Creel, Garcia-Cuellar, Aiza y Enríquez, S.C.®
Since the World Health Organization declared the pandemic outbreak of the SARS-CoV2 virus (COVID-19) a public health emergency, and given subsequent declarations by the Federal Government, public companies and issuers of securities in the Mexican securities market have had to focus on addressing the most pressing matters, including the wellbeing of their employees and business continuity.
As more information becomes available, and the magnitude of the implications is better understood, including the potential economic impact, it is clear that other short, medium and long term matters related to the operations and business models of companies need to be addressed.
Investors must be informed of some of these immediate matters, including those pertaining to operations and business models. Management must also remain informed and make decisions, some of which will eventually have to be taken by the shareholders of the company.
How should these issues be managed in times of social isolation and suspension of labor?
In the following deliveries of COVID-19 legal insights for Mexico, we will address the following matters:
- Information and Market Transactions
- When should issuers inform investors about the impact of the emergency and any operational changes to the company?
- How should a company treat privileged information generated by the emergency? (insider trading)
- Can the repurchase fund be used in this situation?
- What should the board of directors and its members be considering?
- Shareholders Meetings
- How to hold shareholder meetings in times of social distancing?
Issuers – Information and Market Transactions
Disclosure of Relevant Events
Board members, the CEO, and other relevant officers of an issuer of registered securities have the responsibility to disclose to the investing public any “relevant events”, i.e. any information about events or matters that may affect the price of the securities.
Although exceptions may exist, it is very probable that the disruption caused by the emergency will affect most public companies. In fact, regulation contemplates as an example for relevant events “acts of God and force majeure that impede the activities of the issuer or its subsidiaries”.
Disclosing a relevant event in the context of the COVID-19 emergency is a good opportunity to inform the investing public of the management’s perspectives about different measures adopted or intended to be adopted to assure business continuity and address impacts on operations and liquidity.
Clearly it is not possible to determine with certainty the ultimate impact that the emergency will have on the company´s operations. However, timely, assertive, and clear communications may signal to the market that management is addressing the situation properly and would provide assurance to the holders of securities.
For CKD issuers (certificados de capital de desarrollo) or of investment projects -that maintain investments in different assets, businesses, projects and industries, the task of properly communicating the effects on its portfolio -or exit strategies contemplated up to a few weeks prior- may be complex. In these circumstances, it is critical for management of the CKDs to work on the details of such communications as soon as possible.
Privileged Information – Insider Trading
In a highly volatile environment where information is generated and changing rapidly, it is particularly relevant for the insiders (those persons deemed by Law to have “privileged information”), such as members of the board, the CEO, and other relevant officers of issuers, among others, to strictly abide by the policies of their companies in respect of transactions with publicly-traded securities, and that they are particularly observant in making sure that there is no pending relevant event to be disclosed, in the event they decide to move forward with a securities transaction.
One of the immediate effects of the current situation has been a sharp decrease in the price of stocks and securities of many issuers. When prices reach certain levels, it is possible that issuers that have a repurchase fund (fondo de recompra) see an opportunity to repurchase stocks or securities in the market, providing liquidity to investors and taking advantage of prices to increase the value of the company.
Just as with insiders, transactions of the repurchase fund should be managed with special care in the current environment.
Management should ensure that the issuers have disclosed all relevant events prior to making any repurchases, and not carry out any such transactions in the days before quarterly or annual reports are to be made public.
*This article or news brief does not constitute legal advice and is protected by copyright.