S&C Draft of April 17, 2020 Navigating the COVID-19 Crisis Q&A – European Capital Markets Developments

European Capital Markets Developments

This note contains a high-level discussion of selected questions related to the effects of COVID-19 on capital markets activity in Europe and on related considerations for issuers and underwriters. It is derived from the discussions during the S&C Covid-19 Crisis European Capital Markets Webinar held on April 30, 2020. The information in this note should not be construed as legal advice.

Debt Capital Markets

What are the trends on investment grade debt in the United Kingdom?

According to the Bank of England in March, UK issuers issued £21 billion of bonds and £16 billion of commercial paper in the primary markets. This was lower than in February and the previous six-month average and probably reflects the extreme market volatility we saw as the scale of the COVID-19 crisis began to emerge. Nevertheless, the numbers are still substantial. We saw towards the end of March that the bond markets were starting to open up again for investment grade issuers and it would not be surprising if we start to see the numbers go up as issuers come out of their quiet periods and take steps to access liquidity and bolster their balance sheets.

On the investment grade side, we have seen a number of blue chip issuers taking steps to make sure they have maximum flexibility to access the public bond markets as market conditions permit and this is where having a current Euro Medium Term Note (EMTN) program really comes into its own as issuers can supplement quickly to update their disclosure to reflect changed circumstances and be ready for issuance.

When it comes to issuance by investment grade issuers, there seems to be good investor appetite, possibly enhanced by various economic support programs by central banks and governments and possibly also because investment grade issuers are generally better placed to maintain their creditworthiness by cancelling dividends, share buybacks and capital expenditure plans and we have seen a number of issuers announcing these sorts of initiatives. In addition, because interest rates are so low, terms can also still be very good for blue chip issuers even with widening of yield spreads.

What is the relevance of the UK Covid Corporate Finance Facility?

One new feature of the UK landscape for investment grade and equivalent issuers is the UK’s Covid Corporate Finance Facility (CCFF). This is a UK government facility specifically designed to alleviate temporary liquidity concerns of eligible issuers and provides for the Bank of England to purchase commercial paper issued by investment grade or equivalent issuers who make a material contribution to economic activity in the UK (and this can include non-UK issuers if they satisfy the eligibility criteria). Aggregate issuance under the facility was £11.2 billion as of April 23 and, even if they do not immediately intend to access the facility, a number of issuers are taking steps to confirm their eligibility consistent with the aim of preserving access to liquidity.

What are the trends on investment grade debt in continental Europe?

In continental Europe, the investment grade bond market saw in March a period of more than a week without any bond issuance. Since the last week of March, however, the investment grade bond market has been very active with very large issuances such as AB InBev, CapGemini, Engie, Airbus and Aéroports de Paris. An interesting example that the bond market is still open for investment grade corporates is Pernod Ricard’s

-1- Attorney Advertising May 2020 Prior results do not guarantee a similar outcome. European Capital Markets Opportunities Guide, continued

€500m tap offering priced on April 27, which increased their €1.5 billion offering placed in early April (and was significantly oversubscribed).

Many issuers are also getting ready to draw under their EMTN program. Twenty EMTN base prospectuses or prospectus supplements have been approved by the Autorité des Marchés Financiers (AMF) in April 2020.

Due to the lack of visibility, issuers are also anticipating their debt issuances and trying to place bonds now while they were initially planning on doing so later in the year.

What issues should companies and underwriters be thinking about as they prepare to go to market on a bond offering?

The current circumstances have had a significant impact on a number of aspects of the offering process. In some respects, we have found that companies that are used to accessing the debt capital markets more frequently, and that are used to following an almost formulaic process with their offerings, have faced more challenges. This is because they are used to an offering going very smoothly, on a short timeline with little contingency, and the COVID-19-related developments have put pressure on that.

Of course it is critical for companies to ensure their disclosure appropriately reflects the potential impact and risks posed by the COVID-19 pandemic. Beyond disclosure, there are some other key considerations for investment grade issuers. One of the most important questions that companies face accessing US markets is whether their auditors are going to be able to provide standard negative assurance comfort. We have seen a number of different issues be raised by auditors, and it is critical that the company, its counsel and bank counsel ask at a very early stage if there will be any issues for the auditor in a comfort letter being delivered. As well as obvious considerations such as confirming their going concern analysis, auditors are very focused on COVID-19-related disclosures, especially in areas such as impairments. For SEC-registered issuers we have found the auditors to be particularly focused on understanding how a company is implementing the SEC’s recent guidance. Audit firms are also bolstering the substance of the representation letters they seek from management. All of this can come as a surprise to a company which has never had an issue in a comfort letter being delivered on prior transactions, and it is very important to take nothing for granted.

