“Antiviral” measures for business: recommendations of lawyers (Part 1)
Coronavirus: how can business cope with the rising challenge and keep working amid rigid quarantine, weak contractual discipline, a crisis of trust, underdeveloped electronic document circulation, absence of a digital notary services, and e-court? Spoiler: by resisting and meeting the challenge with head held high.
Any Ukrainian business with even a short history is immune to crisis phenomena. Planning of business continuity amid coronavirus pandemic and mass quarantine is a new unprecedented challenge even for robust companies. It is also new experience we will all gain to become stronger. With remote support for business processes as the main objective, work planning should be based on regulatory rules that may not only add complications but also be of great aid.
We hope, this unique crisis that has temporarily pushed us all into the virtual world will give a significant “kick in the pants” and launch various transformation processes in the state and in business, making them more resilient to turmoil of the material world.
We also hope that the situation will stabilize much earlier than all necessary “antiviral” measures and transformations can be implemented, which, however, will in no way diminish their value for the overall hygiene of the business environment.
Corporate governance from home: only critical solutions, “alternate” signatories, payments, and online fees
Business should make sure that its control and management bodies and its officials operate hassle-free during quarantine (temporary incapacity).
Large bureaucratic organizations and companies with advanced corporate governance systems are generally more stable in terms of their own governance. Other businesses need to make sure they are able to make decisions, sign contracts and other documents in the event when their CEOs are temporary unavailable. If your company's charter does not authorize the sole executive body to delegate its powers, you should introduce the following changes: the executive body should be authorized to issue PoAs for performing management functions and signing documents, these powers should be extended to other officials, and the executive body should be transformed into a collegial body. If your company has a two-signature rule (initial level of corporate control), you should understand who will back up both signatories and grant powers of attorney to their alternates: other employees in the corporate hierarchy and / or direct representatives of participants.
You should also make sure that all signatories have proper access to the client bank and can use this system. Last year, the obligation to submit notarized specimen signatures of the director and the chief accountant to the bank was abolished. Now the company may submit to the bank a list of persons authorized to manage the company's account, such list being prepared in the form established by the bank and signed by the company's director; the number of such persons in the list is unlimited (para. 9 of the Instruction on the procedure for opening and closing accounts of bank clients). Unfortunately, it is impossible to completely avoid physical contact with the bank: all designated persons should put their handwritten signatures in the list. If so prescribed in the bank's internal procedures, the bank may also require that the signatories make a personal visit to the bank branch. We recommend that you clarify the procedure for submitting a list of signatories even if you have recently passed the same, as the bank could have changed the rules for the security purposes.
No changes can be made in the EDRPOU without a notary in (new rules are effective from last November): the protocols to be submitted to the registrar (or notary registrar) must be executed on the notarized forms; documents must be submitted by the director or by a person acting on the basis of a notarized power of attorney granted by the director. In the near future, access to notaries may be restricted: the Notary Chamber recommends that they refrain from servicing citizens. Therefore, you are recommended to:
- Urgently carry out all necessary notarial actions
- Prepare for a scenario where it is impossible to make changes in the register, for example, to include signatories or change the composition of the executive body
- Find and check all powers of attorney issued before, and in case they are lost, dream about the times when powers of attorney will become digital
Dreams about digital powers of attorney are also shared by all notaries and employees of the Ministry of Justice who stay at home, considering the fact that a fundamental step towards so cherished digital notarial services was made through the Law “On Electronic Trust Services” adopted in 2017. If notaries had actively promoted the digitalization of their own services, they would be armed with qualified electronic signatures and seals today and could not care less about the quarantine.
Corporate rules and roles should not be changed in a hurry. It is important to keep calm and assess the needs in making legally significant decisions in the coming months, and to take into account that such decisions may become less needed due to the general slowdown in business activities.
