Capital markets and Coronavirus as a risk factor

Capital markets worldwide are reacting to the effects of Coronavirus (Covid-19) with price corrections, some of them considerable. Issuers whose securities are listed on the regulated market or offered to the public may be required under Regulation (EU) 2017/1129 ("Prospectus Regulation") to inform their investors about the consequences of the Coronavirus on the securities to be issued. For example, there may be an obligation to include a separate risk factor in the prospectus on the possible effects of Coronavirus on the issuer. Issuers who already offer securities to the public on the basis of a prospectus may be obliged to include a supplement on the consequences of Coronavirus.

Such obligation is in any case subject to the condition that the consequences of Coronavirus represent a material and specific risk either for the business activity, assets, financial position or earnings of the issuer or for the securities. Whether such a risk exists can only be examined on a case-by-case basis and the issuer is ultimately responsible for such an assessment.

Materiality and specificity

Pursuant to Art. 16 of the Prospectus Regulation, a prospectus shall include only risk factors that are specific to the issuer and/or the securities and which are material for taking an informed investment decision.

In assessing materiality, the probability of the occurrence and the expected magnitude of the negative effects must be taken into account. According to the ESMA Guidelines on Risk Factors, information is material if omitting or misstating could negatively influence investment decisions based on the use of the prospectus.

Specificity requires a clear link between the risk factor and the impact on the issuer or securities. For example, travel restrictions affect the revenues and profit prospects of transportation companies, plant closures affect the demand for products, or a temporary reduction in the customer base affects expected revenues. Since the presentation of risk factors is forward-looking, the issuer must assess the influence of Coronavirus on its business activities. Will the switch to home office bring about a significant change in the issuer's ability to meet customer orders? Will temporary unavailability of an executive due to illness affect the completion of a project or important transaction? Are there assets in a geographically concentrated region that are no longer generating the expected return due to quarantine measures? Are customers concentrated in one or more industry sectors that are significantly affected by the Coronavirus outbreak in their business activities, leading to payment deferrals or defaults?

The issuer should only include a risk factor on Coronavirus if such effects are sufficiently identifiable and can be described in detail. A general "Corona risk" would not be sufficient for this purpose. The same applies to risk factors relating to securities. Here it is even more difficult to describe the specificity of the effects of Coronavirus, with the exception of CAT bonds, for example, which are linked to pandemics. However, this should not be relevant for most issuers. The risks of trading venues or settlement systems failing are for example already reflected in most prospectuses.

Supplements to the prospectus

In the case of prospectuses that have already been published, issuers may be obliged to publish a supplement due to the effects of Coronavirus. Pursuant to Art. 23 of the Prospectus Regulation, any significant new circumstance that could influence the assessment of the securities must be mentioned without undue delay in a supplement. For supplements, in addition to the considerations mentioned above, issuers must assess on a case-by-case basis when such a significant new circumstance has occurred. The date of occurrence is decisive for the right of withdrawal of investors - especially in the case of continuous issuances with ongoing settlements. Even if the consequences of the Coronavirus have not yet materialized, ongoing monitoring of the development of the crisis and risk assessment is recommended.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.