What practical considerations should issuers be aware of relating to remote working?

It is also important to consider administrative developments relating to remote work and social distancing measures. For documentary due diligence, counsel will often need to undertake a customary due diligence exercise to be able to deliver customary disclosure letters. Before COVID-19, many issuers still required in- person review of those materials. Obviously, electronic solutions have been available for decades, but there can be significant lead time and internal compliance hurdles to implementing that on short notice within large organizations.

The second administrative development relates to settlement timing. In times of extreme volatility, no one is interested in deals remaining open for any longer than necessary, even if the capital markets launch-to-close cycle already appears riskless when compared to M&A transaction between signing and closing right now. Because markets are changing daily, issuers, underwriters and their respective disclosure counsel are now looking to settle offerings on a T+2 or T+3 basis when they previously would have settled T+5. So there is increased pressure on issuers and their lawyers to prepare all the documentation required for closing while working remotely and not having access to the same administrative resources. Obtaining signature pages in the same manner as pre-COVID-19 has become a logistical impossibility in many cases.

Which leads to the third administrative development: electronic signatures. In our experience, clients have been able and are often eager to adapt quickly to electronic signatures. In the end, electronic signatures may

-2- European Capital Markets Opportunities Guide, continued be much more efficient than the usual process and will likely be the standard approach even after we return to the office. Issuers should, however, allow for sufficient lead time to introduce new procedures, especially if legal opinions as to due execution, delivery and validity are required to ensure all parties are comfortable with the new technological approach.

It is clear that issuers and their advisors will have to make a number of adjustments to the typical offering process. What about another key constituency, the regulators? Do regulators have to make similar adjustments or take a step back in their approach to regulation and enforcement?

Regulators have also been affected by COVID-19. In fact, the SEC was one of the earlier institutions to adopt a remote working policy. But although the SEC staff have been working from home longer than most of us have, they have actually done so pretty seamlessly. In our recent experience, the SEC remains fully open for business, whether that’s reviewing a registration statement, working through WKSI waiver letters or providing interpretive guidance relevant to a COVID-19 world. If anything, the SEC commissioners and staff have become more active in issuing guidance to companies on how to navigate the legal and practical challenges of COVID-19. There have been a series of releases and public statements specific to COVID-19 disclosure, and they have also worked to implement accommodations for filing delays caused by COVID-19. In our experience, the same holds true for regulators in Europe. But given how much is on the regulators’ plates, and the natural challenges of working remotely, issuers and their counsel would be well advised to consider approaching the relevant regulator sooner about issues than would have been the case historically. Again, don’t assume something will work the same way it has always worked before.

Equity Capital Markets

What are some of the trends in equity capital markets in Europe?

We have seen a few weeks in March with basically no activity. But accelerated bookbuild offerings, i.e., private placements with institutional investors, have come back already at the end of March and beginning of April. For example, in the U.K., France, Germany and the Netherlands, we see primary deals with the issuance of new shares often around 10% of the existing share capital. We have also seen convertible bonds, partially also mandatory convertible bonds, in the market. Mostly, these transactions have not been rescue transactions by companies under pressure due to COVID-19, but rather capital raisings in industries that have not suffered or even benefitted from the crisis, such as Dutch online pharmacy Shop Apotheke or Just Eat Takeaway.com, which raised €700m through an accelerated bookbuild offering of new shares and convertible bonds in April.

We have also seen a number of secondary transactions, most notably a sale of existing shares in the Italian telecoms towers business Inwit by Telecom Italia and Vodafone.

These transactions have been completed successfully, so investors are willing to engage. At the same time, it is fair to say that activity levels on the equity capital markets side are still very low compared with those of previous years. And of course one category has been missing almost entirely so far in Europe this year: IPOs.

In light of the markets, are issuers still preparing for IPOs?

IPO preparations have not totally stopped, but the pipeline is not what it used to be. In mid-March, the Cboe volatility index, which measures expected market swings, peaked at about 83, a level more than three times the level where nearly all of the European IPOs priced in the last 20 years.

