The global COVID-19 coronavirus pandemic creates great challenges for the management and supervisory boards of Dutch companies and semi-state bodies.
COVID-19 is set to have long-term consequences for companies in many sectors due to a drop-off in consumption/purchasing, reductions and limitations in workforce mobility, serious disruption to the manufacturing chain and limited possibilities for funding, in part due to falling share prices.
Many companies, as well as their suppliers and customers (including end customers), are expected to experience financial difficulties, and potentially liquidation, in the near future.
Within these grim market dynamics, there is an important role for the management boards of companies, being those responsible for general and financial policy, and also for supervisory boards, in their supervision.
Adequate risk management
The management board's most important task is to serve the company’s and its affiliated companies’ interests. The principle that the company’s continuity is priority should be leading.
To this end, management boards are expected to demonstrate adequate risk management and take mitigating measures in that respect, while taking into account the specific risks facing their companies due to the COVID-19 crisis. Where liquidation potentially lies ahead, management and supervisory boards must also take the interests of the company’s creditors into account.
Main points of focus for risk management
The following points of focus should be taken into consideration:
- Governance and internal organisation: in times of crisis, management and supervisory boards are expected to monitor events very closely. It would be advisable to establish a dedicated team led by the CEO/CFO in order to continuously monitor and mitigate the risks and developments in terms of strategy/scenario planning in relation to the COVID-19 crisis. Increasing the frequency of management and supervisory board meetings and consultations is also recommended, as is communicating clearly with important stakeholders in order to keep everyone on the same page. A well-thought-out communication plan is advisable. The works council and the general meeting of shareholders should be consulted when important strategic policy changes are being made. Organizing physical meetings will be problematic, which means that digital options should be assessed and used creatively, and, if necessary, the possibilities of such statutory options must in be created jointly.
- Finance and financial policy: in times of uncertainty with potential consequences for continuity, cash and cost planning and forecasting must be improved to the extent that a weekly, or preferably daily, overview of available cash & expenses, and any borrowing requirements, is realised. In view of the administration obligation, it is important that business records are kept in an orderly manner and that financial statements are adopted and filed timely. It is also relevant to assess impacts on the company's financing arrangements and to investigate whether the company can continue meeting its financing conditions. For example, this crisis may qualify as a Material Adverse Change (MAC). In addition, the possibilities of certain government funding schemes should be assessed. One might consider the temporary wage costs compensation scheme and the postponement of tax and fine payment. In the given circumstances, the management and supervisory boards would be well-advised to assess any dividend resolutions critically and cautiously with a view to continuity, as here, there is a looming danger of directors' and officers' liability. Any restructuring and/or reorganisation will need to be carried out in a timely manner.
Good accounts payable management and maintaining good relations with important creditors is key. The possibility of reducing or extending payment terms must be evaluated. Moreover, in the context of cash planning, the question as to which creditors have priority becomes relevant. In principle, the management board is free to decide to give certain creditors priority over others in the interests of the company, for example, in securing the company’s continuity. In doing so, the board should be careful that such decisions are not being made in the interests of others than those of the company (e.g. private interests). Lastly, if the management board knows that the creditors that the company is currently not paying will never be paid because, for example, the company will go into liquidation, the management board must decide to stop making any payments and file for bankruptcy. This is necessary, because if the management board pays some of the creditors in that phase, this damages the collective creditors in the liquidation and the management board runs the risk of being held personally liable. The decision to make or not make payments therefore always requires careful consideration.
It is advisable to garner advice promptly and to set out your considerations properly. In these exceptional times, it is a question of balancing creditors. In the unlikely event that the management and supervisory board foresee the company permanently being unable to pay its debts due to liquidity shortfalls, they would be well-advised to garner advice promptly as to the possibilities of a suspension of payment or liquidation. Keeping a loss-making company afloat may involve the risk of directors' and officers' liability. - Important commercial transactions and contracts and supply chain: it is relevant to chart the most important (commercial) contracts and to evaluate the potential implications of the COVID-19 crisis. Clear understanding of whether the company or a trading partner can escape some or all of its contractual obligations through termination or by invoking e.g. force majeure or unforeseen circumstances and whether there is any liability for compensation due to delay/cost-increasing circumstances and termination is relevant. This also applies to important rental contracts or leases.
It is prudent to do the same where a company's supply chain is concerned, and to clarify the extent to which deliveries and continuity might remain possible. Apart from decisions affecting ongoing contracts, planned M&A transactions must potentially be reconsidered or put on hold, business opportunities created by the changes in circumstance be analysed or reviewed, and future commercial and transaction documents must be provided with the necessary contractual protection mechanisms and clauses to cover the risks associated with COVID-19.
If you have any questions regarding this article, feel free to contact Marit van der Pool.
