Navigating legal rights and obligations in chaotic conditions
With COVID-19 reaching its peak in some jurisdictions, and the true economic costs becoming clearer, business leaders need to start to shift their focus from the here and now to the opportunities and challenges that they may face in the next new normal, ensuring the strategic decisions made now can position their businesses for the future.
As business leaders consider their plans for short- and long-term stability and resilience, it’s now clear that business contracts, arrangements and relationships are a core foundation for all business activities and response strategies. The ability to understand legal rights and obligations in the web of contracts that govern all aspects of businesses and their supply chains has never been more important.
As COVID-19 runs its course, we can expect that an organization’s business contracts will be increasingly seen as a core foundation – and asset – of a business, and that the legal issues and analysis that surround them will command more attention in planning for the post-recovery world.
Amid the current conditions, the legal issues that many business leaders are dealing with fall into three broad categories: commercial resilience, operational resilience and financial resilience.
This set of issues centers on how business can be conducted as usual, or as close as possible, in extraordinary times.
For example, with travel restrictions and physical distancing policies in place, the ability to conduct business electronically has become critical. Does your organization’s constitution and governance require in-person board meetings? Does the jurisdiction allow contracts to be executed with electronic signatures? Does a witness need to physically observe a contract’s signing? Do court filings require original, hard-copy documents? Do regulatory filings need to be made in person?
The enforceability of rights and obligations under existing contracts can also create issues as many companies try to manage the impacts across their global supply chains. Legal counsel are increasingly looking at the legal concept of force majeure and whether COVID-19 qualifies as a force majeure event — that is, an unforeseen circumstance out of a party’s control that prevents them from fulfilling a contract’s terms and thus releases them from or suspends their obligations.
A second set of issues involves the legal underpinnings for keeping the business efficient and productive, which includes managing relationships with employees. Companies also need to ensure they can continue to comply with their governance requirements in a virtual environment, for example, when board, advisory board and shareholder meetings must be held in person. The ability of management and compliance functions to do their jobs remotely is critical.
Financial resilience issues focus the legal lens on the organization’s capital management plan, including its capital, debt and equity, cash restructuring and plans for growth. In particular, the speed of COVID-19 has greatly affected financing transactions and mergers and acquisitions (M&A) in progress. This is prompting many organizations to review material adverse change clauses, especially where mergers and acquisitions are concerned.
The next new normal — thinking ahead
As many companies seek to build their bridges to the post-recovery world, they should not expect things to simply revert to their pre-COVID-19 state. The current environment has put significant pressure on supply and demand and highlighted the complexity and interdependence of business and modern supply chains with multiple parties and multiple tiers. As companies plan for the future, they need to take into account the requirements and sensitivities of both their customers and their community of suppliers.
Above all, organizations should avoid making short-term decisions, based on technical legal rights, which may help their business now but might damage business relationships and arrangements in the months ahead.