Given the extreme volatility, issuers looking to launch their IPOs in April or May have put those plans on hold. While volatility has decreased significantly, the outlook remains uncertain, with activity unlikely to pick up until the second half of the year at the earliest and probably not until the fourth quarter of 2020. While IPO activity is likely to be buoyed by the stimulus measures being put in place to combat the effects of COVID-19, it will be

-3- European Capital Markets Opportunities Guide, continued highly correlated with success in containing the spread of the pandemic – a second wave of infections after the lockdowns have ended could make it very difficult to bring any deals to market, even with tempered pricing expectations.

That said, there is no reason for an issuer focused on a Q3 or Q4 IPO to go pencils down, particularly in sectors less or even positively affected by the crisis. In fact, a Zoom rival called Pexip, just announced its intent to IPO on the Oslo stock exchange and Exasol, a German analytics database management software company, just set the price range for its IPO. While these examples are clearly the exception, we are also working with a number of issuers who want to be ready for an IPO if the window is there.

Interestingly, from a process point of view, very little has changed. Regulators have adapted – in Germany the BaFin review process continues virtually unchanged, notwithstanding the fact that everyone is working from home. Due diligence meetings and drafting sessions are being held (in some cases more efficiently) by video- conference. It turns out even analyst and investor meetings can be done remotely. Whether this ends up changing IPO practice going forward remains to be seen.

What do the equity capital markets look like in France?

The activity level in the French equity capital markets is low for now, but the market receptivity remains strong for companies that (a) have a credible downside case and (b) offer an attractive investment case in recovery.

Groups that have liquidity issues remain focused on their financial indebtedness, including through the granting of State guaranteed loans.

Market valuations are currently depressed and groups are not keen on diluting their shareholders on that basis or even do a rights issue with a significant discount as compared to current market prices. Many issuers are therefore waiting for their stock price to recover before considering any capital increase. At the same time, they want to be the first ones out in the market. Some will try to launch before the summer but we can expect a significant amount of equity capital markets activity after the summer even for issuers that have not seen their stock price improving.

In light of the current market valuations, we may also start seeing more innovative structures to allow equity offerings at a premium over stock price.

On the IPO front, it may take a few months before seeing again large IPOs such as the ones we saw in 2019 (Française des Jeux and Verralia, for example). Also, the French state will need cash and one could expect that at one point a new privatization program may be needed. It is interesting to note that as a result of the crisis, the retail investors have significantly invested in the stock market which had not been the case for many years. This return of retail investors will be helpful in the context of privatization programs which are often oriented towards retail investors. Therefore, we remain cautiously optimistic regarding IPOs.

What kinds of actions are being taken to assist UK listed companies to raise additional equity capital quickly and effectively?

On April 8, 2020, the UK’s Financial Conduct Authority (FCA) announced a series of measures that are designed to assist UK listed companies to raise additional equity capital quickly and effectively in response to the COVID-19 crisis, whilst at the same time balancing the needs of investors.

These new measures are intended to give UK listed companies the potential ability to:

 Issue additional equity within certain parameters without having to make a pre-emptive offer to existing shareholders

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 Make a clean working capital statement in a prospectus or shareholder circular while including assumptions relating to the COVID-19 crisis – this is a temporary measure in place until further notice from the FCA

 Where possible, make use of the simplified prospectus regime introduced by the EU Prospectus Regulation

 Avoid the need to hold a shareholder meeting to approve a transaction provided the approval thresholds are otherwise satisfied and gives a dispensation – this is also a temporary measure in place until further notice from the FCA

What does an exclusion of pre-emptive rights in the UK entail?

The starting point is there are usually limits on the ability of a UK company to issue new equity securities for cash unless they are first offered to existing shareholders, what we call pre-emption rights, or those pre- emption rights are first disapplied by a special shareholder resolution. These pre-emption rights are relevant to issuances of ordinary shares and also to convertibles. For UK companies, pre-emption rights derive from UK company law, and the UK Listing Rules require non-UK incorporated companies that have a premium listing in the UK to give their shareholders the same pre-emption rights as UK companies.

A company will usually get approval each year from its shareholders at Annual General Meetings (AGM) to disapply these pre-emption rights to enable it to issue equity securities for cash other than to existing shareholders, but it is normal for that disapplication to apply only to a small percentage of the company’s existing share capital. The limit on the size of the disapplication is a function of guidance to the market issued by a group called the Pre-Emption Group – which is made up of representatives from a number of UK institutional investor bodies – on what it considers are acceptable parameters rather than any legal or regulatory requirement.

