COVID-19 : the road to recovery for your business

On 31 October, the Prime Minister Boris Johnson announced a month long lockdown in England in response to concerns over a second wave in the Coronavirus pandemic. Acknowledging the severe strain that businesses will inevitably face in the run-up to Christmas, he also announced an extension to the Coronavirus Job Retention (or furlough) Scheme.

With many people continuing to work from home, furlough and other government support measures extended and the Bank of England’s warning of the sharpest recession on record, it’s clear the road ahead is likely to continue to be bumpy for many businesses.

Some may soon be ready to take what in some cases will be major steps to survive, including, amongst other things, to consider the sale of non-core parts of their businesses, mergers and acquisitions. 

• Sale of non-core or distressed business assets
• Acquisitions
• Pricing agreement and certainty
• What is an earn out?
• Commercial contracts
• Force majeure
• Business solidarity
• Deferred payment options
• Government assistance is continuing

Sale of non-core or distressed business assets

A business may decide to raise more funds by selling off some of the company’s non-core or distressed assets. These are assets which are:

• no longer used
• not essential to the company’s business operations
• have a severely depressed value.

Undertaking a review of which assets could be sold and potentially moving to focus more exclusively on core business, could be an effective way forward for some. However, using these methods must be carefully considered, particularly when a company is in financial difficulty. There are legal implications and you should seek specialist legal advice. 

Directors will always need to be mindful of their statutory duties which are:

• To act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred
• To promote the success of the company for the benefit of its members (this changes to a duty towards creditors when a company is insolvent or likely to become insolvent)
• To exercise independent judgement
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare an interest in a proposed transaction or arrangement

Additionally, the Companies Act 2006 sets down the following fiduciary duties that Directors must adhere to:

• A Director must only act within the powers as granted by the Company’s constitution.
• A Director has a prime duty to promote the Company’s success (unless insolvent).
• A Director must exercise independent judgment.
• A Director must exercise reasonable care, skill and diligence in his/her role.
• A Director must avoid conflicts between his/her role and his/her personal interests.
• A Director cannot accept benefits from third parties which arise from his/her role.
• A Director must always declare to other director his/her personal interest where the Company proposes to enter into any transaction or arrangement.

In the event that the company is insolvent or likely to become insolvent, a Director should immediately call his or her accountant and legal adviser, as he or she faces an increased risk of personal liability if the wrong course of action is taken.

Acquisitions

Many businesses are seeing this period as a time of threat – but it should also be considered a time of opportunity. For some, now might be an excellent time to consider merging with or acquiring rival companies or businesses. Should you be considering this option you will need to conduct tentative financial, commercial and legal due diligence.  This is especially important if prices are volatile. 

A range of key issues relating to apportioning the risk inherent in the lockdown should be considered. For example:

• Should the new owner of the shares or business be given time to make the payments under the share or asset purchase agreement? 
• Should payments only start once a lockdown is relaxed for that particular sector? 
• How should the relaxation of a lockdown be defined – by way of a government announcement, or a return to pre-lockdown turnover levels?  

Pricing agreement and certainty

On a share purchase, buyers should be aware that they will be responsible for the repayment of VAT deferrals. Also, for both share and asset acquisitions, they may face the risk of lockdowns being re-imposed in the event of a spike in cases as we have recently seen. This may adversely affect the business they have bought. Equally, sellers should be particularly careful with drafting earn outs, as a downturn in the business will likely affect the amount they receive.

What is an earn out?

An earnout is a clause in a contract covering additional money the seller will receive if stated and agreed financial targets are met in the future.

If you are selling a business, you should look to exclude or mitigate the effects of subsequent lockdowns from earn out calculations as part of the contract of sale negotiated with your buyer.  We anticipate this will be a much negotiated provision in some transactions over the coming months.

Commercial contracts

It’s vital that you assess all your commercial relationships to understand both your own contractual obligations and those owed to you. You should review all your key contracts and pay particular attention to the following points:

• the duration of the contract
• whether it can be terminated early
• any payment obligations
• any reservation of title clauses
• applicable warranties. 

Now is the time to make sure you have quantified potential losses and taken professional legal and business advice on how such losses could be mitigated. Many people find it useful to create a spreadsheet for each contractual counterparty, and work through systematically to identify which contracts are profitable and which are onerous. 

Force majeure

For onerous contracts, you should look at whether they can be terminated in accordance with their terms. You may be able to argue that they have been frustrated or that performance of contractual obligations has become impossible. The contract may well contain a force majeure clause. That is a clause that seeks to deal with non-performance of a contract due to circumstances beyond the control of the parties. You must check the wording in detail to see whether Coronavirus (COVID-19) can be defined as a force majeure event. This may seem straightforward, but lawyers are finding that the question of whether or not force majeure clauses will actually apply during this pandemic is complex. It’s therefore important to speak to a legal adviser who will be able to help you.

Business solidarity

These are changing times and while seeking legal advice is always sensible, it may be that contacting the counterparty directly will prove fruitful.  Many people are in the same boat and are finding that agreements can be reached. At Tees, we have seen many examples of consensual amendments to contracts in what is (currently at least) an environment with high levels of business solidarity. 

Deferred payment options

If you are worried about how you are going to fulfil your own payment obligations, make sure you explore deferred payment options or request longer credit terms.  

Government assistance is continuing

The Government has made available a range of financial measures to support businesses through the current crisis. Chancellor Rishi Sunak recently announced that the furlough scheme is to be extended until the end of March 2021 and the Coronavirus Business Interruption Loan Scheme (CBILS) is still available to businesses suffering from cash flow issues, to help them stay on their feet.

Call our specialist solicitors on 0808 231 1320

Tees are here to help

We have many specialist lawyers who are based in:

Cambridgeshire: Cambridge
Essex: Brentwood, Chelmsford, and Saffron Walden
Hertfordshire: Bishop's Stortford and Royston

But we can help you wherever you are in England and Wales.