Economic Fluctuations: Are You Ready?
After more than two turbulent years of a pandemic, global geopolitical conflicts, a serious economic downturn followed by a series of record rebounds in public and private financial markets, the business community has had to adapt its risk management repeatedly through these exceptional situations. In this context, companies face and will continue to face major challenges.
To help you easily adapt your business practices, better understand the legal consequences of the economic situation on your business and make informed decisions, Fasken has developed the guide "Preparing your Business for Economic Fluctuations", which answers your main questions. This guide explains key elements to consider in your strategic planning or in the ordinary course of your business.
Looking to the Future
To help you to navigate more wisely in this context, we have identified seven main themes that are presented as questions:
- How can you manage future interest rate fluctuations?
- What are the impacts on public companies and their boards of directors?
- Mergers, acquisitions and capital markets: what are the legal considerations in a context of economic fluctuations?
- How can you adapt your contractual arrangements to the economic situation?
- How do you optimize your real estate leases?
- Is it essential to protect your intellectual property during this period?
- How do you build labour and employment relationships in a hiring freeze?
01. How can you manage future interest rate fluctuations?
As a further attempt to curb rising inflation, the Bank of Canada raised its key interest rate for the sixth consecutive time, to 3.75% as of October 26, 2022, representing a 14-year high.
Business managers may not realize it, but interest rates have a significant impact on their activities. It is important to keep a close eye on these trends.
- Existing variable rate financing, including the amount of interest paid, will become more expensive.
- As a result of rising interest rates and a potential decrease in earnings due to the current economic environment, companies may find it more difficult or may no longer be in a position to comply with the financial ratios required under their loan agreements
Advice From Fasken Legal Professionals
- Review the terms and conditions of your loan agreement. Specifically, you will want to determine whether, after giving effect to the interest rate increase and your financial projections, you will still be able to comply with the financial ratios required under your agreement.
- If a company does not expect to comply with the financial ratios required under its loan agreement, the company should contact its lender. The earlier the lender is notified, the easier the negotiations will be.
- Explore the possible options with your lender. The lender may, instead of recalling the loan and exercising its remedies and recourses, agree to tolerate the failure to comply with the financial ratios for a certain period of time. This tolerance period will provide the time needed to agree on revised terms and conditions for the credit agreement that are more flexible and suitable to the company going forward. These revised terms and conditions could include, among other things, the suspension of principal repayment for a certain period of time. In exchange for this tolerance, it is not uncommon for a lender to charge certain additional fees, including higher interest rates.
- Companies may also consider refinancing their current loan to implement an asset-based financing, if necessary. This type of financing typically imposes fewer financial ratios compared to a more traditional corporate financing.
- Companies with variable rate financings may also consider entering into an ISDA contract with financial institutions to fix all or a portion of their interest rate exposure on their borrowings.
- To the extent that an increase in interest rates threatens a company's ability to repay its loans, the company may consider setting up a protection plan under insolvency laws. This solution would obviously require prior consultation with professionals.
02. What are the impacts on public companies and their boards of directors?
Rising interest rates and increasing geopolitical tensions are putting downward pressure on markets and the value of public companies, making them potentially more vulnerable to an unsolicited bid or proposal.
Advice From Fasken Legal Professionals
What should executives and the board of directors do?
- Plan your strategy now. In the event of an unsolicited offer or proposal, make sure you have the right tools to respond.
- As a board of directors, you are required by your fiduciary duties to assess any offer or purchase proposal received. When an unsolicited bid or proposal is made, your duties don't change: you must make your decisions in the best interests of the company and its stakeholders, including shareholders. In doing so, you must consider the long-term interests of the corporation. More precisely, the process involves comparing the benefits of the company's long-term business plan with those of the bid or proposal received.
- When considering an unsolicited bid or proposal, you must adopt the best corporate governance practices and implement a rigorous process to properly discharge your duties, which may include establishing a committee of independent directors and the hiring of legal and financial advisors. Having strong corporate governance before a bid or proposal is even made is a major asset for your company and your board of directors
- If the unsolicited bid or proposal is made public, communications with your employees, suppliers and clients will need to be handled carefully and mindfully. This critical period, between the announcement of the offer and the shareholders' vote, if any, during which public relations, shareholder communications, regulatory approvals and other legal considerations come into play, requires effective and informed oversight by the board and management.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.