COVID-19 puts the legal pressure on businesses
This checklist may expose hidden risks and contracts in need of review and updating
As COVID-19 has spread in 2020, businesses in the United States have quickly moved into crisis mode to navigate this unchartered territory. Our business community has been disrupted by uncertainties in the labor, financial and capital markets – the effects of which have been largely unforeseen.
Provisions for a pandemic of unknown size and duration are not typically found in business and financial contracts. This raises the stakes as businesses and their counselors look to shore up their legal standing and capital channels against unforeseen risks.
It's time to review your loan documents, business contracts and succession plan and figure out where, when and how to manage your contracts and agreements to minimize any legal fallout as you make every effort to see that your business withstands COVID-19. Here's a checklist of items to include in your risk abatement review.
Credit facilities and loan agreements
Have you significantly curtailed business operations, or do you expect to suffer material financial results due to COVID-19? If your business has borrowed money under customary lines of credit or loan documents, review those agreements – especially the covenants section – to determine if your business is (or will) remain in compliance.
For instance, a suspension of your business in the ordinary course may technically trigger a default under your operative loan documents even though the suspension is only temporary. Will your business maintain the various financial ratios and other financial requirements that are commonly required in loan documents? A conversation with your loan officer may be advisable sooner rather than later.
Is your business in the midst of, or contemplating, raising money through the private or public sale of securities? If so, you may want to consider additional disclosures to investors regarding the impact of COVID-19 on your business and its prospects.
What constitutes a “security” is defined very broadly under federal and state law, and includes both equity and debt interests and instruments, such as stock, LLC membership interests, partnership interests, promissory notes, profit-sharing arrangements, etc. The Securities and Exchange Commission recently published guidance on issues and matters to consider in connection with such offerings.
Entity formations and government filings
Often in business transactions, the parties to such transactions form various business entities, such as corporations and LLCs. At times, other government filings or consents may be required depending on the nature and size of the business transaction. Before rushing to set a closing date, it may be advisable to investigate whether the applicable government office is open for business or operating on a significantly delayed basis.
Delays in contract performance
Is your business subject to contracts with customers that require you to meet certain deadlines or performance requirements? If yes, does the contract contain a force majeure clause that allows your business to claim relief from certain contractual requirements?
Perhaps one of most difficult matters is handling the COVID-19 crisis with your employees, especially if furloughs, pay reductions and employment terminations have happened or are likely to happen. Even if your employees’ jobs are not in jeopardy, is your business following best practices in ensuring their health and safety?
Check your insurance policies for possible business interruption insurance and consider that coverage is often conditioned on timely notice to the carrier of an insurance claim.
Who will step in if circumstances cause you or a business partner to step away from business operations? Review your business’ governing documents (i.e. bylaws, operating agreement, partnership agreement, etc.) and any shareholder or buy-sell agreements relating to your business. Similarly, consider if your estate plan need updating. Your estate plan should identify who will make financial (including business) decisions and medical decisions on your behalf should you become incapacitated as well as clearly specify who receives your business interest upon your death.
Trying times like now call for extraordinary oversight to curb risk factors that could crop up later. Going through this checklist may expose hidden risks and additional contracts and agreements in need of review and updating.
This information is not intended as legal advice. Seek specific legal advice before acting.
David A. Thayer, Esq., is a corporate and transaction attorney, and former CPA, that focuses on being a deal maker, not a deal breaker, as he helps clients achieve their business dreams. He can be reached at email@example.com.