This article appeared in the April 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.
As the COVID-19 outbreak has worsened, at least 48 states, including Michigan, have declared states of emergency. Many states, including Michigan, have also issued shelter-in-place or similar orders significantly restricting manufacturing. The momentum and breadth of the Michigan quarantine measures are taking their toll upon manufacturers and causing significant business disruption and decreases in revenue. The purpose of this article is to provide manufacturers with a list of short-term financial and legal strategies that could help minimize the impact of these unforeseeable circumstances, as well as enhance long-term viability.
If a manufacturer’s business is completely or substantially disrupted by the quarantine measures, the first order of priority is to calculate and project the company’s cash position. The second task is to determine how the company is going to use that cash. For example, are there critical vendors the company needs to pay, essential employees that need to remain working or health insurance commitments? Third, manufacturers should consider which cash outlays can be renegotiated, extended, or spread out. Of course, review of the manufacturer’s contractual obligations is recommended before navigating down this path to avoid a breach of one or more material terms. And, a review of critical contracts will further place parties in a better position to negotiate modifications of existing terms. When managing cash, manufacturers faced with the prospect of laying off employees (or even if layoffs have already occurred) should carefully consider whether the new legislation offering tax credits or SBA loans is a better option.
Another short-term strategy is to consider whether it is appropriate to send out notices of force majeure or impracticality to customers. More specifically, manufacturers that cannot operate due to the State’s Executive Order should review whether performance under their existing contracts is excused. The analysis is fact-intensive and dependent upon the choice of law and contract language, among other essential factors. Legal counsel should assist with this assessment. Of course, if there is later a dispute as to force majeure, a court will make the ultimate determination of whether conditions existed. However, there is a basic principle: courts will hold parties to the contracts they made, and force majeure or impracticality of performance is an exception to that rule, excusing performance in whole or in part, forever or for a limited period, under its terms.
If these short-term strategies do not create the financial stability necessary to sustain operations during the current crisis, bankruptcy may be an option to preserve the business. Chapter 11 bankruptcy provides a company with a breathing spell from creditor lawsuits and judgment collections. Under certain circumstances, this breathing spell can be used by a manufacturer to preserve jobs and value, create stability, restructure the balance sheet, and shed burdensome contracts and leases. While there are many benefits to bankruptcy, it is also expensive and can have a negative stigma. A qualified professional can help an organization determine whether Chapter 11 bankruptcy, or another restructuring option, is the most beneficial resource available to the manufacturer.
In conclusion, preparing and implementing a strategy to address the COVID-19 global crisis that focuses on short-term financial stability will enhance the long-term goals and viability of Michigan manufacturers. There are any number of opportunities and tools to utilize. Long term success will depend on having strategic leaders at the helm during a crisis like this one, not just winging it, but analyzing options and devising a short-term financial strategy and plan to navigate safely through this storm.
Clark Hill PLC is an MMA Premium Associate Member and has been an MMA member since February 1908. Visit online: clarkhill.com.