The eurozone crisis and the fallout taking place in Greece are keeping Europe on edge. An increasing number of analysts anticipate a new recession. Perhaps you, too, are wondering how the situation will affect your business, especially your international contracts.
Below is a short outline of potential issues that we think are
relevant. We have approached these issues from the perspective of
doing business, or planning to do business, with foreign parties
that run a higher than average risk of being "hit" by the
current economic situation.
Potential issues
Due Diligence
Where M&A transactions are contemplated, it is advisable to
assess the target's risk to material exposure as part of the
due diligence process. This could, for example, be the case where
the target party has entered into agreements that might not be
fulfilled if the situation in the eurozone worsens. The target may
also have assets where the value may be affected by a worsening
situation. It is appropriate to adjust your due diligence
questionnaire – and contract review procedures - to this
eventuality.
Price
If a country leaves the eurozone, debts payable in that country
may have to be redenominated to the new national currency. It is
conceivable that an unfavourable compulsory exchange rate would be
chosen.
Consider stipulating the following in relevant documents:
- payments should always be made in euro (not in the newly-adopted national currency)
- payments should be made in a country unlikely to withdraw from the eurozone
- the agreement should be governed by the laws of a country unlikely to withdraw from the eurozone, and disputes should be resolved by the courts of that country
- if, despite the above provisions, your debtor is likely to pay in a different currency:
- your company may terminate the agreement and seek early payment of its claims
- agreements with a fixed interest rate should stipulate that the interest will be adjusted (increased) to the market level (the agreement should outline how this will be done)
- agreements with a variable interest rate should stipulate which reference interest rate will replace the previously agreed-upon reference interest rate (often, EURIBOR of EUROLIBOR)
- your company must be indemnified for any exchange loss between the moment of conversion in accordance with the prescribed exchange rate and the moment of payment.
Payment / security
In business-to-business situations, productive supplier credit is regularly used. As a selling party, it is advisable to closely examine your company's policy and consider tightening the terms under which you extend credit. Examples include: shorter payment deadlines, tighter control on collecting outstanding debts, higher and perhaps rising interest rates, and smaller shipments.
Suppliers can obtain additional security by including extended
retention of title in supply contracts, i.e. title to the supplied
goods is retained until they have been fully paid for. Please note:
the often mandatory rules on retention of title may vary
considerably by country/jurisdiction and affect the parties'
contractual arrangements.
There are, of course, other types of security, such as requiring
letters of credit, bank guarantees, suretyship, or joint and
several liability.
In addition, many forms of export credit insurance are offered
in the market. This type of insurance protects the supplier against
the risk of a debtor defaulting on its payment obligations. If this
situation occurs, ensure that the insurer receives timely
notification of a debtor's failure to pay on time.
Buyer credit may be used if your company buys under supply
contracts. To limit your risks, it is advisable to assess if, and
how, buyer credit should be agreed upon, and to build-in sufficient
security, e.g. by stipulating a bank guarantee or by taking out
advance-payment insurance.
"Subject to financing'' clause
In the current economic climate, contractual parties may invoke
an agreed-upon "subject to financing" clause sooner. This
raises the question whether it is advisable to agree on such a
clause at all, given the associated uncertainty. In your agreement,
consider stipulating what effort must be made by the other party to
obtain financing. For example, what is the minimum number of
lenders that must be approached and what are the terms under which
financing has to be accepted?
Unforeseen circumstances / MAC
In times of economic adversity, contracting parties regularly aim for the amendment or termination of agreements based on "unforeseen circumstances ". Such amendments or terminations of contracts can have an adverse impact on the other party. To avoid any disadvantages/risks beforehand, it might be sensible to outline what constitutes "unforeseen circumstances " in the contract. Bear in mind that Dutch law does not easily recognise unforeseen circumstances that would justify amendment or termination.
In this context, M&A contracts often use a MAC clause
(Material Adverse Change). In purchase agreements, the MAC clause
is normally a condition to closing. When the condition is
fulfilled, the purchaser may postpone the completion of the sale or
terminate the purchase agreement. The clause describes what
constitutes a MAC and what events form an exception to the MAC. It
can be useful to review the scope of MAC clauses in existing
purchase agreements with a view to the potential crisis scenarios.
In ongoing negotiations about a MAC clause, it could be appropriate
to incorporate the potential effects of the euro crisis, depending
on your position (buyer or seller).
Jurisdiction and governing law
By choosing the laws and a court or arbitration forum of a country with a strong economy, you limit the chance that your intentions, as incorporated in the agreement, will be deviated from as a result of circumstances that are specific to a weaker economy.
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.