The impact of COVID-19 has been dramatic and its legacy is likely to be lasting. The introduction of social distancing measures has disrupted how content can be produced in 2020.

Scripted productions have been suddenly suspended, so too have sports and live events. Even those shows that have kept on the air have had to drastically rethink their way of operating with stripped back productions, crew numbers being kept to a minimum, and presenters and panel members appearing from their own homes to observe social distancing and self-isolation measures.

As a result of these changes independent production companies across the board are finding their revenue flows being severely disrupted and finding themselves in financially precarious positions.

This article looks at some of the things directors of such companies can do to help alleviate the financial pressures from a legal perspective and some of the other legal issues those directors should be mindful of in the challenging months ahead.

Contracts

In this COVID-19 landscape with timetables disrupted it may be that contracts containing obligations that seemed feasible in February 2020 can no longer be met.

Breaking a contract can be costly for a company if the counter-party takes legal action. There has been much discussion in the legal world about the concepts of ‘force majeure’ and ‘frustration’ in light of the COVID-19 outbreak. These could temporarily suspend or terminate a contract because of an event outside of the parties’ control.

These legal concepts may be useful to some companies in relation to key contracts or where a counter-party does not agree to an amendment. However, whether they will apply will depend on the wording of the contract and, in the case of frustration, the obligations to be performed under it, so invoking such clauses requires particular care.

Amending contracts

For most contracts, parties are likely to look to the simpler route of amending the contract to avoid a breach. The basic requirement for varying any contract is to look at the underlying contract and see what it says about how changes can be made.

In most cases all the parties to the contract will need to agree to any amendments although occasionally the contract may provide for unilateral variations or, where there are multiple parties, for a certain number of those parties to agree. Whatever the threshold is for variation, then this must be followed to ensure the variation is effective.

Similarly contracts often provide that any variation will need to be in writing and signed by the relevant parties.  Without this provision, variations to most English law governed contracts may be made orally. However, it is generally recommended that, even in cases where oral variation is permitted, some sort of written record of the variation is made and exchanged by the parties to ensure that it is clear what the revised terms are.

In addition to the formalities in the contract there are some legal formalities to be complied with including the requirement for the amendment to be backed up by consideration with both parties providing a benefit, or something of value, to the other.

If there are any issues or question marks over whether consideration is being provided by one party, consider executing the document as a deed or including a nominal payment being made by that party.

Alternatively if one party is simply giving up a contractual right (whether permanently or temporarily) then the most appropriate solution may be a waiver. A waiver does not need any consideration to be given by the party giving up their contractual right.

Which contracts may need to be amended or require a waiver?

Whilst commercial contracts may be front and centre of many people’s mind there are other contracts that could require amendment in light of COVID-19.

• Employee / freelancer contracts

Whilst there are some outstanding questions about how the Government’s Coronavirus Job Retention Scheme operates, when it comes to freelance contracts seen in the TV and film sector, it is apparent that across the industry producers are taking advantage of the scheme and placing employees or freelancers on PAYE on furlough.

Other companies, for whom furlough has not been possible due to the ongoing need for those individuals, have looked to change the hours or salaries of their staff to reduce overheads. Any reduction in a freelancer’s or employee’s salary or hours (including placing them on furlough) will be an amendment to that individual’s contract and so any prudent employer should ensure that such changes are agreed in writing with clear terms for the new arrangements.

• Financial and shareholder covenants

Any production company that has previously received investment or any sort of financing may be bound by covenants that the company must adhere to. However, current circumstances may mean that such covenants are likely to be breached. It will be important over the next few months for directors to reacquaint themselves with their shareholder agreements and financial facilities. They should talk to their investors/lenders at an early stage to lay the groundwork for any amendments or waivers that might be required as COVID-19 restrictions impact their business and its financial position.

• Earn-outs and call options

For management who have recently sold their business, the economic impact of COVID-19 may cause problems if an ‘earn-out’ was agreed so that part of the purchase price will only be paid if the company meets certain financial targets. Similarly COVID-19 may impact founders who have previously taken investment with their remaining shares subject to call options with the price for those shares being based on the financial performance of the company.

Accordingly, it may be appropriate for founders to re-visit and seek advice on the terms of the sale or investment agreements. In particular they may consider:

• whether there are any specific accounting policies that founders may rely on to bolster the company’s financial performance and reduce the financial impact of COVID-19. For example, can exceptional, abnormal or one-off costs (e.g. staff redundancies) be removed from the calculations?
• whether it would be appropriate to re-negotiate the deal, on the basis that if founders receive a significantly reduced payment, there may be a real lack of incentive to drive business forward and create value for the purchaser/investor. Founders may consider if they could benefit from (and if the purchaser/investor would agree to):
  • an extended earn-out/option period: once COVID-19 has run its course and markets have stabilised, there may be an opportunity for companies to trade back to strength; and/or
  • delaying the start of the earn-out/option period: this may benefit founders who sold their businesses or received investment very shortly before the escalation of the pandemic.

Directors’ duties

Directors owe general duties and responsibilities to the company of which they are a director. A central duty is that directors must act in the way they consider would be most likely to promote the success of the company for the benefit of its shareholders as a whole.

However, where a company is in financial difficulties, the directors’ duty shifts so they are required to act in the best interests of the creditors of the company.

Whilst directors should ensure that they maintain standards of good governance at all times, this is particularly important where a company is experiencing financial difficulties. Keeping a record of the key decisions of the directors and the rationale behind them (in particular how those decisions will look to build the long term success of the company and protect creditor interests) will be important if, for any reason, those decisions are subsequently examined. Directors should also consider having Directors and Officers insurance in place to cover them over this period.

Directors of companies in financial difficulty should also be aware of the wrongful trading regime under which directors may find themselves personally liable if they allow the company to continue to trade after a point where it was obvious that the company could not avoid insolvency.

The Government has proposed that these provisions be temporarily suspended until the end of May 2020 to give directors comfort that they can continue to trade even where it is not clear that the company can meet its outstanding liabilities as they fall due.

However, as the detail around the relaxation of these rules has not yet been provided by the Government, directors should still be cautious in continuing to trade. They should continue to record their decisions and reasons for them to help minimise any criticism of their actions down the line.

Finance and insurance

Whilst minimising outgoings will be key to the survival of many businesses over the next few months, with productions at a standstill, and many costs continuing, it may be that further finance is required for some production companies.

Production companies with a friendly existing investor, where the structure of the investment provides a loan facility to cover working capital costs, may be able to draw on or negotiate an increase in that facility. Others may need to look to other lenders including the Government’s coronavirus business interruption loan scheme to provide extraordinary finance (although we note there has been wide scale criticism of the ease and speed of access for loans under this scheme).

It may seem an obvious point, but it also is worth checking the company’s insurance coverage to see to what extent the company is able to claim for losses arising from the COVID-19 outbreak. The ability to claim will depend on the terms of the relevant policy but it would be worthwhile for directors to check whether the company may recover any losses under their insurance policies.

If you would like any more information about the issues discussed above, or would like to chat through any legal issues you are currently facing, then please do get in touch with any of our TV and Film team.