The Celtic Manor in Newport, South Wales, has an illustrious recent history, playing host to the Ryder Cup in 2010 and a NATO summit in 2014. The meeting of world-leaders saw the surrounding area temporarily locked down for security reasons. But when a nationwide lockdown was imposed earlier this year, the resort faced a new challenge. It had to pivot to keep some cash flowing into the business. Instead of trailing high-profile events, its billboards advertised a new "Celtic at Home" offering: luxury afternoon tea or evening meals available for collection.
As the situation changed over the months that followed, the messaging on advertising hoardings moved on: in the summer it offered "staycation" packages in the summer for those unable or unwilling to travel abroad. More recently, it has proclaiming "Hello Neighbour", with offers and health club packages for Newport residents under local lockdown.
Businesses across the country have been forced to take a similar approach, switching their target customers and their core offering, sometimes dramatically. The urgency of the situation has meant that these major business decisions often need to be taken quickly, putting huge pressure on those in charge to get it right.
Hindsight is 20/20
But what happens when the pivot does not work out as hoped? Decisions taken in the heat of the moment may be more difficult to justify in the cold light of day to shareholders who have lost some, or even all, of their investment.
Shareholder disputes are a particular risk when it comes to recapitalisation. Government-backed lending has been a lifeline for many, with more than 1.3 million businesses accessing a combined total of more than £58 billion. Along with other private debt, it is estimated that there will be around £70 billion in unsustainable debt by the end of March 2021.
One option will be to seek to convert some of this debt to equity, joining those companies which have already issued additional shares as a way of bringing much-needed capital into the business. Not every shareholder, though, will agree with the dilution of their holding.
Commonly, a company's articles of association will contain restrictions on new share issues, either for new capital or through the conversion of existing debt. And for many companies faced with raising new capital in the current environment, it may be necessary to encourage new investment through the introduction of new classes of preferred capital, giving incoming investors a preferential position over existing shareholders. This will almost invariably require modifications to existing capital structures and share rights through amendments to the articles, requiring shareholder approval and potentially consents from existing classes of shareholder. Failing to observe the protections afforded to existing shareholders – either contractually or as a matter of law – could leave the company open to a claim and, potentially, the unwinding of the new share issue.
Even if majority shareholders push through changes to a company's constitution using their existing voting powers, company law requires that those powers are exercised in good faith for the benefit of the company as a whole. Taking action that is to the economic detriment of certain shareholders may be wholly justifiable, but not if the purpose is to oppress the minority shareholders for the benefit of the majority or is otherwise unjust.
Obvious at the time
Unpacking the competing interests and purposes behind company decisions can prove extremely difficult, particularly if, as so often happens under pressure, critical choices are not properly documented. At the time, the rationale behind a switch in commercial focus or need for additional equity may have seemed obvious, but can the company prove that the different options fully modelled, and that the assumptions underlying the projections were robust?
Attention inevitably turns to the conduct of meetings and stakeholder consultation. It may have been necessary to hold meetings at shorter notice, and through more informal means of communication, than may technically be required. But an aggrieved party may try to rely on this as evidence of an attempt to circumvent their interest.
With evidence of intention often being both crucial and sparse, one potential advantage of virtual meetings is that they can be easily recorded – providing a much fuller and more colourful record than board minutes. It is worth considering use of this function for meetings in which key decisions are being made. Bear in mind, though, that those recordings, along with any instant messages and other electronic communications that have replaced in-person conversations, would likely need to be disclosed if a dispute later arose.
Manage the risks
Experience from the financial crisis and other downturns tells us that decisions taken in the immediate aftermath of a crisis can leave a long tail of corporate disputes. Company directors and legal teams need to be alive to the heightened risk and act now to mitigate those risks. The following practical steps are a good starting point:
- Understand your duties. Directors owe a number of statutory and common law duties, including the duty to promote the success of the company and the duty to exercise reasonable care, skill and diligence. The law is not there to second-guess decisions just because they do not pan out as intended. But it is important to ensure, for example, that shareholder/directors are acting in the interests of the company as a whole, and that directors are up to date with the changing regulations, for example around trading, workforces or government schemes.
- Check the company articles. Before decisions are taken, particularly those that may adversely affect certain shareholders, check the rights that attach to different classes of shares, procedures required for holding meetings and the rules around voting on matters on which a director may have an interest. Consider whether it is necessary, and possible, to ratify any actions that have already been taken.
- Document decisions. Actions that seem entirely rational at the time can be more difficult to justify in hindsight. Record clearly the reasons taken for important decisions and ensure that calculations, communications or other documents on which those reasons are based are preserved. Ensure that key documents are readily accessible in case they need to be provided in the event of a dispute, insolvency or request for information from an authority.
- Resolve disputes early on. High Court litigation is invariably expensive, time-consuming and distracting for senior management who should be concentrating on running the business. Corporate disputes tend to carry a number of uncertainties, from the evidential to the challenge of establishing the loss that may have been suffered. In smaller companies in particular, disputes often involve heightened emotions that pose an additional barrier to reaching resolution. Often, the best way to head off a full-blown dispute is for the parties to engage from the outset in a meaningful way and acknowledge each other's aggravation; simply pulling down the shutters and hoping it will blow over is not an effective strategy.
If you would like to discuss how we can help you to understand and manage your risks, please contact one of the experts named below, or your usual Osborne Clarke contact.