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Extreme times require extreme measures. Yesterday, the Financial Markets Authority (FMA) and the NZX announced regulatory relief measures due to the disruption caused by COVID-19.
FMA's relief includes an additional two months for Financial Markets Conduct Act reporting entities (FMC reporting entities) to provide their audited financial statements. The NZX has provided similar relief for listed issuers and has also provided waivers to help ensure issuers are able to access sufficient equity capital urgently if needed.
FMA financial reporting waivers
The process of financial reporting requires boards, audit committees and audit firms to make informed judgements about their business. The developing COVID-19 situation is significantly disrupting that process, with judgements that looked reasonable only a short while ago needing to be revisited. This is making it difficult for many FMC reporting entities and audit firms to comply with the FMC Act's prescribed timeframes for producing audited financial statements. The difficulty is not only in the additional time required to assess the impact of COVID-19 on their businesses for reporting purposes, but also the imposition of various restrictions that make it difficult for completing audit processes such as practical resourcing constraints and difficulty in obtaining inputs from third parties such as valuers.
In keeping with measures taken by equivalent overseas regulators, the FMA has announced that it will grant a class exemption to allow FMC reporting entities (which includes issuers, banks, licensed insurers, and non-bank deposit takers) and managed investment schemes an additional two months to produce their audited financial statements. This means affected entities and schemes will have six months, rather than four months, to complete this work.
At this stage, the relief will apply for entities and schemes with balance dates from 31 December 2019 to 31 May 2020. However, the FMA has signalled that the relief may be extended to include later balance dates as the COVID-19 situation develops.
In addition, the FMA has determined to provide consequential relief for affected restricted schemes, by providing them with an additional two months to provide confirmation notices to members.
NZX's support package
The NZX's supporting measures have been made through two separate class waivers.
Relief for equity capital raising
The first relief provides measures aimed at ensuring NZX listed issuers are able to access sufficient equity capital urgently should the need arise, in addition to any existing debt facilities. These measures will remain in place until 31 October 2020 unless the NZX specifies an earlier date.
The measures include:
•Placements – increasing the percentage of additional shares that can be issued in any 12-month period without having to obtain shareholder approval from 15 per cent to 25 per cent.
•Share Purchase Plans (SPP) – allowing all shareholders to purchase up to $50,000 worth of new shares in any 12-month period (rather than the current cap of $15,000) and increasing the threshold at which shareholder approval is required for an SPP from 5 per cent of the shares already on issue to 30 per cent.
•Rights issues – allowing a rights issue to be announced on the “EX Date" and reducing the closing date for rights issue applications from seven business days to three business days after the last letter of entitlement is sent if the only means by which holders of rights are able to accept the offer is electronic means.
The NZX makes it clear that these measures support participation by retail shareholders, and seek to mitigate dilutionary effects. In particular, NZX has made it clear that issuers should be mindful of the NZX Corporate Governance Code recommendation that favours pro rata capital raisings that allow existing investors to avoid dilution.
Care needed for cleansing notices
Importantly, issuers relying on the “quoted financial product" exemption under the Financial Markets Conduct Act 2013 will still need to publish a cleansing notice. In essence, publishing a cleansing notice requires the issuer to confirm that:
•it is complying with its continuous disclosure obligations under the NZX Listing Rules and its financial reporting obligations, and
•it does not hold any "excluded information", being price sensitive information that has not been disclosed to the market in reliance on a permitted exemption.
In short, it requires the board to be comfortable that the market is fully informed. This means that the information set available to investors is complete and not misleading.
In the current environment, it may be harder and potentially more time consuming for boards of listed issuers to get themselves in a position where those confirmations can be given. If raising capital is potentially required, we recommend that boards of listed issuers consider starting the process to assess whether those confirmations can be given, to allow for a shorter lead-in time if a decision is taken to raise capital at short notice.
These assessments may well be difficult in the current context, as they necessarily require the board to form its own view on the impact of COVID-19, and its associated travel restrictions and economic effects, on their business. What then does that impact mean for the business' expected financial performance? Finally, in light of those conclusions, to what extent is the market informed of those impacts? Boards may only be comfortable issuing a cleansing notice if they feel that they have a reasonable view on the impacts, and they have disclosed them to the market.
We expect that some issuers may have an imperfect information set at the time and will need to carefully consider the disclosures made before any capital raising commences. While it may be an uncomfortable position, having imperfect information shouldn't prevent an issuer from publishing a cleansing notice provided that the board makes the market aware of the imperfections or, potentially in some circumstances, is comfortable that the market is aware of the imperfections and doesn't think that something is more certain than the board does. It will be important to work through this with experienced legal support.
The second relief follows on from the FMA's proposed class waiver for all FMC reporting entities. The NZX's waiver provides similar relief to issuers of debt, equity and fund securities subject to NZX's periodic reporting requirements by:
•Full year and half year results announcements - increasing the current period from 60 days to 90 days for releasing results announcements after the end of a financial year (for issuers with a full year balance date falling on a date between 1 January 2020 and 31 May 2020) or half year (for issuers with a full year balance date falling on a date between 1 August 2019 and 31 December 2019),
•Annual reports - extending the period required for preparing and delivering an annual report for debt and equity issuers (with a full year balance date falling on a date between 1 January 2020 and 31 May 2020) from within three months after the end of a financial year to five months, and
•Scheme annual reports - extending the period required for preparing and delivering an annual report for a relevant scheme (for issuers with a full year balance date falling on a date between 1 January 2020 and 31 May 2020) from within three months after the end of a financial year for the scheme to five months.
NZX has included an appendix to the waiver which illustrates the impact of the class waiver on the specified periodic reporting obligations. For example, the current timing requirement for an issuer with a balance date of 31 January 2020 for releasing its full year results announcement was 31 March 2020 and is now 30 April 2020.
If you have any questions about the matters raised in this article please get in touch with the contacts listed, or your usual Bell Gully advisor.