The Middle East conflict: what Australian corporates should do now, and into the future

The current conflict in the Middle East is impacting the legal landscape for Australian businesses – from sanctions exposure and supply chain vulnerability, to heightened disclosure obligations and boardroom accountability.

Even if it ended today, however, and the entire world was at peace, the effects of it and other conflicts will reverberate into the future.

There are five practical steps Australian corporates should take now – not just as a one-off response to the current Middle East conflict, but to create a framework for managing future geopolitical risk and their downstream impacts on your business.

Sanctions and export controls: keeping on top of who's affected

Australia maintains sanctions that restrict Australian entities' dealings with designated persons and entities. The Australian Sanctions Office administers these sanctions and maintains a Consolidated List of designated persons, entities and vessels. Given the fluidity of global politics, today's trusted counterparty could be tomorrow's designated person, and attract severe penalties (for corporations, that could be fines of up to approximately $3.1 million or three times the benefit obtained from the contravention, whichever is greater).

To address sanctions and export control risks, Australian businesses should:

• Sanctions compliance: Review and update sanctions compliance frameworks to align with Australian laws and guidance from the Australian Department of Foreign Affairs, including subscribing to receive updates to the Consolidated List, and using the sanctions compliance toolkit and risk assessment tool to be aware of, and assess, sanction risk.

• Due diligence: Conduct enhanced due diligence on transactions, counterparties and supply chains involving the Middle East to identify and mitigate sanction and AML/CTF risks.

• Export controls: Ensure compliance with Australian export control rules, including items on the Defence and Strategic Goods List (DSGL) such as the supply of DSGL technology (including software), the brokering of DSGL goods or technology and, in defined circumstances, the supply of DSGL goods or technology outside Australia. 

Supply chain and procurement risks: freedom to pivot

Disruptions to maritime and commodity supply chains are among the most immediate impacts of the Middle East conflicts. The Strait of Hormuz, a critical chokepoint for global transit, has faced acute security threats, with significant reductions in tanker traffic and surging commodity prices.

To address these risks, Australian businesses should:

• Map supply chain dependencies: Identify direct and indirect reliance on Middle Eastern suppliers, shipping routes and commodities, to assess exposure to disruptions.

• Force majeure: Review force majeure clauses in supply and procurement agreements to assess whether the conflicts, or their consequences, fall within the scope of defined force majeure events. The scope and triggering conditions can vary significantly between contracts, and corporates should not assume that sanctions-related disruptions will automatically be captured.

• Frustration: While narrow in application, consider whether a contract may be frustrated. For example, where a change in the law after formation – such as the imposition or expansion of sanctions – renders future performance unlawful or radically different from what was contemplated at the time of contracting.

• Exclusivity: Check whether a contract imposes exclusivity, and if it permits counterparties to obtain alternative supply. 

M&A and investment decisions: allocating risk and maintaining the commercial value

Geopolitical instability can also affect M&A and investment activity involving Australian corporates. Heightened uncertainty may depress deal volumes, extend due diligence timelines and increase the complexity of risk allocation in transaction documentation.

To address these risks, buyers and sellers should carefully assess the following:

• Due diligence: The target's sanctions compliance framework and exposure to sanctions risks, including any supply chain dependencies.

• Sanctions risk allocation: Ensure a clear allocation of sanctions-related risks in transaction agreements.

• Representations and warranties: Assess the adequacy of representations and warranties regarding sanctions compliance to ensure they address the evolving landscape noting that warranties are typically qualified by buyer knowledge and seller disclosures.

• MAC provisions: Review the scope of material adverse change (MAC) provisions to understand the impact of geopolitical and sanctions-related disruptions, noting potential qualifications to the scope of what may constitute a material adverse change in the sale agreement. In particular, MAC definitions may include carve-outs for general economic or market conditions, changes in law, and industry-wide developments, which may prevent a buyer from relying on a MAC clause in the sale agreement.

