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Covid-19 Considerations For Business Owners And Operators

on Wednesday, 18 March 2020 in The Closer - M&A, Securities and Corporate Counsel: Kevin P. Tracy, Editor

As we all navigate through this new territory, there are certain issues that every business owner and operator may want to consider with respect to its ongoing operations. This article provides a high-level overview of some key issues we are currently addressing with our clients.

Force Majeure Clauses

Whether a force majeure clause will excuse a party from performing under a contract due to events related to COVID-19, is primarily an issue of contract interpretation. A force majeure clause will only apply if a “force majeure event” has occurred, as defined in the underlying contract. Oftentimes, force majeure clauses reference “acts of God”; however, this phrase is most often interpreted to mean weather-related events and will likely not apply to COVID-19 related events. 

If a force majeure clause does not cover a COVID-19 related event, the doctrine of impracticability might provide alternative relief. Discharge by reason of impracticability is a court-made doctrine recognized in Nebraska. The party asserting impracticability must prove the following to excuse performance:

  1. The occurrence of an unanticipated event;
  2. Such event would make performance of contractual obligations difficult or burdensome; and
  3. The party asserting impracticability did not assume the risk of such event’s occurrence.

Depending on how it is drafted, an express force majeure clause may supersede the application of this court-made doctrine. Therefore, in some cases, a poorly drafted force majeure clause may provide less protection than the underlying doctrine of impracticability.

For prospective drafting purposes, expressly referencing COVID-19 as a force majeure event would afford the most legal protection. Alternatively, a force majeure clause that expressly references “epidemic” or “pandemic,” or “acts of government” – such as travel bans or the banning of large gatherings — might also cover events related to COVID-19. Finally, a force majeure clause that covers events that render performance “impracticable” or “inadvisable” (as opposed to “impossible,” which arguably incorporates a higher standard) might also cover events related to COVID-19.

Directors, Shareholder, or Member Meetings

The governing documents (Bylaws, Operating Agreement, etc.) and applicable state law will govern when and how director, shareholder, or member meetings may be held. While many organizations may be considering postponing their events, without a particular end in sight for COVID-19, such organizations should explore their ability to allow participants to attend meetings telephonically or by other remote means, which will depend on the provisions of their governing documents and state law. 

If an entity desires to allow remote participation, plan to provide timely notice to your participants in accordance with your governing documents and Nebraska or other state law. Note that most rules governing remote meetings or telephonic participation require that each participant can simultaneously hear each other and participate in the meeting. 

To the extent an entity needs to take a vote at such a meeting, the entity generally must be able to collect such votes and verify that the person voting is, in fact, a voting shareholder or member. Note that some entities may be able to collect votes ahead of the meeting via proxy. In addition, if you are unable to reach a quorum for your meeting, you can generally adjourn the meeting to a later date.

Working Capital and Financing Arrangements

COVID-19 will obviously continue to put financial stress on many businesses through the remainder of this year. Businesses should review their existing credit facilities and consider drawing on available funds in order to establish necessary reserves. If your ability to make debt service payments may be at risk in the future, it is better to address with your lenders now in order to allow some time for negotiating any necessary forbearance or modification agreements.

Note that the Small Business Administration has implemented a loan assistance program for certain small businesses impacted by COVID-19. This program is intended to provide working capital financing at a competitive rate. It will be available for eligible Nebraska businesses soon. Stay tuned for more information regarding this program.

Other Considerations

  • Review your insurance coverage for possible protection for cancelled events
  • Take caution when providing financial impact data from COVID-19 to your shareholders, members, or others
  • For nonprofits, to the extent you have received sponsorships or pledges in advance of a now cancelled fundraiser, review your ability to enforce such commitments
  • For SEC-regulated companies, consider whether you need to disclose health status of your directors and managers

To the extent you would like more information regarding any of these issues or need advice on their applicability to your business, please contact a Baird Holm LLP attorney. 

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