During the current climate of uncertainty caused by the COVID-19 pandemic, and as businesses seek solutions, directors and management must be aware that some solutions may cut across existing obligations and restrictions to which the business is already subject.
For example, obligations and restrictions imposed on individuals and companies by governance documents (such as shareholders’ agreements) or transactional documents (such as investment agreements and/or sale and purchase agreements). Below, we look at common situations whereby such issues may arise:
Shareholders’ Agreements
The majority of shareholders’ agreements contain reserved matters and consent rights in favour of shareholders. These tend to take the form of a list of matters which cannot be carried out by the company and the directors of the company without the prior consent of all or certain key shareholders. Certain rights which are frequently found in such documents will be applicable to business continuity in the current circumstances, for example consent may be required to incur any borrowing in excess of a certain amount or to close down any business operation
Therefore, it is prudent for both directors and shareholders of any company with a shareholders agreement in place to review this agreement to determine precisely what approvals are needed for any proposed measures relating to business continuity during this period of uncertainty. To the extent directors need to seek shareholder approval, it is sensible to hold these conversations with relevant individuals now in order to obtain these consents promptly and prevent avoidable delays to business-critical decisions and actions.
Investment Agreements
Similarly, equity investment agreements also frequently contain consent rights in favour of (i) the investor (ii) an investor director who sits on the board of the company, or (iii) both. The directors of any company which has received third-party equity investment should, therefore, familiarise themselves with the contents of the investment agreement to ensure they are comfortable with the consent rights contained therein and obtain any such consent in good time.
In addition, investment agreements usually contain information rights relating to financials and other key information whereby the directors will have a duty to report any material changes to the business’ prospects or activities to the investors. Again, it is vital these are engaged early and conversations held with investors as soon as possible in order to:
- determine what issues a company may face;
- see what support an investor may be willing to give; and
- ensure compliance with any reporting obligations (such as information rights).
Acquisition Agreements
In addition, acquisition agreements containing an element of deferred consideration may contain reporting rights and/or reserved matters which require prior consent of sellers.
In these uncertain times we recommend that companies, shareholders and any other parties to any corporate transactional documents review all key agreements to which they have been party, in order to ascertain how they can best comply with their obligations thereunder and avoid any breaches which might incur liability in due course.
If you would like to discuss any aspect of the above, please do not hesitate to get in touch with a member of our corporate team.