• FIRB considerations: Where a transaction involves parties or assets with connections to sanctioned or conflict-affected jurisdictions, consider the potential impact on Foreign Investment Review Board (FIRB) approval timelines, conditions and risk assessments. Geopolitical instability and evolving sanctions regimes may heighten FIRB scrutiny and introduce additional conditions to approval.

ASX disclosure obligations: general vs specific developments

While the general impact of the Middle East conflicts on global markets may already be known, listed entities must assess whether specific developments materially affect their own operations, financial performance or prospects, and keep the market appropriately informed in accordance with their continuous disclosure obligations.

Potential disclosable matters may include the following:

• Material financial matters: Revenue, earnings or asset values being affected by supply chain disruptions, sanctions exposure, loss of access to markets or customers in affected regions, increased input costs (eg., energy and raw materials) or asset impairments.

• Contractual matters: The triggering of force majeure or material adverse change provisions under key contracts.

• Earnings guidance considerations: If developments arising from the Middle East conflicts render previously published guidance inaccurate, the entity should consider whether a market update is required. Entities that do not publish formal guidance but indicate they are "comfortable" with analyst forecasts, or that results will be "in line with" prior periods, risk making de facto earnings guidance that may also need to be updated.

To meet their continuous disclosure obligations, ASX-listed entities should consider the following:

• Assess specific exposures and materiality: Conduct a detailed review of their exposure to the Middle East conflicts, including supply chain dependencies, sanctions risks and market access and the potential materiality to the entity.

• Monitor developments and earnings expectations: Establish real-time monitoring of geopolitical events to identify any new or unexpected impacts that could materially affect the price or value of their securities. An entity without published earnings guidance that is covered by sell-side analysts should regularly monitor analyst forecasts and consensus estimates to understand market expectations and identify any potential earnings surprise.  If a significant difference emerges between the entity's internal earnings projections and analyst forecasts or consensus estimates, the entity should consider why, including whether any information that should have been disclosed has not been.

• Strengthen disclosure protocols: Ensure disclosure protocols and escalation procedures are capable of responding to fast-moving developments.

• Engage key stakeholders: Maintain close collaboration between operational management, in-house counsel and the company secretary to promptly identify and assess price-sensitive information.

Directors' duties: broadening your lens

Directors of Australian companies owe a number of statutory and fiduciary duties. These include the duty to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the company’s circumstances and occupied the same office. In the current geopolitical environment, this increasingly requires directors to proactively identify, assess and manage geopolitical risks that may impact a company’s operations and strategic direction.

To fulfil these duties in the current environment, boards and their risk committees should be satisfied that their Risk Management Framework provides line of sight into exposures and that management is taking appropriate steps to identify, assess and, where possible, mitigate or reduce the likelihood and impact of severe events. Specifically, boards should:

• Incorporate geopolitical risk into governance: Make geopolitical risk a standing agenda item for board and risk committee meetings, with regular updates on developments and their potential impact.

• Understand exposures, including third‑party exposures: Actively assess exposures, including supply‑chain issues, that may affect operations. This should include third‑party and fourth‑party effects.

• Consider insolvency and credit risks: Require management to undertake enhanced financial due diligence on counterparties and obtain appropriate credit support to mitigate counterparty insolvency risks, where applicable.

• Actively use crisis scenarios: With key exposures understood, actively use a range of crisis scenarios to deepen understanding of potential exposures, impacts and the key mitigation techniques that the organisation may deploy.

• Mandate regular risk assessments: Require management to prepare and update assessments of the company’s exposure to conflict risks, including sanctions, supply‑chain disruptions and other geopolitical factors.

• Establish delegations and escalation protocols: Implement clear delegations and escalation procedures to address fast-moving issues, such as sanctions compliance, supply chain disruptions, and, as noted above, disclosure obligations.

• Document risk oversight: Maintain appropriate records in board minutes to demonstrate the board’s active consideration and management of geopolitical risks.