Coronavirus – Secure Your Business-Critical Issues

As the coronavirus (COVID-19) outbreak continues to impact global markets, corporate management and shareholders are being forced to prepare for a prolonged epidemic. Can disruptions due to the virus be invoked as force majeure if they prevent a company from fulfilling its contractual obligations? Can a listed company alter its general meeting plans? We provide some principles and advice below.

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Duty of Care Obligates Managers to Act

The principles enacted in the Finnish Limited Liability Companies Act state that the management of a company—i.e. the board of directors and managing director—are guided by a duty of care towards the company and its shareholders. The duty of care requires active measures. It requires the management to secure the company’s interests and ensure that the company is in compliance with the law and authority requirements, and the coronavirus outbreak provides no exception to this. In practice, this means that the management must continually monitor the situation, analyse the impacts of the epidemic and attempt to mitigate risks.

Identify Critical Agreements and Supply Chains

Authorities across the globe have imposed restrictions in order to stem the spread of the virus, and many companies have taken voluntary precautions. These include quarantines, travel bans or, for example, temporary closures of factories and offices.

These restrictions have caused resource shortages, disruptions in international supply and distribution chains, and other business challenges. As a result, many companies have had to delay their performance of their contractual obligations or have been completely unable to fulfil them.

It is up to management to assess what business-critical contracts and supply chains could be disrupted due to the coronavirus. In the case of contract chains, it is important to ask your contracting parties to carry out a similar analysis in order to be able to manage the risks of the entire chain.

Assess Force Majeure Separately for Each Contract

If a company is unable to fulfil its contracts, the question becomes whether the disruptions caused by the coronavirus could constitute a force majeure event. A force majeure would exceptionally release the contracting party from its contractual performance obligations.

The existence of a force majeure has to be assessed based on the wording of each individual contract. Here are a few rules of thumb:

– The force majeure clause may limit force majeure to only the examples explicitly stated in the clause, and these kinds of lists cannot generally be interpreted expansively.

– The threshold for a force majeure is usually high. As a result, companies need to give careful consideration to whether a contract can be fulfilled in a timely fashion in some alternative way despite disruptions caused by the coronavirus.

– Invoking force majeure often requires that the obstacle could not be foreseen. If entering into a contract after the start of the outbreak, it is best to mention disruptions caused by the coronavirus as an example of force majeure circumstances, otherwise it may not be possible to invoke the clause.

– Force majeure clauses also may set forth a procedure for invoking force majeure. For example, a party must often give the other party written notice within a certain amount of time from the occurrence of the force majeure.

Depending on the circumstances and the applicable law, a contracting party may be released from liability for damage caused by non-performance even without an express clause if the damage was caused, for example, due to an event beyond the control of that party or the party can prove they acted with care.

Continue Fulfilling Your Contractual Obligations as Best You Can

An event that disrupts the fulfilment of a contract will only exceptionally release a company from its contractual obligations completely. If a company is able to fulfil some of its contractual obligations despite a force majeure, it must do so.

As soon as the force majeure ends, the performance of the contract must be continued immediately. The party invoking force majeure is also always obligated to minimise the damage caused by the disruption to themselves and their contractual partners.

Identify Disruptions and Give a Timely Notice

Management can best secure their company’s interests when they identify threatening disruptions in good time, document disruptions and their causes and consequences, and make sure that the company issues its own notifications and notices to its contractual partners in the prescribed time limits. If the contract does not provide time limits for issuing notices or other notifications, they must be issued in a reasonable time. It is also worth reviewing your business insurance policies and make sure that any damage events are notified within the time required by the insurance terms.

Publish Changed Outlooks

The coronavirus has already had an impact on business, but its effects will be seen in companies in many different ways and spans of time. Listed companies have to assess their outlooks during the current financial period and monitor the realisation of their forecasts and guidance. If the epidemic causes significant changes to business and previously published forecasts and guidance, this needs to be published as a profit warning as soon as possible.

Consider Exceptional Arrangements for Your General Meeting

The general meetings season is at its peak for listed companies, and it is natural that the coronavirus is giving companies and shareholders preparing for their general meetings pause for thought. Certain aspects of meeting arrangements can be altered on short notice. For example, the meeting venue stated in the notice convening the general meeting can in exceptional circumstances be changed prior to the opening of the meeting.

The Finnish Companies Act allows a general meeting to be held elsewhere than in the municipality stated in the articles of association, but this requires a very weighty reason.

The act also permits shareholders to participate in general meetings remotely. Euroclear Finland has the capability to carry out electronic advance voting for general meetings if the situation requires.

Look into the Possibility for Virtual Closing in Mergers and Acquisitions 

The coronavirus epidemic may affect mergers and acquisitions that have already been signed or that are being prepared. It is worth including wording in SPAs that the transaction can be closed virtually. This will ensure that the closing will not be prevented even if one of the parties is unable to travel to sign the necessary documents, for example, due to their company’s internal guidelines.

It is also worth reviewing the seller’s representations and warranties in the SPA with an eye to how they might be affected by the epidemic. Other customary SPA clauses—such as long-stop dates and business between signing and closing—should be reviewed with particular care to ensure they provide enough flexibility.