As governments all around the world continue to implement measures to curb the outbreak of COVID-19, businesses in many industries will suffer from reduced customers, reduced revenue and disruptions to supply chains and business practices. This may, in turn, have a significant adverse impact on their ability to operate and on the obligations and requirements that they face.

In this note, we consider some specific areas of business operations, namely contractual obligations, regulatory and statutory disclosure requirements on listed issuers and the holding of board meetings and general meetings and also some deal-related issues.

Contractual obligations

Relief from contractual obligations may sometimes be found in the form of a force majeure provision in the contract. A force majeure provision, where applicable, may provide a defence against a claim for breach of contract if such breach is caused by an event covered by the force majeure provision. However, in Hong Kong, this provision only applies if the contract expressly provides that it does and the event cited (such as epidemic, pandemic or related government actions) are specifically identified in the contract as an event that gives rise to this defence and this event is, in actual fact, the cause of the breach. Additionally, in the event that force majeure is applicable, care should be taken to determine the effect of the provision; some force majeure clauses operate to suspend performance until the end of the force majeure event, some operate to extend time for performance and others operate to terminate the contract.

In the absence of a force majeure clause, contractual parties would need to rely on the common law doctrine of frustration. A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. Again, relief under this doctrine may be limited as it would be difficult to demonstrate that the contract is physically or commercially impossible to fulfil.

It’s not necessarily all bad news though. Although some industries are affected more than others, most businesses would be expected to suffer some impact from COVID-19. It is open for contracting counterparties to negotiate with each other to reach a sensible solution that works for all parties. Businesses should be proactive in this regard. They should, if not already done so, undertake a review of all of their contracts to identify obligations that could potentially be breached and identify if any defences are available. Businesses should start a dialogue with counterparties pre-emptively as negotiations are often more productive if there is less time pressure on them. Counterparties could include customers, suppliers, banks, lenders and others.

Regulatory and Statutory Disclosure Obligations on Listed Issuers

Listed issuers are obliged under the Securities and Futures Ordinance to disclose inside information as soon as practicable after it has come to their knowledge and to take all reasonable measures to ensure proper safeguards exist to prevent a breach of the disclosure requirement by the listed issuer.

In light of the COVID-19 outbreak, in a joint statement, the Stock Exchange and the SFC specifically reminded issuers that ‘if their business operations, reporting controls, systems, processes or procedures are materially disrupted by the [COVID-19] outbreak and/or the related travel restrictions, management should assess whether any inside information has arisen and, if so, make a separate announcement as soon as reasonably practicable, independent of any applicable Listing Rule requirement.

In addition, it appears likely that the disruptions caused by the COVID-19 outbreak may result in, amongst other things, a number of listed issuers experiencing significant deterioration in financial performance or listed issuers being involved in material litigation. Any such situation should be assessed to determine whether inside information has arisen as a result. If any inside information has arisen, a profit warning announcement or other inside information announcement should be issued as soon as practicable.

Given the severity of the disruptions, it seems likely that this period will see a significant number of profit warning announcements or other inside information announcements being issued. This seems to be an opportune time for listed issuers to review their internal control systems and ensure that they have proper safeguards in place to ensure that they are in a position to announce inside information as soon as practicable after it arises. This might include a refresher on what constitutes inside information. Issuers should be reminded that any officer involved in the management of a listed issuer who breaches the proper safeguards obligation and/or whose intentional, reckless or negligent conduct results in a listed issuer’s breach of the disclosure requirement is also liable for the breach of the disclosure requirement. Non-executive Directors should be particularly vigilant.

Holding of Board and General Meetings

This aspect of business operations will be particularly affected by the current requirement to practise social distancing. This is also the subject of a recently enacted regulation, namely the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation, which limits public gatherings to no more than four persons during its effective period of 14 days. Prima facie, any physical general meeting would be subject to this regulation, although there is an exemption for meetings that are required by legislation or regulations to occur, such as annual general meetings (AGMs) and other general meetings that are subject to a legal or regulatory requirement as to timing. Thus, it seems that the regulation would apply to all general meeting apart from AGMs and other general meetings that are subject to a legal or regulatory requirement as to timing.

Fortunately, technology provides great assistance to companies in this regard. Most companies would have easy access to technology that would allow board or general meetings to be held in a hybrid manner, that is, simultaneously at two or more locations while attendees can speak and listen to each other and vote at the meeting.

The conduct of board meetings would typically be governed by companies’ constitutional documents (rather than by statute). Most companies’ constitutional documents do not contain any prohibition against holding board meetings in a hybrid manner. Board meetings should be able to be held via video conferencing or teleconferencing facilities.

