruments admitted to trading on a regulated market, an MTF or an OTF, are obliged to comply with the EU Market Abuse Regulation (MAR). According to MAR, such companies shall, as a general rule, inform the public as soon as possible of any inside information which directly concerns the company. Inside information comprise information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more companies or to one or more financial instruments, and which, if it was made public, would be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments. An adverse change of a company’s financial results or position may therefore be circumstances that constitute inside information and which the company is obliged to disclose through a so-called profit warning, by which the public is informed of the change.
How significant an adverse change of a company’s financial results or position should be in order to constitute inside information may depend on several factors. Nasdaq has stated that the company, in its assessment hereof, should evaluate the deviation based on the last known actual financial performance, forecasts or forward-looking statements. The company should also consider performance prospects and publicly known changes in financial conditions during the remainder of the review period. Matters affecting such prospects may include changes in the company’s operating environment and seasonal patterns in the company’s line of business. Attention may also be given to any information the company has disclosed about the effect of external factors on the company. Market expectations, such as analyst estimates, are not decisive for such evaluation; instead, it is the information disclosed by the company itself and what can justifiably be concluded from such information which is important. An additional basis for evaluation is whether similar information in the past has had a price sensitive effect or if the company itself has previously treated similar circumstances as inside information.
In light of the above, it can be discussed whether the consequences of the outbreak of coronavirus are to be considered as inside information or not. This may vary not just between different industries, but also between different companies within the same industry. For example, let us assume that a company in its manufacturing has a large exposure to a region that, due to the outbreak of coronavirus, keeps factories closed and that the market is aware of the exposure. It may then be discussed whether the information that the company’s manufacturing has suffered from the closing of the factories in the region would be considered as information that, if disclosed, would be likely to have a significant effect on the price of the company’s shares. If the information would not have such a significant effect on the price of the company’s shares, it is not to be classified as inside information and, consequently, does not need to be disclosed on that basis. If the example is altered so that the company’s manufacturing facilities are the only factories that can maintain a functioning production in a region where other factories are closed due to the outbreak of coronavirus, the conclusion would potentially be the opposite. In this case, the circumstance that the company’s facilities are kept open constitute such positive information that, if it was made public, would be likely to have a significant effect on the price of the company’s shares. The information is then considered to be inside information and shall be disclosed. In addition, the European Securities and Markets Authority (ESMA) has, due to the impacts of the outbreak of coronavirus on the financial markets, issued recommendations which entail additional disclosure obligations for listed companies, please see below.
In cases where certain information is deemed to be inside information, MAR contains an option for companies to delay the disclosure of inside information, provided that certain conditions are fulfilled, that is, that such delay of disclosure is not likely to mislead the public. ESMA has in its guidelines declared that delayed disclosure of inside information is likely to mislead the public if the inside information which the company intends to delay the disclosure of is materially different from the previous public announcements of the company on the matter which the inside information refers to. The situation is the same if the inside information which the company intends to delay the disclosure of relates to the fact that the company’s financial objectives are not likely to be met, where such objectives were previously publicly announced; or if the inside information whose disclosure the company intends to delay is different from the market’s expectations, where such expectations are based on signals that the company has previously sent to the market, such as interviews, roadshows or any other type of communication organized by the company or with its approval. In short, this means that if the company’s financial results or position, based on information previously disclosed by the company, significantly deviates from what could reasonably be expected, information regarding the deviation could constitute inside information and shall thus be disclosed as soon as possible. In such a case, delay of disclosure would be likely to mislead the public, and therefore prohibited.
Another situation where delayed disclosure would be likely to mislead the public, and therefore be prohibited, is if the company’s financial results or position deviate from a forecast disclosed by the company. A forecast refers to specific figures for the current financial period and/or subsequent financial periods. Nasdaq considers short-term goals to also constitute forecasts. This means that, for example, also a target turnover for the next quarter is considered to be a forecast. If a company reasonably expects that its financial result or position will deviate significantly from a forecast disclosed by the company and such deviation constitute inside information, the company shall disclose information regarding the deviation.
In light of the impact of the outbreak of coronavirus on the financial markets in the EU, ESMA has also published recommendations regarding listed companies’ obligations to inform the market through continuous information disclosure, as well as financial reporting. According to the recommendations, companies should, as soon as possible, disclose any relevant significant information concerning the impacts of the corona virus on their fundamentals, prospects or financial situation in accordance with their transparency obligations under MAR. Further, companies should provide transparency on the actual and potential impacts of the corona virus, to the extent possible based on both a qualitative and quantitative assessment of their business activities, financial situation and economic performance in their 2019 year-end financial report, if these have not yet been finalised or otherwise included in their interim financial reporting disclosures. In addition to ESMA’s recommendations, listed companies should also review the risk factors in their financial reports and prospectuses and, if necessary, supplement these with risk factors relevant to the company or the company’s financial instruments linked to the outbreak of coronavirus.
Finally, in cases where a company intend to disclose information relating to an adverse change of the company’s financial results or position, there may be an obligation to inform the marketplace where the company’s financial instruments are traded before the disclosure.
Axel Helle, member of the Swedish Bar Association
*The content of this article is a general account of the Equity Capital Markets team’s assessments but does not constitute legal advice to be used in an individual case.
Please do not hesitate to contact our specialists if you have any questions or want to know more.