Recommendations from West Oak Partners
in response to the situation created by COVID-19

Faced with the new scenario caused by the health alert and the resulting paralysis
economic, we would like to share with you in a schematic way a series of
recommendations prepared by West Oak Partners taking into account a
transversal vision of the company.

New scenario that has emerged

Financial implications
  • Declining revenues
  • Liquidity problems
  • Non-compliance with financial ratios
  • Possible insolvency and/or
    asset imbalance
Institutional implications
  • Request for information from partners
  • Management control by the partners
  • Structural changes in the sector of activity
  • Potential reputational damage
Organisational implications
  • Review of the business plan and budget for the current year
  • Restructuring of the workforce (teleworking, reduction of working hours, redundancies, ERTES, ERES, etc.).
  • Outsourcing of services
  • Focus on new technologies and online channel
  • Impact on the production and supply chain
Legal consequences
  • New regulation
  • Management responsibility
  • Modification of contractual relations
  • Breaches of contract
  • Potential claims and compensation

Recommendations in the private commercial field

Renegotiate contractual obligations

1. Review the various contracts entered into by the company, including:

  • Suppliers
  • Intermediaries
  • Contractors
  • Landlords
  • Auditors
  • Clients
  • Financial institutions
  • Insurance companies

2. Analyse whether there are provisions in the contracts in relation tothe supervening imbalance of services:

  • MAC clauses (material adverse change)
  • Early termination clauses
  • Obligation to mitigate damage
  • Notification system
  • Time limit for remedying non-compliance (cure period)
  • Liability regime (limits, penalties, indemnities, representations and warranties)
  • Enforcement of guarantees
  • Insurance coverage

3. In-depth analysis of the different contracts signed by the company, including:

  • Identify
  • Explain
  • Quantify
  • Recommend

4. On the basis of the above, if there has been an imbalance in performance as a result of COVID-19 and the declaration of the State of Alarm – renegotiate the contracts:

  • Requesting waivers
  • Modify payment schedule
  • Include a grace period for the payment of amounts and expenses assumed by the company.
  • Reduce amounts owed (permanently or temporarily / fixed or staggered)
  • Include variable amounts
  • Modify the scope of benefits
  • Modify the term of contracts
  • Include bank, real or personal guarantees
  • Establishing the liability regime in the event of non-compliance

5. Instruments for renegotiation:

  • Communication to counterpart
  • Term Sheet
  • Termination of previous contract
  • New contract
  • Addendum to previous contract

6. Grounds for terminating, suspending or revising contractual obligations (restrictive and casuistic interpretation):

  • Doctrine of supervening impossibility of release– termination of the contract.
    The discharged debtor cannot be held liable for damages caused by the impossibility to perform.
    If this doctrine is applied, unjust enrichment must be avoided and the principles of good faith and fairness must be observed – the discharged debtor must return what was received to remunerate the unperformed performance.
  • Doctrine of extraordinary hardship / rebuc sic stantibus – review of the obligation
    Supervening alteration of circumstances leading to an imbalance in the performance of the parties under the contract

7. Throughout the process, due diligence should be exercised:

  • Avoiding social and individual liability of directors, officers and managers
  • Avoiding reputational damage and damage to business relationships
Complying with corporate obligations and adopting new resolutions
1. Possibility of holding board and shareholders meetings by telematic means.

2. Possibility of adopting resolutions by written ballot without a meeting

3. To analyse the adoption of new resolutions by the company’s bodies.
  • Approval, ratification or acknowledgement of specific controversial actions carried out during and after the crisis
  • Specific discharge during the crisis period
  • Modification of the strategic or business plan
  • Adjust annual budget
  • Approve new target and remuneration policies linked to the above adjustments.
  • Amendment of the by-laws to enable remote meetings
  • Granting of powers of attorney empowering the use of electronic signatures
Balancing the equity situation

1. Situation of imbalance of assets::

  • Insolvency (inability to meet payments)
  • Cause of dissolution in SA and SL – Equity < 1/2 Share capital
  • Obligation to reduce capital in joint stock company – Equity < 2/3 Share capital

2. Avoid liability of directors for – failing to convene a meeting within 2 months of becoming aware of the imbalance of assets (this period has been modified by the State of Alarm regulations) in order to:

  • Removing the cause for dissolution
  • Dissolving the company
  • Call for Pre-bankruptcy
  • Call for bankruptcy

3. Mechanisms to remove the imbalance of assets:

  • Capital increase:
    – by cash and non-cash contributions
    – by offsetting claims
  • Capital Reduction:
    – by offsetting losses
    – by setting aside reserves
  • Shareholders’ contribution (PGC account 118) – quick and easy mechanism that avoids notary and registry costs.
  • Participating Loan (considered as Equity for the purposes of measuring whether there is a cause for dissolution)
  • Corporate restructuring – can also be useful to reduce costs, separate business risks associated with each activity and achieve a better organisation that maximises the group’s profitability:
    – contribution of participations/shares in group companies
    – transformation into SL
    – merging
    – splitting
    – segregation
    – global transfer of assets and liabilities
  • Dissolution and liquidation (when faced with a decision to end a company’s activity, a good strategy can lead to a joint dissolution and liquidation – reducing time and associated costs)
  • Pre-concurso (3-month deadline for negotiating with creditors)
  • Arrangement with creditors (last resort)
Analysing the suitability of an acquisition
1. Analyse opportunities to sell or buy other companies (or relevant assets):
  • Contact advisors
  • Prepare sales/purchase booklet
2. Preparatory documents
  • Confidentiality agreement
  • Exclusivity agreement
  • Letter of intent
3. Analysis of the target company (due diligence)
  • Preparation and analysis of all company documentation
  • Sessions with company managers
  • Question and answer process
4. Preparation of transaction documents
  • Private purchase and sale agreement
  • Compliance with agreed conditions (authorisations, financing, etc.)
  • Closing of the transaction before a Notary Public
  • Adoption of corporate resolutions to change the owner of the company and its managers
5. In case of partial sale, drawing up of investment contract and between partners

This note is for information purposes only. Our comments, estimates and recommendations should not be interpreted from a financial, economic, technical or business standpoint. We have addressed the issues that we reasonably considered relevant. However, our criteria for considering material issues may differ from other criteria applied from a commercial or technical point of view. In deciding whether to take any action, we recommend that you do not rely solely on this note, which is not intended in any way to replace a thorough and comprehensive analysis of the terms and conditions of the relevant documents or circumstances.

Nothing in this note shall be construed as a representation or warranty given as to the current or previous status of the situations under discussion. West Oak Partners, its partners and associates assume no responsibility for the accuracy of any opinion or commentary or for any information provided in the note.