30 March 2020
COVID-19: How the outbreak will impact disclosure deadlines and AGMs of listed and non-listed Dutch Companies
Governments' responses to COVID-19 are evolving on a daily basis. The measures against the coronavirus have a knock-on effect on Dutch companies' ability to comply with Dutch corporate law and best practice, particularly when it comes to the preparation and adoption of annual accounts and holding annual general meetings.
The continuing spread of COVID-19 also has implications for listed Dutch companies' market disclosure and financial reporting obligations, following recommendations issued by the European Securities and Markets Authority (ESMA, the EU's securities markets regulator).
To date, the Dutch Government has not yet implemented any legal changes to the usual procedures. However we may receive additional guidance in due course. In the meantime, this post is intended to help you navigate the current landscape of rules and requirements.
1. Annual accounts: Will deadlines be deferred?
Companies are required to disclose their annual accounts by certain deadlines set out in the Dutch Civil Code (Burgerlijk Wetboek).
A Dutch company must draw up its annual accounts and make them available for inspection by shareholders within five months after the end of its financial year. The five-month period can be extended by the company's general meeting (the meeting of the company's shareholders) by a maximum of five additional months, but only in case of extraordinary circumstances. For listed companies, the deadline is four months, with a possible four-month extension.
The definition of 'extraordinary circumstances' lies with the company's managing board. There are no objective tests, reviews or guidance. The managing board could, therefore, classify the COVID-19 outbreak as an 'extraordinary circumstance' that requires shareholders to extend the initial deadline.
Before the annual accounts can be adopted, they must be audited by an external, independent auditor. There are some exceptions from the audit requirement – for example, for small companies, or where the annual accounts are consolidated with another company's annual accounts. If an audit is required, the unaudited annual accounts can be adopted if there is a legal ground for not having an audit report. The legal grounds for not conducting an audit are not clearly defined by Dutch law. However situations where the auditor (i) cannot, or does not, issue an audit report, or (ii) issues a qualified auditor report, are not considered valid legal grounds. A legal ground could be force majeure (overmacht). The COVID-19 crisis might qualify as a force majeure event for a company, but careful analysis is needed to check that it qualifies.
The adopted annual accounts must be made public within eight calendar days after the adoption date. If the accounts have been drawn up, but have not been adopted, they must still be made public by the company within 12 months after the end of the company's financial year.
If the annual accounts of a public limited company (naamloze vennootschap) are not adopted, the profits realised in the relevant financial year cannot be appropriated or distributed to shareholders. However interim distributions of profits made in 2019 can still be distributed to shareholders if certain legal requirements are met. Missing the 12 month deadline for publication of annual accounts can lead to directors incurring personal liability in the event the company becomes insolvent.
Recently, we assisted one of our clients, a Dutch company with global business operations headquartered in The Netherlands, on a matter where the company's annual accounts were drawn up and made available to its shareholders within the first five-month deadline. However, the company's external auditor had informed our client that, due to the COVID-19 crisis, there would be a delay in issuing the audit report. Whether that would lead to our client not being able to adopt its accounts in 2020 was not yet clear. This is just one unfortunate example of how third parties and their processes can be affected by COVID-19, in turn impacting companies' ability to meet annual accounts deadlines this year.
2. Annual general meetings (AGMs): Can a company still hold its AGM?
Following the social distancing measures introduced by the Dutch government, almost all gatherings are now prohibited until 1 June 2020. This means that companies will either need to postpone their AGMs this year or alter their format.
Under Dutch law, companies must hold at least one AGM per year. For listed companies, the AGM must normally be held within six months after the end of the company's financial year, or in some cases, even sooner, if specified in the company's articles of association. The adoption of the annual accounts is usually voted at the AGM, however this is not a legal requirement and the annual accounts can, in principle, also be adopted without holding an AGM, i.e. by way of a written resolution of the shareholders.
The general rule is that the AGM must be held at the physical location set forth in the company's articles of association, or in the municipality of the company's corporate seat. Under Dutch law, the AGM must be a physical meeting and the law does not currently allow companies to hold a completely virtual AGM, however a hybrid format may be possible.
A company can change its AGM to a hybrid format, where a subset of people attend the physical meeting and others participate by way of electronic communications,provided that the company's articles of association expressly allow this format. This means that the company's articles of association must expressly state that shareholders are authorised to participate in the AGM by way of electronic communications as an alternative to in-person attendance. Where this is possible, the requirements for electronic communications are that the AGM participants can (i) be easily identified, (ii) directly take notice of the meeting proceedings (e.g. via a live webcast) and (iii) vote on the AGM voting matters. The company's articles of association may also require the possibility for participants to actively participate in discussions during the meeting.
