Corporate Governance: Combining transparency, responsibility and control
The coronavirus (COVID-19) outbreak raises corporate governance concerns and may give rise to risks that should be considered by companies and their management boards. It is worth recalling that pursuant to the Ten Corporate Governance Principles of the Luxembourg Stock Exchange, listed companies are expected to ensure a rigorous system of corporate governance combining transparency, responsibility and control. These three elements should form the basis for all actions taken by the board in relation to the COVID-19 outbreak.
In many EU countries, the lockdown has ended or been relaxed and business travel is once again possible, albeit not recommended. The COVID-19 crisis will be followed by a financial and economic crisis, the full extent of which cannot yet be determined. Many directors will have to deal with financial and other issues affecting the companies they manage.
In the light of these developments, directors will be obliged to take measures to ensure business continuity. They may have to (re)negotiate payment terms with (certain) creditors and refinance short-and medium-term payment obligations in order to avoid bankruptcy.
It should be noted that until the state of emergency is lifted, which is scheduled to occur on 24 June 2020, the directors' obligation to file for bankruptcy within one month from the time the company ceases to pay its creditors is suspended. This suspension will probably be extended beyond 24 June 2020: According to Bill No 7552, bankruptcy applications filed within two months from the end of the state of emergency (i.e. until 24 August 2020) will be considered inadmissible, and the deadline to declare bankruptcy will be extended for two months following the end of the state of emergency (i.e. until 24 August 2020)
Directors may need to meet more frequently. Board meetings can still be organised in accordance with the provisions of the Grand Ducal Regulation of 20 March 2020 introducing additional measures on the holding of meetings by companies and other legal entities (see related article on our website). According to Bill No 7566, the rules provided for by the Regulation will continue to apply mutatis mutandis after 24 June 2020. This means, in practice, that the rules on the holding of virtual meetings will apply for a period of nine months from the end of a company's financial year. Thus, for a company whose financial year ended on 31 December 2019, the rules will apply until 30 September 2020.
The deadline for filing annual accounts with the Luxembourg Trade and Companies Register has also been extended (until 31 October 2020 for companies whose financial year ends on 31 December).
Directors must act at all times in the best interest of the company. This includes an obligation to act as reasonably prudent businesspersons. They must manage the company’s business in good faith, with reasonable care, and in a competent, prudent and active manner. It goes without saying that in times of a global health emergency, directors of Luxembourg public limited companies must keep themselves informed, actively monitor the company's affairs and evaluate on a day-to-day basis the evolution of the coronavirus crisis and its impact on the company.
According to the preamble to the Corporate Governance Principles of the Luxembourg Stock Exchange, good corporate governance includes procedures and instruments that strike an optimal balance between entrepreneurship and performance, on the one hand, and the control and prevention of risk, on the other hand. In uncertain times, the control and prevention of risk probably prevail.
The current COVID-19 outbreak poses commercial risks due to potential disruptions to the supply chain and probable absenteeism of employees, which will impact the ability of companies to deliver products and services on time. In order to mitigate these risks, directors should carefully and proactively consider the company's situation and, for example, check for alternative supply arrangements. Directors should also consider developing a business continuity plan and a risk management strategy. This is in line with Recommendation 8.14. of the Ten Corporate Governance Principles of the Luxembourg Stock Exchange, according to which the board shall review and assess the main risks to which the company is exposed in pursuing its corporate purpose as well as the strategy implemented to control and manage these risks. Furthermore, the board shall inform shareholders of the conclusions of its review and assessment.
Directors of listed companies should also check if the company's particular situation requires the disclosure of inside information to the public in accordance with Regulation (No) 596/2014 of 16 April on market abuse. According to this regulation, an issuer shall inform the public as soon as possible of inside information directly concerning it. In this context, inside information is considered information of a precise nature which, if it were to be made public, would be likely to have a significant effect on the price of the issuer's financial instruments or related derivative financial instruments. It is up to the directors to evaluate if the COVID-19 outbreak requires such disclosure. This could be the case, for example, if a company has material operations in areas severely affected by the outbreak or relies substantially on supply chains involving companies in such areas.
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