Before the COVID-19 crisis, the Pre-Emption Group’s guidelines meant that a UK-listed company would typically get approval for a general disapplication of pre-emption rights from its shareholders to issue for cash:

 Up to 5% of its share capital for general purposes;

 Up to a further 5% of its share capital in connection with a specified acquisition or investment; and

 No more than 7.5% of its share capital on a rolling 3 year basis.

What’s new is that the Pre-Emption Group has issued guidance saying that it will support requests by listed companies for general disapplications of pre-emption rights for up to 20% of share capital and it is the Pre- Emption Group’s new guidance that has been publicly endorsed by the FCA.

The Pre-Emption Group has however placed some additional limitations on a company’s ability to use this 20% limit for new equity issues. The two main ones to keep in mind are that:

 a company needs to undertake proper consultation with a representative sample of its major shareholders in relation to the new issue; and

 as far as possible, the new issue should be made on a soft pre-emptive basis – meaning the arranging banks should allocate shares to investors in accordance with an allocation policy which, to the extent possible, replicates the existing shareholder base, although it’s recognized that the limitations mean that it’s likely not all shareholders will be able to participate.

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There are a couple of practical points that are worth just touching on in relation to this development on pre- emption rights. A listed company would typically need to hold a shareholder meeting to seek approval for a larger disapplication of pre-emption rights, to take advantage of this and companies that have not yet issued their AGM notices are in the best position in the short term to seek approval for larger disapplications. Companies that had already sent out their AGM notices prior to the new guidance being issued would either need to consider postponing their AGMs or holding separate shareholder meetings to approve larger disapplications – both of which have cost implications or would have to make the issue or part of it conditional on obtaining shareholder approval as was the case recently with Informa plc.

For a UK company, it’s already possible to structure an equity fundraising or a convertible as a so-called “cashbox” transaction, which can avoid the need to seek or use up a disapplication of pre-emption rights and they can also be used to obtain a particular balance sheet treatment. These structures are not new and rely on the new securities not being issued for cash. However, the Pre-Emption Group has historically discouraged the use of “cashbox transactions” for large issuances by treating such arrangements as being within the limits in its guidance. So, the increase of this limit to 20% of a company’s share capital should, in practice, give UK companies some more flexibility in this respect. A steady stream of UK-listed companies have been undertaking share placings in recent weeks, and we expect more to follow.

What are the accommodations with respect to the working capital statement?

The prospectus regulation requires any prospectus for the issue of new equity securities to include a working capital statement, as to whether or not the issuer has sufficient working capital for at least 12 months from the date of the prospectus. Under the relevant ESMA recommendations, this working capital statement can either be “unqualified”, which is to say the statement is made without any caveats, qualifications, assumptions, sensitivities or cross-references to risk factors, or “qualified”, which is rare to see, as it requires an explanation and a description of the proposed action plan to remedy the current shortfall in working capital.

One of the key principles in the ESMA Recommendations is that an issuer is expected to have undertaken an assessment of whether there is sufficient margin or headroom to cover a reasonable worst-case scenario over the 12-month period. And as mentioned before, it is not permissible to disclose key assumptions underpinning the analysis.

Of course, due to the COVID-19 pandemic and its effects, many issuers are currently unable to model such a scenario, so compliance with the ESMA Recommendations in this respect would result in a significant number of working capital statements being qualified.

As an accommodation, the FCA has published a Technical Supplement: Until further notice, an otherwise clean working capital statement will be permitted to disclose key modelling assumptions underpinning the reasonable worst-case scenario, as long as those assumptions are only related to COVID-19 and are clear, concise and comprehensible. Assumptions unrelated to COVID-19 are not permitted to be included.

For more details see “UK’s FCA Announces Temporary Measures Designed to Assist Issuers”.

What is the situation on the continent?

We have not yet seen any such accommodations, but it will be interesting to see whether some of these accommodations will also become available outside the UK. In general, we are looking forward to seeing what happens to the IPO market after things start to open up again. Certainly, some companies won’t have seen their businesses significantly affected, but they will no doubt be impacted by broader market conditions and investor sentiment, and then others will have seen significant adverse effects that may take time to work through.

