This article was written by Stephen Minns, Will Heath and Nicola Charlston.
As the economic, employment and social effects of COVID-19 develop, there will be specific legal issues that arise. However, it is possible to plan now to manage these issues. Identifying the key matters to consider will enable Boards to get ahead of the actions they will need to take. In particular, those matters that may be important considering a Board’s role in managing risk and overseeing the strategic direction of the company as a whole.
We have outlined a number of these issues below, and provided commentary on both considerations and actions that need to be taken.
Understanding the consequences of COVID-19 for the business, its financial position, customers, employees and the community is critical. A specific review focussing on the possible consequences in all these areas should be undertaken, and the Board and senior management briefed accordingly.
- Following a briefing, the Board should formally review and decide on appropriate actions to reduce the risks for shareholders, customers, employees and the broader community. The Board should also decide if changes to the existing strategy or conduct of the business are required.
- Boards should also consider their reporting expectations from management over this period. They should take into account the significant pressure management is likely to face in managing the business through the current situation.
Continuous disclosure (for listed companies)
Matters to consider on a regular basis include:
- If formal guidance has been given – should that guidance be withdrawn?
- Does there need to be a profit warning?
- Do any issues arise regarding the capacity of the company to continue to carry on business?
Companies should carefully consider any “we are fine” announcements, unless deemed necessary to respond to rumours or speculation. Any such announcement may increase the need to provide regular updates if circumstances subsequently deteriorate.
Companies should undertake a review of the company’s and employees’ obligations under workplace health and safety legislation in connection with COVID-19.
It may become necessary to consider reduced work weeks, compulsory leave and adjustment of remuneration arrangements. This is a complex area and planning should start as soon as possible.
The remuneration of senior executives is always closely analysed by shareholders and the market generally, and some companies have already announced cuts to executive compensation.
Questions to ask include: Are the current remuneration arrangements still appropriate or do they need to be adjusted? If so, what needs to be done to implement any changes?
The Board should receive a formal presentation from appropriate executives on the Company’s financing arrangements, including maturity, covenants and key terms.
Under review should be various scenarios for short- and medium-term liquidity and alternative funding arrangements, including additional equity. As circumstances evolve, your customers, suppliers and stakeholders may have issues paying debts as and when they fall due. Your own company may be impacted or come under financial distress. Monitoring your company’s cashflow and ensuring compliance with financial covenants is paramount.
Dividend and share buyback policies should also be reviewed.
You should have regular contact with key regulators.
It will be important to try and forecast what additional information or changes to business practices may be required by regulators.
It may become necessary to enforce or defend key terms of agreements which have been affected by circumstances arising from COVID-19. The legal concepts of force majeure and frustration may be relevant.
Whilst it may be time consuming and difficult to identify and access all relevant agreements, a review and analysis of the relevant provisions needs to be undertaken with business-critical contracts an initial focus.
Activists and key shareholders
The Board’s response to the COVID-19 virus will be critically reviewed by key shareholders and could provide the basis of an attack by activist shareholders.
There should be a review of the company’s actions in response to the COVID-19 virus from the perspective of key shareholders and activists. A particular focus may be the remuneration arrangements for key executives (see above) and corporate transactions (see points below) and so attention should be paid to these areas in the first instance.
Change of control
The current levels of uncertainty mean that the likelihood of receiving a proposal for a change of control is low in the short term.
However, lower valuations mean that companies may be more vulnerable to an approach by well-funded long-term investors such as pension and sovereign wealth funds. Companies relatively unaffected by the COVID-19 virus may be particularly vulnerable.
The usual work of ensuring preparation of an up-to-date valuation, assessment of possible acquirers and communication with key shareholders should continue.
Acquisition and other corporate opportunities may emerge.
These opportunities need to be considered carefully – with a particular focus on funding and shareholder reaction. Further, key consideration should be given to opportunities or risks from a longer-term perspective. Test likely scenarios which may arise from a spread of the virus and how this may affect your business and stakeholders.
Internal and external communications are critical in keeping all key stakeholders appraised of the business impact and response; whilst providing you with the opportunity to manage your own messaging.
While the legal risks of communications other than in respect of financial matters are likely to be low, there are some risks.
For example, statements as to continued employment, remuneration and risks to health will be relied upon and legal liability may arise. It is preferable if a series of key messages can be agreed and regularly reviewed by the legal team.
These are unprecedented times. Businesses are being fundamentally impacted by the unexpected and unpredictable situation resulting from the global Coronavirus. Remaining on top of these impacts and likely consequences is critical for business continuity and the well-being of employees, customers and communities alike.
KWM has mobilised teams to identify and analyse the risks and the opportunities for our clients and help navigate these unchartered waters. For corporates and boards, staying ahead of the risks and opportunities will be important for short-medium term compliance as well as long term sustainability.