Where issuers are still issuing securities at all or offers of securities have not yet been closed, the provisions under prospectus law need to be observed. In the future, issuers and external advisors will continue to take into account the effects a pandemic may have on a companies. In the meantime, we have learned that this may have dimensions that were previously unimaginable and can affect all areas of life.
In cases where issuers have already published a securities prospectus and the offer period has not yet closed, supplements to the prospectus may have to be drawn up in accordance with Article 23 EU Prospectus Regulation (Regulation (EU) 2017/1129 of the European Parliament and of the Council of June 14, 2017 – “Prospectus Regulation”), which has been in force since July 21, 2019. According to Article 23(1) Prospectus Regulation, an obligation to do so exists if, after approval, significant new factors, material mistakes, or material inaccuracies relating to the information included in a prospectus which may affect the assessment of the securities have occurred. Incidentally, positive changes also need to be added. Supplement must also be approved by the competent supervisory authority, which is usually done fairly quickly.
The obligation to draw up supplements, thus the obligation to update, relates not only to risks, but also to other presentations in the prospectus such as business prospects, supply chains, products, litigation, information on management discussions and analysis (MD&A), etc. These topics are to be updated if the possible effects of the coronavirus (Covid-19) on issuers could potentially influence the investment decisions of prudent investors. This will need to be examined on a case-by-case basis for each issuer.
Updates may also be advisable for documentation in private placements, since risk factors and other documents and information comparable to the prospectus are made available to potential investors at least on a regular basis.
Where supplements are published in accordance with the Prospectus Regulation in relation to an offer of securities to the public, investors who have already agreed to purchase or subscribe for the securities before the supplement is published have the right to withdraw their acceptances according to Article 23 Prospectus Regulation, provided that the significant new factor, material mistake, or material inaccuracy arose or was noted before the closing of the offer period or the delivery of the securities, whichever occurs first.
It should be noted that the failure to publish a supplement constitutes an administrative offense in accordance with Section 24(3)(17) German Securities Prospectus Act. Potential provisions on prospectus liability must also be taken into account. In accordance with Article 23(3) Prospectus Regulation, financial intermediaries also need to inform investors where and when a supplement will be published and offer to assist them in exercising their right to withdraw acceptances in such case.
Supplements will likely only be necessary and possible until the public offering is closed.
In cases where the obligations of the MAR under capital market law are already applying, since trading has already commenced or an application for admission or inclusion has been filed, an ad hoc notification in accordance with Article 17 MAR may be necessary in parallel.
In the near future – once issues are resumed – we will observe discussions and comments on pandemics. In relation to the prospectus, these may be relevant in particular as a risk factor, but also in other parts of the prospectus.
The Prospectus Regulation stipulates strict requirements for including risk factors in a prospectus. Contrary to the old law in force prior to July 21, 2019, no generic risks should be included. Rather, the risks should be material and specific to the issuer and its securities. Supervisory authorities also pay particular attention to this materiality and specificity when examining a prospectus and, in particular, risks.
Including such risks is therefore only possible if a pandemic comparable to the coronavirus has specific effects on the issuer or its securities. Where such risk factor are included, this must also be reflected in other part of the prospectus, such as the description of the business, prospects, and similar disclosures.
The risks are also to be allocated in certain categories with the most material risk to be mentioned first. It therefore depends on the individual case whether a pandemic such as the coronavirus is material and specific, under which category and with what importance it is to be mentioned. Aspects to be considered include interruption of supply chains, missing workforce, missing customers, official closures, or restrictions on opening hours such as those currently imposed on stores, restaurants, hotels, and other tourist sites, business closures, or risks of damages. Impairments of financing and breaches of covenants, in particular of financial ratios, in financing are also relevant. Both the risk and the specific impacts on the issuer need to be described.
As mentioned above, the risk and the impacts must also be reflected in the other sections of the prospectus. This may be particularly relevant in the following areas: trends and prospects, business activities of the issuer, supply relationships, employees, disputes foreseeable in connection with a pandemic, information on management discussions and analysis (MD&A).
For current issues, it is necessary to consider whether adjustments to the prospectus or other issue documents need to be made. According to the Prospectus Regulation, investors have the right to withdraw their acceptances if the change was already present at the time of their subscription and was not disclosed. It is also mandatory to observe ad hoc notification requirements. Additionally, possible pandemics will be discussed when a prospectus and issue documents are published in the future and – where relevant – need to be described specifically in relation to the issuer and its business.