This article was written by Neil Carabine, Gary Lock, Ike Kutlaca and Eugene Lau.
COVID-19 presents a huge challenge for business in Hong Kong.
In this article, we examine the impact on Hong Kong corporate law and recommend strategies for listed and private companies during these difficult times.
COVID-19 and Hong Kong corporate law
- We have already seen major Hong Kong companies cancelling shareholder meetings due to the unavailability of appropriate video conferencing capabilities
- Companies must urgently ensure directors and shareholders can continue to hold meetings and pass resolutions – companies should be quickly reviewing (and amending, if required) their articles of association and any shareholder or joint venture agreement to ensure board and shareholder meetings by teleconference and video conference are permitted (and if appropriate, that circulating resolutions can be used)
- Similarly, directors should consider forming a board committee to deal with COVID-19 impacts, and key management should be regularly communicating with directors and shareholders to ensure they remain fully informed
- We have also noticed some companies publicly stating they will no longer honour contractual commitments (like obligations to pay rent) – while this may be a clever negotiating tactic, there is a world of difference legally between saying "we don't think we can pay" and "we won't pay", with the latter likely to be a repudiation of the contract that leaves the repudiating party exposed to significant claims for damages – companies should work with their:
- contractual counterparties, to renegotiate or terminate agreements in accordance with law
- legal advisors, to determine if the company may be released from contractual obligations due to frustration or a force majeure or material adverse change (MAC) clause
- Similarly, COVID-19 will force companies to reduce staffing – but employment law is complex and highly regulated in Hong Kong – to reduce risks of future claims, getting proper legal advice before making changes to employment is strongly recommended
- Companies will need to consider appointing replacement signatories (for contracts or bank accounts) if directors or employees are unable to reach ordinary working locations because of travel bans or illness
- Management of companies who expect unsolicited takeover offers should prepare takeover defences (assuming the shareholders would be hostile) or prepare for the sale process (if the shareholders are supportive) – since nobody can say when the COVID-19 impacts will subside, the best action for boards and management of likely takeover targets is to start preparing now
- We expect to see delays in applications for renewal of licences as the Hong Kong government continues its work from home programme – for critical licence renewals, companies are advised to start the process early
- With staff working from home, at least some ordinary audit controls are likely to be relaxed or bypassed, and increased errors or fraud will occur (and, with work from home being somewhat similar to ordinary audit leave, historic frauds are also likely to be uncovered) – companies should increase vigilance and work closely with their auditors where ordinary practices have been changed
Special considerations for listed companies
- Investors may expect that COVID-19 will impact the financial performance of listed companies – but the extent of such impact may not be accurately understood, so directors must carefully form a view as to whether there is a particular impact of COVID-19 on the listed entity which is not appreciated by the market
- Pulling earnings guidance isn't enough, listed companies must consider disclosures for operational and strategic impacts of COVID-19, including for major:
- supply chain disruptions
- closures of offices of other facilities
- losses of employee hours or productivity
- disruptions from travel restrictions
- lack of access to financial markets
- drawdowns on available facilities
- Directors should also review historical forward-looking statements, and issue corrections where required. Particular attention should be made to the "No Material Adverse Changes" confirmation in circular and consider whether any carve-outs should be made
- Hong Kong-listed companies, especially those with significant operations in China, Europe or the USA, may struggle to produce audited accounts and other required filings within the required timelines. For these companies (Impacted Companies), the Hong Kong SFC and HKEX jointly released guidance notes in February and March 2020 which provide that:
- Impacted Companies should consult the HKEX as early as possible and explain how and why travel and other restrictions have impinged upon their ability to meet reporting deadlines
- if an Impacted Company with a financial year end of 31 December 2019 can issue either a preliminary results announcement (without agreement with its auditors), or an announcement containing its management accounts, on or before 31 March 2020, trading of its shares will normally not be suspended
- an Impacted Company may delay the publication of its annual report for a period of 60 days from 16 March 2020, provided that a preliminary results announcement without agreement with its auditors, or the management accounts, are published on or before by 31 March 2020
- The blackout period for trading in an Impacted Company will continue until audited financial statements (or an announcement confirming that the released results have now been agreed with the company's auditors) has been published. Impacted Companies should consider sending internal notes to all of their directors and senior management reminding them of the dealing restrictions during the blackout period
- That said, as the financial results of an Impacted Company must be laid out at the AGM for that company – Hong Kong-incorporated Impacted Companies should additionally note that the Hong Kong Companies Ordinance requires listed companies to hold their AGMs, and directors to lay the issuer's annual financial statements at its AGM, within six months after the end of the financial year. The HKEX and SFC will not relax this AGM requirement
- For companies incorporated in any other jurisdictions, the HKEX may consider applications to delay the AGM to a date which is more than six months after the end of the financial year on a case by case basis
- Companies must urgently consider the format of AGMs. While the Hong Kong government has confirmed that the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation does not apply to AGMs, companies should still consider the format of the AGMs. The Hong Kong SFC and HKEX jointly released a joint statement in April 2020 which provides that issuers should:
- monitor how the current situation develops in order to better decide how to manage the potential health risks of a physical meeting (if one is needed); and
- explore and assess measures permissible under the laws of their jurisdictions of incorporation and their constitutional documents to reduce the need for physical attendance, including the use of technology, encouraging voting by proxy and encouraging shareholders to limit the number of questions during AGMs.
- Key executives remunerated by reference to KPIs will push to have their remuneration adjusted – leaving remuneration committees with the unenviable balancing act of retaining key staff while cutting costs – boards should start considering this point now
