COVID-19 Business, but not as we knew it Restructurings and Reorganisations
Business Restructurings Part One
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COVID-19 | Business, but not as we knew it: Restructurings and Reorganisations
Business Restructurings Part One
Businesses confront the most significant challenge in a generation as their markets shrink, change or disappear. Having navigated the initial phase of the crisis implementing a series of cost saving and liquidity measures, companies are now progressing to the next phase. For most, including many who were strong heading into the crisis, this next phase will be the most challenging as businesses look to replace lost revenues and “future proof� their organisations. Whilst for some this phase will present an opportunity to refine operations and improve efficiencies, for many it represents simply an existential threat. The likelihood therefore is that increasingly we will see companies undertaking not just a financial restructuring - where the business looks to reschedule or refinance its debt - but also a broader business restructuring involving a root and branch review of all operational aspects as organisations adapt to the Covid era and reengineer not just their balance sheets but their entire business models. Part one of this article examines the wide range of matters which will fall for consideration in the context of those broader business restructurings and the second part will explore the options, implications and processes involved in a financial restructuring.
Johnathan Rees Partner johnathan.rees@laytons.com +44 (0)20 7842 8000
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Workforce
• Organisations will need to assess whether they have the requisite skills in their teams to adapt to the changes
The government’s job retention scheme has been modified
in their business model. This may mean training,
such that:
recruitment and redundancies.
• furloughed employees can be brought back to work part time from 1st July • employers must contribute progressively to the
• The well-being of the workforce will be of paramount concern to businesses. Flexible working makes this both more challenging and more important to monitor.
employment costs from August • the scheme will end on 31st October
• HR and IT infrastructures and policies will need to be reviewed and updated to cater for these new
A range of issues now confront businesses:
conditions. The bursting of the dam created by the government’s job protection scheme is likely to see
• budgeting for and financing those new costs
a swathe of redundancies and these combined with
• how and whether to take advantage of the part-time
employee health and safety guidelines on return to
arrangements (e.g. whether contractual arrangements
work, absenteeism and data subject access requests are
will need to be reviewed, ensuring that systems are in
likely to place significant strains on HR teams.
place to meet the reporting requirements) • the possible need to make redundancies at the 31st
Where a business operates cross-border it will need to assess
October end date and the timing impact of any
these issues in each of its locations by reference to the local
consultation required
legal and regulatory requirements.
As businesses contemplate a return to the office a number of factors fall to be considered: • Compliance with government guidelines on working
Executive Remuneration In addition to furloughing, many employees have been
safely. Businesses will need to undertake a risk
required to take pay-cuts as part of a business’s financial
assessment which in the case of organisations of more
measures. The challenge for many businesses is to balance
than 50 employees must be placed on the website.
the need to make savings whilst simultaneously rewarding
Employee confidence will be key and detailed planning
the loyalty of those members of staff who have suffered a
ahead of re-opening offices will be essential to that both
reduction in pay and retaining and incentivizing key senior
in terms of HR policies and infrastructure.
management. Companies may well look to some form of share incentive plan to address these issues which will enable
• Many employees will continue to work remotely on a full or part-time basis. Businesses must adapt to the new
them to deliver value to employees with no effective cash cost to the company.
ways of working and IT systems will need to be robust. Similarly maintaining the organisation’s productivity
Where share incentive or bonus schemes are already in place
and ensuring that employees working remotely remain
businesses may need to review their terms to assess whether
focussed and engaged will be key.
any adjustments need to be made to reflect any impairment to the business arising from the crisis and to ensure that the performance conditions remain meaningful
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Commercial Contracts
• Routes to market
Businesses may have to find alternative ways of
Business failures can have devastating effects along the supply
reaching customers e.g. in the event of the failure or
chain. Many organisations are considering what action they
unavailability of a logistics partner – not all businesses
can take to mitigate their risk.
which emerge from lockdown on the same day or at the same pace. In addition many businesses will be
• Uneconomic contracts
looking closely at their supply chains particularly those
Many businesses have been confronted with looking
which are multi-jurisdictional. The risk and management
to escape or renegotiate contracts which are
associated with lengthy chains is something all
economically unviable or not fit for the new purpose.
businesses will seek to mitigate. Time will be of the
This has led to lawyers scrutinising early termination
essence (no pun intended) and existing contracts will
rights (e.g. via force majeure or material adverse
need to be reviewed to assess liability and new ones
change provisions) and contractual frustration. The
entered into to mitigate exposure.
ability to exit loss-making contracts and replace them with new profitable revenue will be a continuing challenge for businesses navigating the next phase (see below).
