COVID-19 and Public Offerings

The rapid spread of the COVID-19 coronavirus has led to significant recent falls in share prices on international stock exchanges.

The continued spread of the virus has the potential to cause significant disruption to ongoing or contemplated capital markets transactions due to the following factors:

• stock market suspensions or closures;
• restrictions on travel; and
• lock-downs or quarantines,

all of which may make it difficult to undertake due diligence or fundraising roadshows.

For issuers, the spread of the virus and the legal restrictions imposed as a result of the spread of the virus may affect the issuer's financial condition and its expectation of its performance, any manufacturing and its supply of goods and services, workforce availability, its own supply chain and market demand for its products and services.

Parties considering an initial or secondary public offering of shares should consider whether the contractual arrangements which they put in place will allow the relevant contracts to be terminated in the event of a worsening of the spread of the COVID-19 virus. Equity capital markets transactions are often undertaken in real time, so it is important they can be terminated quickly in the case of an emergency. Placing agreements typically give banks and brokers a wide discretion to terminate the agreement for force majeure reasons, such as wars and acts of terrorism, but may not refer to the spread of viral infections.

'Force majeure' is not a universal legal doctrine, or a mandatory principle of international law. The way 'force majeure' works depends on which law 'governs' the contract, as well as its express terms. Indeed, the very phrase 'force majeure' is actually just a type of business shorthand for clauses used in contracts to deal with events beyond the parties' control.

Under English law, there is no definition of 'force majeure' based either on statute or court precedent. Therefore, the way in which force majeure clauses operate in English contracts depends on their drafting, properly interpreted. This would apply to descriptions of force majeure trigger events, excuses from performance, duties to notify and restore performance etc. The force majeure clause therefore needs careful drafting to ensure that it covers the type of events which could jeopardise a capital markets deal. Unfortunate events such as this worldwide outbreak bring these clauses and how they operate, to the forefront of our minds.

For any new placing or underwriting agreement, parties should consider including reference in these clauses to the spread of disease or infection, epidemic or pandemic with a specific mention of a worsening in the severity of the spread of the COVID-19 virus, so that the agreement can be terminated if necessary.

The inter-play between the force majeure provisions of the contract and any "material adverse change" clause in the relevant agreement will also need to be considered carefully, to ensure that the parties are clear on which events would trigger an appropriate right to terminate the contract.

Our equity capital markets teams in both Amsterdam and London have recently advised clients on these issues and we would be delighted to advise other clients and contacts who are considering COVID-19 in light of current circumstances on forthcoming deals.

Last reviewed 11 March 2020

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