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Private Placements

In prior market downturns, including, for example, the financial crisis, we saw an increase in private investments in public equity transactions as well as other private placements. What are the trends with respect to private placements in Europe? Are particular industries accessing this market more than others and is private equity playing a big role?

There are a lot of discussions throughout Europe at the moment regarding private placements, for several reasons. With respect to issuers operating in industries that are not – or not so much – affected by the crisis, we have seen undocumented accelerated bookbuild offerings, as mentioned earlier. For capital raisings in more difficult industries, institutional investors expect to see a significant risk premium and therefore discounts to share prices. These discounts often mean that offerings are less attractive to issuers, discouraging them from going out into the market. Some investors, such as certain strategic buyers, large family offices or private equity funds may have special insights into certain industries and may therefore be willing to move forward at acceptable prices. Further, companies may be concerned about their low share prices and seek protection against unsolicited takeover bids by issuing equity in private placements to investors that they consider as stable, long-term oriented and somewhat immune against short-term takeover offers. We have also seen some investors opportunistically increasing their already existing stake in listed companies, for example, Italian Mediaset in German media group ProSiebenSat.1.

As to private equity: We would expect private equity to come more into this now – the last few weeks our impression was that private equity was more focused on existing, already-signed transactions and on issues with existing portfolio companies.

Private placements only offer opportunities for companies that are still attractive enough for institutional investors. In some industries that are hit most by the economic turmoil, private placements may not be feasible at attractive prices or may be limited in size under the laws of the relevant jurisdiction, requiring issuers to resort to more broad-based offerings, such as rights offerings. This is a lesson from the dot com bubble in the early 2000s and the financial crisis in 2008/2009, and we will see these rights offerings throughout Europe again. While the underlying concept – dilutive rights offerings with a significant discount to theoretical ex-rights price (TERP) based on prospectuses to be approved by the national regulator – will be the same, execution of such transactions often depend on the somewhat diverse corporate law concepts in the different countries in Europe. Some will require shareholder approval, others have significant authorized capital. Some can be executed after launch in a two-week process, others have rights offering periods of a minimum of four weeks.

Being Prepared for Open Window

At S&C, we are working with a number of issuers who need to raise capital now. However, others may have a longer time horizon and simply want to be prepared for when a window opens. What should issuers be doing now to ensure that they are ready, and are there any lessons that can be learned from companies that have gone through the capital raising process in the past few weeks?

We’ve already talked about some of the issues surrounding comfort and the administrative aspects of undertaking an offering while working remotely. Another point to bear in mind is that the relevant corporate entities that will need to provide approval must be kept apprised of financing needs and plans so they are able to act quickly if an opportunity or need arises. Most companies have been very good about providing frequent updates to their boards about the impact of COVID-19, but maintaining that discipline and, in particular, including updates on financing needs and the state of the market will be important, especially if, as mentioned before, issuers may be considering instruments that are novel from their perspective.

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As markets move quickly and unpredictably there can be a significant benefit in being ready to access capital markets on very short notice.

How can issuers adjust their transaction structures, especially for IPOs, to address the current situation?

This depends on the issuer and specific transaction contemplated. In IPO transactions, the big challenge will be valuation. Whereas in the U.S., it is relatively easy to upsize (or downsize) a deal at the last minute, and/or to price above or below the range, all without SEC involvement, it is harder to do this in Europe since it may require an amendment to the prospectus that has to be approved by the competent authority. There are ways to build in additional flexibility to address this constraint. In Germany we have seen “upsize options” (separate from the greenshoe option) to permit upsizing without an amendment to the prospectus. We also used to see IPOs based on the so-called decoupled approach, in which the actual price range was not fixed until a few days prior to pricing, and we could see this reintroduced as a way to optimize pricing in a volatile market environment.

Also, given the likelihood that investors will demand a high IPO discount in this environment, we would expect IPOs may be scaled back in the expectation that secondary tranches post lock-up may be possible at higher valuations, particularly in the case of private equity exits. In the high yield space, other than higher risk premiums, which investors will obviously expect, there is likely to be a renewed focus on covenants and a need to agree “flex” terms. We have also seen “Corona clauses”, permitting certain add-backs for lost revenue or allowing issuers to redeem a portion of the issuance at a reasonable premium to par if it receives regulatory debt in the near term.