No matter how limited or flexible the director's powers are, they are all subject to the rights of the supreme body of the company – the general meeting that, if necessary, may “serve” as the director. Of particular value today are the provisions of the Law on Limited and Additional Liability Companies that grant participants the right to hold general meetings virtually: via video conferencing that enables all participants of the general meeting to see and hear each other at the same time (Part 3 of Article 33 of the Law). Whatsapp, Skype, Zoom, Facebook Messenger and other popular services will work for this purpose. The law does not require that the company's statute expressly provide for videoconferencing; thus, it is a rule of direct effect. However, the possibility of holding general meetings via videoconferencing is not regulated by Law; therefore, it is advisable to set this procedure out in detail in the charter. Including the procedure for identifying attendees (“it was not me on this video!”), recording the conference, storing the files, and accessing participants (“I joined the conference, but do not remember what decisions were made”). The secretary has a crucial role in arranging for virtual meetings; this should be a person trusted by all participants. We would like to say “one of the business co-owners” here but we remember how numerous and furious corporate disputes may be. The virtual procedure should be clear and straightforward.
Alternative “old school” options for holding general meetings without unaccustomed technologies: remote voting (however, in this case participants will have to leave their homes or invite another old school guest home–who, as we remember, may decline the invitation–for notarizing their signatures) and polls (Articles 35, 36 of the Law).
Should it be improper time for convening a meeting but there are issues to add certainty about the future, the business owners (or other persons) may enter into a corporate agreement under which the members of the company undertake to exercise their rights and powers in a certain way, or to refrain from exercising the same (Part 1 of Article 7 of the Law on LLCs). Such agreement may be executed in a simple written form, independently of the notary.
Particular attention is required from business owners who, having no trust in anyone, still perform the functions of shareholders, directors, and chairmen of the supervisory boards, and who have put the building of corporate governance or usual leadership succession off “till better time” for years. An epidemiological crisis can be more serious than a crisis of trust. If there is no time for ideological and regulatory systemic changes (and there is none), it is recommended to grant the most trusted, closest persons powers of attorney authorizing them to dispose of equity rights and manage business. In the first case, the power of attorney may be irrevocable – it is a critical step that must be thoroughly thought out, especially if it is taken solely under the influence of current dramatic circumstances. Such power of attorney needs to be supported the abovementioned corporate agreement (Article 7 of the Law on LLCs). Another thing to be done is checking your will.
Agreements: reputation or force majeure
Being in litigation is getting more and more difficult whereas conducting a litigation at e-court is just impossible
In legal relationships, the terms “force majeure” and “fears of a large-scale failure to perform agreements” have become buzzwords in a matter of days. In our opinion, the fear of coronavirus here is combined with a general level of knowledgeability in legal issues and good faith in business. Therefore, the current period is first and foremost an opportunity for all civilized market players to confirm their high business reputation and contractual discipline.
The general advice is to communicate with counterparties, be flexible and open for negotiation to avoid bringing disputes to the courts. Even pre-trial disputes over the grounds for applying force majeure clauses should be resolved in a prompt and constructive manner. All resources must be used efficiently to counteract a common global problem.
Force majeure is a legitimate reason not to perform obligations and avoid liability for such non-performance. However, in most cases, honest counterparties will simply be unable to fulfill their obligations in due time; and force majeure clauses are not necessarily to be applied here. Mutually acceptable solutions may be found through proper communication, planning, and, if required, making flexible changes in the agreements to adjust the terms and other conditions of performing obligations. Even in the most vulnerable international trade contracts where supply chains have been disrupted in today's circumstances.
The formal advice is to check the force majeure clauses in your current agreements and assess their applicability. This is the case where comprehensive definitions must work. The Ukrainian Chamber of Commerce and Industry (the UCCI) has already announced its position: “The inclusion of such events as ‘epidemics’, ‘emergency’, ‘restrictive actions of the authorities’ strengthens the position; however, a party must prove that the coronavirus or related counter measures taken by the government are force majeure”.
As we know from our own experience, even comprehensive contract definitions do not usually include quarantine as a force majeure circumstance. According to Article 1 of the Law “On Protection of the Population Against Infectious Diseases”, the quarantine is an administrative and health protection sanitary measures that are used to prevent the spread of particularly dangerous infectious diseases. Given that quarantine was imposed by formal decisions of local governments and the Ukrainian Government, such decisions may reasonably be qualified as the abovementioned “restrictive actions of the authorities” or “normative acts, decisions, requirements of state authorities” that are included in the force majeure clauses. This Law defines an epidemic as a widespread occurrence of an infectious disease in a community on a certain territory at a particular time. However, as at the time of preparation of this material, neither the aforementioned quarantine decisions nor any other acts have declared an epidemic in Ukraine. We hope that all measures taken and our joint efforts will help avoid the worst scenario.
