The global pandemic of the Covid-19 virus ("coronavirus") is creating major challenges for boards and supervisory boards ("SBs") of Dutch companies and semi-public organizations.
authors: Bart-Adriaan de Ruijter & Marit van der Pool
The coronavirus affects businesses in many sectors for a lower period with consumption/downtime, labor force outages and restricted mobility, severe disruption of the production chain and reduced financing opportunities, partly due to falling stock prices.
The expectation is that in the coming period many companies, including therefore suppliers and (end) customers, will run into financial difficulties and even bankruptcies will follow.
In these intense market dynamics, an important role lies with the management board as responsible for general and financial policy with the supervisory board as supervisor thereof.
The main task of the board is to serve the interest of the company and its related organization. First and foremost is the continuity of the company.
In view of this, the board is expected to: adequately manage risks and take mitigating measures in that regard, taking into account the specific risks facing the company due to the Corona crisis. If a possible bankruptcy is looming, the board and supervisory board should especially also take into account the interests of the company's creditors.
Points of interest include the following:
Governance and internal organization
In times of crisis, the board and supervision are expected to be 'short on time'. It is wise to set up a dedicated team under the leadership of CEO/CFO to (continue to) monitor and mitigate risks and developments in strategy/scenario planning related to the Corona crisis. It is advisable to increase frequency of board/Supervisory Board meetings and consultations and have good communication with key stakeholders to keep everyone on track. A tight communication plan is desirable. Major strategy changes should involve the works council and general meeting of shareholders. Meeting physically is difficult. So digital opportunities should be used creatively and, in our view, the statutory possibilities should be created jointly for this purpose if necessary.
Finance and financial policy
In uncertain times with possible implications for continuity, cash and cost planning and forecasting must also be improved so that weekly, preferably daily, available cash & costs and any financing requirements are clear. In view of the obligation to keep records, it is important that records are in good order and financial statements are established and filed in a timely manner. It is also wise to consider the impact on the company's financing and whether the company can continue to meet financing requirements. For example, this crisis might qualify as a MAC (Material Adverse Change). This should include looking at the potential for some funding/subsidization from the government. Consider the temporary arrangement for meeting payroll costs and deferring payment of taxes and penalties. Under the circumstances, it is wise for the board and supervisory board to look critically and cautiously at any dividend decisions with an eye to continuity. Director liability lurks here. Any restructuring and/or reorganization should be initiated in a timely manner.
Good accounts payable management and maintaining good relationships with major creditors is key. Opportunities to shorten or extend payment terms should be explored. In the context of cash planning, the question of which creditors have priority is relevant. In principle, the board has the freedom to choose, in the interest of the company, to give certain creditors priority over others, for example to ensure the continuity of the company. Be careful that this choice is not made out of interests other than corporate interests (e.g., private interests). Finally, if the board knows that the creditors the company is not paying now will never be paid again, for example because the company will go bankrupt, the board should make the choice not to pay anyone anymore and file for bankruptcy. This is because if the board still pays some of the creditors at that stage, it harms the joint creditors in the bankruptcy and the board runs the risk of being sued personally. Thus, making or not making payments requires careful consideration.
It is advisable to seek timely advice and properly record your considerations. It is balancing with creditors in these exceptional times. In the unlikely event that it is foreseeable for the management board and supervisory board that the company will be permanently unable to pay its debts due to a liquidity shortage, it is wise to seek timely advice on the possibilities of a moratorium or bankruptcy. Keeping a loss-making company "in the air" may involve directors' liability risks.
Important (trade/transaction) contracts and supply chain
It is important to map out the most important (trade) contracts and to examine the possible consequences of the Corona crisis on these. It is good to be clear whether the company or a trading partner can (partially) get out of the obligations of a contract by dissolution or by invoking e.g. force majeure or unforeseen circumstances and whether there is any liability for damages for delay/cost-increasing circumstances and dissolution. Also consider important leases.
It is wise to do a similar exercise for a company's supply chain and have clarity on the extent to which supply and continuity remains possible. In addition to decisions regarding current contracts, planned M&A transactions may need to be reconsidered or put on hold, business opportunities created by changed circumstances should be (re)reviewed, and future commercial and transaction documents should be provided with the necessary contractual protections and clauses to cover the risks associated with Corona.
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