COVID-19 Raises Legal Pressures on Businesses

Business contracts and financial agreements may have hidden risks triggered by today’s pandemic. Curb those risks with a real-time review of your operating agreements and legal contracts. Here’s where to start.


As COVID-19 has spread in 2020, businesses in the U.S. have moved rapidly into crisis mode to navigate this unchartered territory. The untimely disruption to our business communities from uncertainties in the labor, financial and capital markets have all been largely unforeseen. 

Provisions for a pandemic of unknown size and duration are not typically found in business and financial contracts. This raises the stakes now as businesses and their legal counselors look to shore up their legal standing and capital channels against unforeseen risks.

It’s time for attorneys to consider and review loan documents, business contracts and succession plans on behalf of their clients to minimize any legal fallout that business clients face as the extraordinary circumstances unfold in response to COVID-19. Here’s a checklist of items for business attorneys to include in their risk abatement review.  

Credit Facilities and Loan Agreements. Have any of your business clients significantly curtailed their operations, or do they expect to suffer material financial results due to COVID-19? If the client has borrowed money under customary lines of credit or loan documents, review those agreements — especially the covenants section — to determine if the client is (or will remain) in compliance. 

For instance, a suspension of the business in the ordinary course may technically trigger a default under operative loan documents even though the suspension is only temporary. Will the business maintain the various financial ratios and other financial requirements that are commonly required in loan documents? A conversation with the loan officer may be advisable sooner rather than later to secure waivers or similar forbearance relating to these types of technical defaults.

Capital Raising. Is your business client in the midst of, or contemplating, raising money through the private or public sale of securities? If so, you may want to consider additional disclosures to investors regarding the impact of COVID-19 on your client’s business and its prospects. What constitutes a “security” is defined broadly under federal and state law and includes both equity and debt interests and instruments, such as stock, LLC membership interests, partnership interests, promissory notes, profit-sharing arrangements, etc. The Securities and Exchange Commission has recently published guidance on issues and matters to consider in connection with such offerings.

Entity Formations and Government Filings.  As a lawyer, you know that often in business transactions, the parties to such transactions form various business entities, such as corporations and LLCs.  At times, other government filings or consents may be required depending on the nature and size of the business transaction. Before rushing to set a closing date, it may be advisable to investigate whether the applicable government office is open for business or operating on a significantly delayed basis.

Delays in Contract Performance. Are any of your clients subject to contracts with customers that require them to meet certain deadlines or performance requirements? If yes, does the contract contain a force majeure clause that allows the client to claim relief from certain contractual requirements?

Employee Matters. Perhaps one of most difficult and looming matters is how a client handles the COVID-19 crisis with its employees, especially if furloughs, pay reductions and employment terminations have happened or are likely. Even if employee furloughs or layoffs are not in jeopardy, is the client’s business following best practices in ensuring the health and safety of its employees?

Business Insurance. Lawyers may want to remind their clients to check their insurance policies for possible business interruption insurance and consider that coverage is often conditioned on timely notice to the carrier of an insurance claim.

Business Succession. With respect to businesses owned by two or more essential owners, who will step in if circumstances require a business partner to step away from business operations? Now may be a good time to review your client’s governing documents (i.e. bylaws, operating agreement, partnership agreement, etc.) and any shareholder or buy-sell agreements relating to the business. Similarly, do your clients’ estate plans need updating? Estate plans should identify who will make financial (including business) decisions and medical decisions should a business owner become incapacitated as well as clearly specify who receives the business interest upon death. 

Trying times like now call for extraordinary oversight to curb risk factors that could crop up later. Going through this checklist may expose hidden risks and additional contracts and agreements in need of review and updating. 

— David Thayer, is a corporate and transaction attorney and former CPA with Jones & Keller. He can be reached at [email protected]This information is not intended as legal advice. Seek specific legal advice before acting.

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