Disclosure Requirements

The European regulators have been putting out a lot of guidance recently and it can be hard for all of us to keep up, but one area that has caught our attention was the guidance on disclosure rules regarding inside information. What are the key takeaways from ESMA’s guidance?

On March 11, 2020, ESMA emphasized in a publication the importance of the ad hoc disclosure rules in light of the current crisis. While everybody knows about COVID-19 and its negative implications for the economy as a whole, the impact on different issuers varies substantially. Among our clients, we had ad hoc releases because Q1 results were expected to go through the roofs and ad hoc releases because earnings were disappointing. It is against this backdrop that ESMA emphasized that the specific impact of the crisis on issuers may well be price sensitive and inside information and reminded issuers to disclose any significant impact of the COVID-19 outbreak on their “fundamentals, prospects or financial situation” as soon as possible.

What is the AMF’s recent guidance regarding publication of inside information?

The AMF issued several statements in connection with the COVID-19 outbreak regarding the disclosure of inside information and in particular for issuers’ financial objectives. The AMF recommends that issuers periodically re-assess the known or anticipated impact of the COVID-19 pandemic on their activity, performance or prospects, determining the materiality and/or amount of such impact. For the AMF, where a significant impact of the COVID-19 outbreak is known or anticipated, previously announced guidance that did not include an assumption regarding such potential impact must be restated and disclosed by way of a press release.

As of April 30, more than 25% of the issuers included in the French CAC40 index have issued ad hoc press releases withdrawing or suspending their previously announced guidance for 2020.

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What is BaFin’s recent guidance in this area?

The BaFin published FAQs on its website in March 2020. In these FAQs, the BaFin pointed out that changes of forecasts due to the COVID-19 crisis only have to be disclosed “if they are sufficiently probable”. Given that there is significant uncertainty about the future development of the economy, issuers may maintain their previous forecasts as long as they cannot predict the actual impact of the COVID-19 crisis. Once issuers have a sufficient degree of likelihood that the actual results will significantly deviate from previously announced forecasts, they should withdraw their guidance, even if they are unable to provide a new detailed forecast. Issuers should disclose a new forecast in the form of an ad hoc disclosure once they can provide a sufficiently detailed forecast. There has also been guidance from national regulators with respect to deadlines and the preparation of financial reports.

What are we seeing in terms of guidance concerning disclosure implications of the COVID-19 crisis from the FCA and FRC in the UK?

In the UK, the FCA published a statement at the end of March saying it appreciated, that, in the short term, there may be slight delays in making required disclosures as new processes are put in place to assess the situation. While there is no guidance on what is an acceptable length of delay, past cases suggest that by “short” the FCA really means very short. For example, in relation to Marconi, a company that experienced financial difficulties in the early 2000s, the FCA’s predecessor stated that a reasonable delay of the announcement of materially reduced expected financial performance would have been no more than 24 hours rather than the three days that it actually was taken. But what we are seeing now is that as companies have visibility on the impact of COVID-19 on their businesses, they are making ad hoc announcements and some are even putting out trading updates ahead of official results announcements.

The FCA has also granted issuers a temporary two-month extension, to the four months from the end of their financial year they normally have, to publish their audited annual financial reports and has said that it will not take normal regulatory action against issuers who take advantage of this extension but this temporary relief doesn’t apply to half-yearly financial reports which should be published within three months of the half-year end. The UK’s Financial Reporting Council has also issued guidance for UK companies preparing financial statements in the current uncertain environment. The guidance addresses capital maintenance, forward- looking statements, the requirements for narrative reporting and going concern statements.

What about the AMF in France?

In France, the AMF followed the same approach as the FCA. The AMF has granted issuers a two-month extension to publish their annual financial reports (for issuers that have a financial year ending between December 31 and March 31) and a one-month extension to publish the half-year financial reports.

The AMF has advised issuers that information regarding the main risks and uncertainties to which they are exposed as a result of the COVID-19 pandemic should be provided in their annual financial reports, including their management reports.

For issuers that closed their accounts on December 31, 2019, those risks and uncertainties are those that the issuer has identified at the time of publication of its annual financial report (i.e., on or prior to April 30, 2020). In addition, the AMF notes that the actual and potential impacts of the COVID-19 outbreak could also be considered as post-closing events requiring disclosure in issuers’ year-end 2019 financial statements.

For those issuers that had already finalized and published their 2019 year-end financial reports, information regarding the impacts of the COVID-19 outbreak will need to be provided in their interim financial reporting disclosures.