One of our clients is a Dutch company listed on a regulated stock exchange in a European Member State, which had to convene its AGM in March. Due to the COVID-19 outbreak, we helped our client set up its AGM in a quasi-hybrid form. The company announced in its AGM press release that it had a (strong) preference for the physical meeting to take place with core attendees only and asked its shareholders to (i) follow the meeting via a live webcast on the date of the AGM, (ii) cast their votes by proxy in advance of the AGM and (iii) ask questions by email in advance of the AGM. Adjusting the format of this meeting shows that a company is doing what is needed in view of the COVID-19 crisis, while prioritising the health and wellbeing of its employees, shareholders and other stakeholders and limiting business interruption.
While Dutch law requires a company to hold its AGM at a physical location, companies could decide to hold their AGMs in a hybrid format and limit in-person attendees to only core attendees in view of COVID-19 and the gatherings prohibition in The Netherlands. Core attendees of the AGM must include the AGM's chairperson.
3. Dutch issuers: Will issuers' disclosure deadlines be deferred?
On 27 March 2020, the European Securities and Markets Authority (ESMA) issued a public statement on the implications of COVID-19 on national statutory deadlines for issuers (those companies listed on a regulated stock exchange in a Member State) for publishing their annual accounts and other financial reports. In its statement, ESMA recommends national competent authorities to apply forbearance powers towards issuers who need to delay publication of financial reports beyond the statutory deadline. For example, national competent authorities are expected not to prioritise supervisory actions against issuers in respect of the deadlines for issuers' annual accounts (with year-ends occurring from 31 December 2019 up to 1 April 2020) for a period of two months after the statutory deadline.
Dutch issuers are required to publish their annual accounts within four months after the end of each financial year, with a possible four-month extension in case of extraordinary circumstances (see above). For 31 December 2019 financial year-ends, the latest publication date without an extension is 30 April 2020. Where issuers reasonably anticipate that publication of their financial reports will be delayed beyond the Dutch law deadlines due to COVID-19, ESMA expects them to (i) inform the Dutch Authority for the Financial Markets (the AFM, the national competent authority in The Netherlands) of this and (ii) inform the market of the delay, the reasons for such delay and to the extent possible the estimated publication date.
Nevertheless, issuers are still required to disclose inside information to the public as soon as possible through the appropriate regulatory channels. The primary question under the Market Abuse Regulation is whether the Issuer is in possession of information which, if made public, would have a significant impact on the price of its listed securities. In addition, issuers are required to have the systems and controls in place to ensure they have a proper handle on information that could be price-sensitive.
4. Are issuers required to make additional regulatory disclosures?
On 11 March 2020, ESMA published a few recommendations for financial market participants in view of COVID-19, including measures relating to market disclosure and financial reporting.
With respect to market disclosure, issuers should disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with their transparency obligations under the Market Abuse Regulation.
With respect to financial reporting, issuers should ensure transparency in relation to the actual and potential impacts of COVID-19. Where an issuer’s annual accounts have not yet been finalised, the Issuer will need to ensure transparency in the annual accounts, including both a qualitative and a quantitative assessment with respect to the Issuer's business activities, financial situation and economic performance. If the Issuer's annual accounts are in final form, the Issuer needs to include transparent information on that in its interim financial reporting disclosures.
Issuers will need to closely monitor the potential effects of the COVID-19 outbreak and carefully consider the timing and extent of any appropriate additional disclosures. We recommend our clients who are issuers to (i) closely monitor the actual and potential impacts of COVID-19 on their business activities and (ii) continuously analyse those impacts in view of their obligations and duties under the Market Abuse Regulation.
Based on ESMA's recommendations, an Issuer may, for example, be required to publish an ad hoc statement if one of its production facilities is required to shut down, if there are supply shortages or export bans, or if important customers or sources of financing are lost that would have a significant effect on business activities.
For issuers it is, therefore, extremely important to closely monitor the effects of COVID-19 on their financials and to ensure that their own operational response to COVID-19 meets the disclosure requirements outlined in the Market Abuse Regulation. If there are subsequent changes to published forecasts or published market expectations, issuers should consider publishing an ad hoc statement.