News & Insights
Mar 23, 2020
“One ought never to turn one’s back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half.”
- Winston Churchill
As responses to the COVID-19 pandemic have evolved over the course of the first quarter, you and your business have reacted swiftly to ensure the health and safety of your customers, partners and employees. However, as you look forward to the second quarter, it is clear that this public health crisis is likely to have a lasting impact on your business and its ongoing operations. While you continue to react to present needs, you’re simultaneously beginning to consider both short- and long-term proactive measures to fully prepare for the potential long-term financial and economic impacts on your company. What should you do most immediately to ensure the viability of your business?
Below is a brief list of items of short-term measures that you should consider for in the near future. We’re actively assisting clients in assessing these areas and helping them shift from a reactive to a more proactive stance. If you wish to explore any of the items discussed below, we’re available to discuss these and any other matters as you navigate through this difficult time.
Designate a Small Core Team to Act and Communicate
In order to be proactive about responding to the various issues that could arise from the spread of COVID-19, you should consider designating and empowering a small, core team to take decisive actions on behalf of the business. A contact list with cell phone numbers should be distributed and kept current. The response team should be supported by experts, advisors and subject matter specialists. The response team should be small but diverse, provided with significant authority to deal with any matters that may arise during the crisis, and should report to the company’s executive team or board of directors on the crisis response. You should keep in mind that, as is the case with any crisis, communication to all stakeholders in your business is key. You should ensure that regular and coordinated efforts are made to keep employees, major customers, suppliers, owners and others apprised of new information and actions being taken to respond to any new or anticipated threats posed by the crisis.
Assess and Continue to Improve Remote Working Arrangements
In light of recent “safer at home” mandates and to continue safe operations for employees and customers, you may have required all or some of your employees to work remotely, or you may have implemented certain other practices to encourage social distancing (for instance, most banks and restaurants in urban areas are now providing drive-thru only services to their customers). Accordingly, it is crucial that you review and update your policies related to employee remote working arrangements, organizational structure and succession, corporate governance and confidentiality practices to ensure that you’re adequately protecting your business in light of the rapidly changing economic environment and potential changes in security controls.
With regard to remote working arrangements, security is critical during this time. Developing and following an Information Security Policy is an important first step. Designating select employees who will have remote access, making sure that those employees are trained on proper login protocols, such as virtual private network (VPN) access, and developing a system for regular communication among remote employees are a handful of the key considerations when implementing remote working arrangements. For more information regarding current workplace best practices and remote working arrangements, please see this Waller blog post.
Assess Your Current Insurance Coverage
Insurance agents and companies are being inundated with requests. Now is the time to be checking the scope of your insurance policies, including your business interruption insurance policy. We encourage you to reach out to your insurance broker to ensure that you have the most recent and up-to-date insurance policies and ask for areas where your broker believes coverage may be available.
For more information regarding insurance related matters, including business interruption insurance, please refer to the Waller blog post entitled “Business interruption insurance coverage in times of the coronavirus”
Business Continuity and Operational Contingency Planning
To the extent that you have an existing business continuity and or operational contingency plan already in place, now would be the time to take it down from the shelf, review it thoroughly and consider implementing all or parts of it, as appropriate. If you do not have such a plan, now would be the time to consider whether you should begin crafting one. Regardless of which circumstance you find yourself in, we are happy to assist you in ensuring that your business has a strategy that insures continuity of operation and maximum business efficiency in the current economic climate.
Understanding Conditional Relief, Extensions and When to Take Advantage
Understanding the hardships that are facing companies and regulated industries, federal, state and local governments and regulatory agencies have passed a series of orders and issued guidance that provide both private and public companies relief from certain ongoing obligations. In addition, the federal bank regulatory agencies have issued guidance encouraging financial institutions to work constructively with borrowers affected by COVID-19. Given the pace at which these obligations are changing, you should reach out to your advisors to better understand any new guidelines and timelines with which your business must comply in order to take advantage of these policies.
For more information regarding relief options that may be available to you and your business, please see the Waller blog post entitled “Considering layoffs? Congress' CAREs Act could offer small business a lifeline”
Begin Taking an Inventory of your Contractual Relationships and Obligations
During business as usual, focusing on the specific provisions of your various lease, vendor, supply, service, employee, and financing contracts or arrangements is not a high priority. However, in light of recently mandated closures, quarantines, and supply chain interruptions, you should proactively review the terms of all of your contracts generally, but, at a minimum, your most important contracts.
In particular, you should pay close attention to the definitional, representation and warranty, required notice, default, termination, and force majeure provisions.
For instance, you’ll likely need to confirm the accuracy of the representations and warranties regarding your business that are located in your financing agreements (credit facilities, term loans and lines of credit), including those relating to “no material adverse changes” and the business’ “solvency.” You should carefully review these provisions whether you’re seeking to draw down on these facilities or whether you’re simply trying to determine your ongoing compliance with the terms of these agreements (e.g., to determine that you’re not in default under your financing agreement). Many financing agreements also contain obligations to affirmatively provide notice of the occurrence of a MAC promptly to your lender. Whether or not a material adverse change has occurred or you have a solvency issue will depend upon the specific verbiage of the financing agreement and your particular situation.
Many operational contracts also contain a “force majeure” provision that may excuse the non-performance of, or delay in performance by, the parties under the contract in respect of certain unusual events such as emergencies, war, terrorism and pandemics. Now is the time to review your contracts to determine if you or your counterparts(ies) are entitled to and need relief from performance. In addition, outside the scope of your contracts, you might be able to argue for the relief of “impossibility” or “frustration” such that your failure to perform might be excused by a court. By that same token, contract counterparties may be looking to make these sorts of arguments in excusing performance owed to your company. This analysis is fact intensive, subject to state law application and interpretation, and specific to your individual circumstances. Also, be cognizant that expressions of understanding and empathy may be perceived as waiving or excusing non-performance. This may be a time where waiver and excusing non-performance is appropriate in certain circumstances but you’ll want to be deliberate in making those decisions.
Assessing your Message to Investors
Many companies are in the midst of preparing for their annual shareholder meetings. You should continually monitor the impact of certain mandates on your annual meeting and whether a virtual meeting will be necessary or advisable. For more information regarding virtual meeting options, please see the Waller alert entitled “(Public companies may consider virtual annual meetings in light of coronavirus)”.
In addition, you’re most likely preparing to close your books and finalize your numbers for the first quarter of 2020. Accordingly, you’ll need to consider whether COVID-19 has had or will have a material adverse effect on your business, your earnings guidance, liquidity, and/or your business prospects and consider crafting disclosure, adding or enhancing risk factors tailored to any new risks and communicating whether there is any impact on your financial statements for your company’s upcoming earnings release and first quarter report on Form 10-Q.
While the COVID-19 pandemic has brought increased uncertainty into your daily operations, the Waller team is here to advise and assist you through this tumultuous period. Most importantly, the “Related Professionals” on this post have the experience you need to weather this current storm. For additional information, please contact the listed Related Professionals or your regular Waller contact at (615) 244-6380.
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