• Corporate Insolvency and Governance Bill
This is expected to be enacted in the next few weeks and will have a significant impact on the supply chain generally. In particular:
• Early warning
Businesses should consider provisions which will
• Retrsopectively with effect from 27th April, winding
give them advance warning of financial distress (e.g.
up petitions based on a statutory demand served
access to financial information) and limit their financial
between 1st March and at least 30 June 2020 (likely
exposure (e.g. by amending payment terms).
to be longer) cannot be brought by a supplier unless (in effect) it can establish that the customer’s
• Exposure
Businesses should also review their credit insurance options, supplier/customer dependency and contingency plans.
financial position is not Covid related. • Where a customer enters an insolvency procedure, contractual rights triggered by that process will become unenforceable (e.g. termination). • During the insolvency procedure, suppliers cannot
• Flexibility
The uncertainty in demand – when and how it will
make payment of outstanding pre-insolvency invoices a condition of continuing supply
return – is a common issue facing businesses. Many assume that it is likely to be volatile and unpredictable.
In short, suppliers could be forced to continue to
It will be vital for a business to be as agile as possible
supply a customer even where the customer enters
during this phase meaning that contracts will be
an insolvency procedure and previous invoices remain
reviewed with customers and suppliers to minimise
unpaid.
the company’s exposure to fixed costs and long-term commitments (such as incorporating appropriate
Consequently suppliers should review their contracts
termination provisions).
with customers who they consider to be in financial distress. Possible protections range from payments on
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Business Restructurings | Part One
account, guarantees, flexible (e.g. short fixed) terms and re-classifying unpaid debts with a view to securing improved priority in an insolvency process.
M&A As part of its costs savings and business reconfiguration many companies will be assessing under-performing or non-core
Intended to buy time for businesses who were solvent
divisions and contemplating a divestment programme. Where
pre-Covid, the legislation could yet unintentionally
there is a distressed aspect to the process deliverability and
spread the financial contagion.
limited seller recourse is likely to be more important to sellers than price (valuation in the current market being more of an
Services/Products
art than ever). On the other hand the current environment will present
Many companies will be forced to appraise their products or
opportunities for strategic buyers looking to bolster gaps in
services and whether these remain relevant to the changing
services or supply-lines. It is likely that buyers will be extra
markets. As part of that exercise businesses may take the
discerning and diligent meaning longer M&A timelines.
opportunity to stop certain loss-making activities, assess whether essential activities can be done differently - and
It will be a particularly interesting time for private equity
whether an activity is any longer “essential” - and focus
sponsors. Whilst many may be sitting on significant funds
resource and investment accordingly.
many are also likely to be looking at their portfolios and analysing which investments to let go. This also gives PE the
This re-designing of the business will impact on all aspects
opportunity to allocate resources to those businesses which
from contractual relationships (IP licences, designers,
have longevity. Capital and time are particularly precious
suppliers, customers, sub-contractors, distribution and
commodities and will need to be invested carefully in the
logistics) to workforce skills and real estate requirement.
coming months.
Real Estate All businesses are looking closely at their real estate requirement as they look to “right-size” their operations and
Insurance
reduce costs. The current trend towards flexible working
As businesses were forced into temporary closure by
means that businesses will need to assess not just the amount
lockdown many turned to their insurers. They have discovered
of space needed but how it is used. The need to ensure a safe
however that classic business interruption insurance may not
environment for workers means that many businesses are
cover Covid-19. Typically “BI” is added to a business’s all-risks
considering moving to a mix of office and shared space.
insurance programme rather than sold as a standalone policy, and covers loss of income that a business suffers as a direct
Commercial tenants are also discovering a new world
result of physical damage to insured property. Therein lies the
relationship with landlords and flexibility on aspects from
rub. The pandemic has not as a rule led to property damage.
break rights, to assignment, sharing and sub-letting. Standard long term leases commitments are likely to be a thing of the
Many businesses will be looking more closely at the fine print
past.
in future discussions.
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That said businesses may still have a route to indemnity but will need to check their policies carefully, act promptly and ensure their claim complies with the policy conditions.
Cyber-security Lockdown has produced a fertile ground for fraudulent activity with many businesses experiencing heightened cyber security risk with large numbers of staff working remotely, the growth of personal devices being used for business and ransomware attacks against critical infrastructure. These issues are discussed in more detail in our recent publication: Covid-19: Cybersecurity - Five tips for secure remote working.
Closing thoughts Organisations will be confronted with an array of challenges as they navigate the next phase of the Covid crisis. The organisation’s ability to adapt to change will have a significant bearing on their recovery and growth. Experience will be at a premium in making these decisions.
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Expertise
Corporate & Commercial We provide a complete range of corporate and commercial advice and support for clients who extend from start-ups, individual entrepreneurs and family offices to multinational corporations. We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market. Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.
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