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Regarding issuers that usually provide financial information on a quarterly basis, the AMF noted that these issuers should continue to do so to the extent they have reliable financial data. If issuers are unable to publish their quarterly results on the initially scheduled date, they are invited to disclose their new financial calendar and reach out to the AMF.

How should companies be approaching any forward-looking guidance and how can they best protect themselves from legal exposure down the line?

The SEC and other regulators have been very active in issuing disclosure guidance on COVID-19, and for European issuers that are considering accessing the U.S. markets (whether on an SEC-registered basis or under Rule 144A), disclosures will be measured, as always, against U.S. disclosure standards. The SEC put out quite a detailed release on various aspects that the SEC staff thought companies should be considering for disclosure, but the statement that Chairman Jay Clayton and Director of the Division of Corporation Finance Bill Hinman put out earlier this month was more interesting.

One of the key takeaways from this statement was that the SEC is focused on the benefits to investors of forward-looking information. This release was perfectly timed to ensure that it was top of mind for US issuers required to report on a quarterly basis and in the process of finalizing their Q1 filings. Forward-looking guidance is more important because the uncertainty around when the economy will begin to return to normal and the nature of any long-term impacts of the pandemic and related response measures makes pre-COVID-19 historical information less significant to investors’ decisions in the post-COVID-19 world. Rather, investors want to understand how management sees their business responding to these challenges and uncertainties in the next quarter or the next year.

Despite the importance of forward-looking information for investors, for obvious reasons we are not seeing a trend toward quantitative forward-looking guidance. Rather, the first phase of COVID-19 disclosures was largely focused on withdrawing or disclaiming any previous quantitative guidance due to COVID-19 uncertainty.

We’ve now moved into the second phase of disclosure: describing known trends and known uncertainties related to COVID-19. And this is actually an important step for companies to take to protect themselves from legal exposure down the line. Even before the COVID-19 pandemic, the SEC’s proposed amendments to MD&A requirements made clear that they expected disclosure of known trends and known uncertainties to be a critical element in public reporting.

So what should companies do in this second phase of COVID-19 disclosure? Three pieces of advice:

 First, manage risk by disclosing as much information and guidance as you reasonably can. The SEC has made clear that good faith attempts to provide forward-looking information won’t be second guessed by the SEC. By contrast, failure to disclose known trends and known uncertainties will expose companies to enforcement actions and investor claims.

 Second, manage risk by properly framing assumptions about the post-COVID-19 world that lie behind forward-looking statements, and identifying those areas where the level of uncertainty is simply too great to provide forward-looking guidance today. Vague boilerplate language will not protect companies from enforcement actions or investor claims.

 Third, manage risk by drafting an appropriate risk factor. For U.S. issuers, the Form 10-Qs being filed now are required to contain material updates to risk factor disclosures from the recently filed annual reports, and the vast majority of companies are choosing to include a dedicated COVID-19 risk factor in their Q1 reports. Although updating risk factors at this time of year is not customary for European companies, any issuers considering accessing the U.S. markets should be reviewing the filings of their U.S. peer companies and thinking about what their COVID-19 risk factor would look like in the event of an offering.

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How will issuers be looking at COVID-19 in the context of key metrics or non-GAAP financial measures?

ESMA issued a new Q&A in April 2020. ESMA acknowledges that, due to the impacts of the COVID-19 pandemic on their operations, issuers may decide to disclose new, or to adjust, alternative performance measures. ESMA reminded issuers that the definition and calculation of alternative performance measures (APMs) should be consistent over time and cautioned issuers use caution not to make adjustments to APMs solely with the objective of depicting the impacts that COVID-19 may have on their performance and cash- flows. ESMA noted that it may not be appropriate to include new APMs or to adjust previously used APMs when the impacts of COVID-19 have a pervasive effect on the overall financial performance. Therefore, rather than adjusting existing APMs or including new APMs, ESMA urges issuers to improve their disclosures and include narrative information in their communication documents in order to explain how COVID-19 impacted and/or is expected to impact their operations and performance, the level of uncertainty and the measures adopted or expected to be adopted to address the COVID-19 outbreak. These explanations may include, where applicable, details on how the specific circumstances related to COVID-19 affected the assumptions and estimates used in the determination of inputs to APMs, for example, impairment losses, expected lease payment reductions or grants received.

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