Adapting to the New Normal: Restructuring Measures
The Dutch lockdown has a huge impact on Dutch businesses. Since the normal society is not likely to return any time soon, companies should start considering long term solutions. This article provides GC’s with practical guidance on restructuring measures.
GC as linking pin
The Dutch governance system is centered around the stakeholder model. Restructuring measures are likely to impact the balance between the various stakeholders and may disproportionally affect certain stakeholders. It is therefore extremely important to proactively engage with your internal and external stakeholders when facing financial distress. General counsel are key in managing this process.
All starts with strategy. Restructuring measures that fit within a company’s strategy are more likely to provide for long-term solutions, rather than temporary relief. General counsel have in-depth knowledge of the strategy and of the legal implications of restructuring measures. They are therefore uniquely placed to play a leading role.
Companies will especially look at their structural costs, which inevitably means workforce related costs.
Various temporary measures are possible, such as not extending fixed term employment contracts and reducing the engagement of temporary agency workers, secondees and on-call employees. Fixed monthly costs reimbursements can be stopped. Temporary reduction of employment benefits such as salary with the individual employee’s and/or labour union consent is allowed. It could be advisable not to extend or enter into new lease car agreements for the duration of a lock down. Under specific circumstances it could be allowed to force employees to take part of their accrued days holiday for the duration of a lock down. In the Netherlands the state aid NOW scheme applies, which offers up to 90% compensation of the wages plus 30% employer costs for the months March, April and May, regardless of whether and to what extent employees can continue working. Companies which have an expected loss in turnover of 20% or more in a 3 consecutive month’s period are eligible.
Permanent measures include under certain conditions permanent reduction of employment benefits and termination of employments for redundancy. Collective dismissals are subject to prior work council consultation and labour union consultation. Redundant employees are by force of law entitled to statutory severance (‘transitievergoeding’), the notice period, compensation for accrued days holiday and accrued holiday allowance.
Key in the approach of dealing with parties which do not or cannot meet their contractual obligations due to the Corona-crisis is checking what your contracts stipulate in case of Force Majeure situations, because the contract is leading. Furthermore is it important to ensure continuity of your key suppliers by, e.g., checking whether (IT) escrow arrangements are in place or considering to acquire financially distressed suppliers. In case you consider restructuring your business, it is already useful to timely start identifying noncritical and critical contracts and perform a due diligence on these contracts to ensure a smooth restructuring process (check on termination / assignment rights and any post contractual obligations).
If the impact of the Coranavirus on your business is expected to continue for a longer period of time, you should start thinking about contingency planning now. Key measures to consider are (i) ring-fencing to protect your overall business against losses of non-viable activities, (ii) accelerated M&A to improve liquidity and (iii) discontinuation of non-viable activities to limit cash outflows. All three measures have a lead time of weeks if not months. To be able to move quickly when you have to, start preparing. The first step is to internally align on which measures are feasible. The second step is to set up a multidisciplinary team with internal and external experts to prepare a high-level action plan and identify road blocks for the preferred measure(s).
Finally this is also the time to closely monitor covenant compliance and engage with creditors, should additional flexibility be required. For borrowers in distress, transparency on financial performance and credible self-help measures will likely be on every anxious creditor’s checklist. If debt needs to be restructured to provide sufficient relief, there are several options available. Dutch Parliament is currently debating a bill (WHOA) for non-consensual restructuring plans to be confirmed by a Dutch court, allowing for cross-class cram down of creditors in a relatively cost-effective and flexible way. Hopefully implementation is in time for those borrowers in need of restructuring this summer.
The power of preparation
Unfortunately, there is no magic formula for saving companies from financial distress. But by proactively preparing for the restructuring measures most relevant to your business, you will be able to act quickly and fully informed if you have to.
Elmer Veenman, partner corporate & restructuring
Benjamin van Kessel, partner commercial contracts & IP