Directors should be reminded, though, that the board, as a whole, should generally act collectively. As such, board meetings should be open to all directors to attend and arrangements should be made on the basis that all directors would attend (except that some old articles might provide that notice of board meetings may not need to be given to directors located overseas). Some things that companies may do to facilitate smooth running of board meetings include, among other things, having consideration to the time zone of the physical location of each director and, to the extent possible, holding board meetings at times when all directors can attend; or if some directors might attend for specific items only, schedule shorter meetings or schedule breaks in between agenda items; and checking and ensuring that the facilities used work properly and are not excessively sensitive to connectivity or other technical issues.

As for general meetings, these are governed by the Companies Ordinance (for Hong Kong companies). The Companies Ordinance expressly allows general meetings to be held in two or more locations using technology whereby the attendees can speak to, listen to and vote at the meeting.

For private companies, typically with a few shareholders, holding general meetings as hybrid meetings should be relatively straight forward, in the same manner as for board meetings.

On the other hand, public listed companies have a large number of shareholders and the social distancing policies, including the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation, have a severe impact particularly on general meetings of listed companies. This issue is given increased prominence at this time as we enter into a period in which a large number of listed companies with 31 December financial year ends hold their AGMs.

AGMs provide one of few opportunities for shareholders to question the board, engage directly with management, and hear the views of other shareholders. However, the COVID-19 and social distancing requirements are causing companies to rethink their arrangements for 2020 AGMs.

In this regard, the SFC and the Stock Exchange have also issued a statement which encourages listed companies to postpone (where possible) the holding of general meetings that can be postponed and outlining some recommended steps that listed companies should take in the event that a listed company proceeds with holding a general meeting. Recommended steps that companies should take for general meetings that are held include, for example, arranging for venues with multiple rooms where attendees can sit in different rooms, increasing the distance between seats, shortening the meeting by holding Q&A sessions separately after or before the meeting or via other channels, arranging for directors to join by video conferencing or other electronic facilities, refraining from providing refreshments and encouraging proxy voting. This would, albeit, still necessitate the use of a hybrid meeting and using technology to link multiple venues/rooms. The first step companies should take is to check that their constitutional documents allow hybrid general meetings.

Although the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation is stated to be in effect only up to 11 April 2020, it seems prudent for listed companies to continue to take the steps outlined above going forward, to help combat the spread of COVID-19.

Naturally, the risk would be minimised if general meetings could be held as virtual meetings, whereby attendees attend solely by electronic means without the need for a physical meeting. The provisions of Hong Kong legislation mean that it is presently not possible for general meetings of Hong Kong companies to be held as virtual meetings.

Implementation of corporate transactions

The COVID-19 outbreak is not only disrupting day-to-day business operations, but also disrupting the implementation of corporate transactions.

Most prominently, as companies face capital and financing constraints, buyers may face hindrances in funding purchases.

Additionally, logistical issues would likely mean that many processes, such as due diligence, obtaining consents or other clearances from governmental bodies or other third parties, would take longer than they might take in normal times. Thus transaction processes are likely to be elongated and result in increased completion risk.

Contracts entered into during this period may need to deal with the impact of the COVID-19 outbreak. For example, without limitation, COVID-19 may be excluded from material adverse change clauses or termination clauses; obligations in relation to satisfaction of conditions precedent may need to be tailored to reflect the actual steps that could realistically be expected to be taken; warranties and representations may need to be adapted to specifically deal with or carve out COVID-19 and/or pre-completion covenants may be relaxed.

In addition, buyers may place increased focus of their due diligence on supply chain disruptions and review of contracts. Given the uncertainty of how long the outbreak will continue, it may be more difficult for buyers and sellers to negotiate and agree suitable protection provisions in connection with the findings of such due diligence. This would need to be carefully assessed.

The way forward

The COVID-19 outbreak is having significant impact on businesses worldwide. Companies should be continually assessing the impact and risks arising from the outbreak and plan and prepare accordingly. It may be prudent to establish and implement a crisis management response and business continuity plan, so that measures can be implemented quickly to government policies and actions taken, given the fluidity and unpredictability of the situation. While things are likely to go back to normal eventually, the outbreak may well last for a while and the ability to assess and deal promptly with risks arising will be critical to businesses’ operations.

Get in touch

Voon Keat Lai
T: +852 2533 2727
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Office: Hong Kong

Paul Westover
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Office: Hong Kong

Jane NG
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Office: Hong Kong

Ivy Wong
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Office: Hong Kong

Michelle Chung
Of counsel
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Office: Hong Kong

Michael Mok
Professional Support lawyer
T: +852 3166 6910
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Office: Hong Kong