After all, if you are still determined to use the force majeure clauses in your agreements, you should:
- Prove (to counterparties, the UCCI, court) the cause-and-effect link between the ongoing events and how they may affect the agreements causing their breach.
- Timely inform the counterparty in the form established in the agreement. In practice, the notification period is a few business days and its method is not regulated at all, or is short-sightedly regulated in the general clauses of the agreement as “sending by registered or insured mail”. However, amid our “quarantine” force majeure, how in practice is it possible to draw up an urgent letter and arrange for the director to put his handwritten signature on it, and send it by traditional mail (especially if there are dozens or hundreds of counterparties)? Email may be an alternative practicable option; though only in case the parties have already stipulated this format of communication in the agreement.
- Quite often, the parties require that force majeure circumstances be confirmed by the Ukrainian Chamber of Commerce and Industry. The UCCI considers requests to confirm the occurrence of such conditions within at least seven business days for companies and 21 days for individuals (para. 6.7 of the UCCI Regulation). In addition, such requests must meet a list of the UCCI's relevant requirements. The Chamber is overloaded with such requests, which means it does not guarantee the desired result. Therefore, it should be envisaged in the agreement that the party exposed to force-majeure circumstances must, first and foremost, notify of occurrence of such conditions, and only after that, if required by the other party, apply to the UCCI for a certificate of its qualified opinion regarding the force majeure terms.
We are seeking precedents. Meanwhile, our attention was drawn to a long-standing economic dispute, in which the parties challenged the lawfulness of non-performance of obligations due to the moratorium on holding any mass events in Ukraine, established by the CMU Order No. 1152 dated 30 October 2009 “On Prevention of the spread of Type A influenza / H1IM1 / California / 04/09 and acute respiratory diseases among the population”. In view of the fact that the launch of the E-Court was (for good reason) postponed, now it is difficult to predict what new court practice will be like and when it will appear at all.
Electronic document management: paper documents can spread viruses; computer viruses are no longer so frightening
Even if all employees of the company work remotely, someone has to print, put signatures and seals, scan and send paper documents. This is a double health risk, because, on the one hand, someone has to break the quarantine, and, on the other hand, cash is dirty (not in the AML sense, but from the viewpoint of hygiene) and can spread viruses as it changes many hands. Have you ever wondered how many people hold your contracts and source documents?
Companies that have taken the plunge and switched to the electronic B2B document management (EDM) are now fully benefiting from digital transformation. They generate orders, manage supplies, conclude contracts, and issue invoices, using tablets and smartphones (via mobileID). No one stands by the printer – all you need now is a charger for your mobile.
Sadly, there is only a handful of such companies. Others deliberately lagged behind the progress or simply did not want to hear their own agents of change. There was certain rationale behind that: reasonable fears that the tax authorities would not accept or challenge the unusual electronic document. However, even these seemingly well-founded fears are paradoxical. After all, the government has fully switched to using EDM in most areas of dealing with business, particularly in taxation and customs affairs, providing almost no alternative channels.
To recap, the 2017 collapse caused by the Petya virus (just an ordinary computer virus and definitely not so severe) revealed that the law contained no mechanisms for taxpayers to file certain types of reporting in hardcopy, even under force major circumstances. To resolve this situation and enable business to file reporting within the deadlines, the Verkhovna Rada had to adopt a special law (No. 2143-VIII). With this experience behind it, the government is still unwilling to consider alternative ways of interacting with taxpayers apart from the electronic channels.
Business also has all necessary regulatory framework for EDM: the Civil Code that allows electronic transactions by exchanging emails, as well as the special Law “On Electronic Trust Services”, etc. So why delay? Nothing should be done in haste.
Digital transformation of business is a lengthy process. It requires a comprehensive assessment from many viewpoints including: legal, financial, technical, and organizational. It also needs awareness and assessment of new type of risks – cyber risks. If the fear of coronavirus is stronger than the fear of virtual threats, perhaps, it could give fresh impetus for a total transition to EDM
However, fear should not be a major driver of changes, especially long-lasting changes. This is exactly where the state should lend business a helping hand, immediately signaling of its support. To begin with, the government should guarantee that all contracts and source documents executed electronically in accordance with applicable laws within the quarantine period will not be challenged during further tax audits. And after that – just not interfere. Changes for the better will become inevitable.