Legal Options for Israeli Companies Operating in the U.S.
COVID-19 has had an enormous impact on business relations around the world. This article specifically considers Israeli-founded companies with contracts governed by U.S. law, or that have business operations or assets within the U.S. While every company needs to take steps to conserve cash and cut costs and cash expenditures, the legal implications of such actions must be carefully planned to avoid pitfalls.
To this end, the review of written executory contracts, in light of the current crisis, should be conducted by counsel familiar with the governing laws. Although the legal system in Israel often tends to be more flexible and concerned about obtaining a “just” or equitable outcome, courts in the U.S. tend to be less inclined to stray into equitable principles. Instead, they impose resolutions that strictly conform to the terms of the contract and established law.
In light of the COVID-19 pandemic, force majeure clauses, which are common in commercial contracts, must be carefully reviewed. Force majeure clauses excuse non-performance when “acts of God” or some other extraordinary event happens, which prevents a party from meeting its obligations. Nevertheless, invoking the protection of such a clause is often not automatic, and its benefit can be lost altogether if notice or other contractual requirements are not met. Ultimately, a court or arbitral body will determine whether COVID-19 qualifies as a force majeure event under the wording of a given contract. If COVID-19 is deemed to be within the contract’s definition of a force majeure event, then consideration must be given to what degree the non-performance could have been mitigated or even prevented.
Where there are no contractual provisions regarding what conditions must exist to excuse performance, state law will determine which defenses are available for a claimed breach. These may include impossibility or impracticability of performance or frustration of purpose, depending on the state. While New York does not accept impracticability as a defense to performance, California does. In light of the severe harm to the economies of all the states, it is not unreasonable to believe that there will be calls for courts to liberalize these standards.
Even if a contract expressly includes “pandemic” as a force majeure event, it will not necessarily excuse all performance, and in any event, will require the restoration of performance as soon as practicable. The broad range of actions taken by the various states to lock down their economies or to allow them to continue will factor into any evaluation, as will any steps that were taken by the party seeking to excuse its performance.
Companies must continue to closely monitor developments in this area closely and how they may impact performance under any contract. They must take all reasonable steps to minimize any harm, including considering securing alternate sources of supplies, performing work remotely and determining whether any of its obligations can be transferred to locations without as many restrictions.
Companies that have a presence in the U.S. or that have assets there should also consider, in some instances, the potential benefits and protections provided by the bankruptcy laws of the United States. Filing a reorganization petition under Chapter 11 allows a company to maximize its value, preserve assets and weather what is hopefully a limited crisis. (See 11 U.S.C. § 109). A significant benefit of bankruptcy is the “automatic stay” of all creditor actions, including pending or anticipated lawsuits, foreclosures, bank levies, and other collection activities with certain exceptions. It also is effective against creditor actions taken outside of the United States. Companies also must understand that their counterparties may also seek protection under the bankruptcy laws and will need to understand their reciprocal obligations.
Although a Chapter 11 filing has a reputation for being time-consuming and extraordinarily expensive, it need not be either if it can be accomplished with a prepackaged Chapter 11 petition (a “pre-pack”).
A pre-pack is one in which a company in financial distress can come to an agreement as to the terms of its plan with its key creditors and receive consents before filing for bankruptcy protection. As compared to an unstructured or “free-fall” Chapter 11 case, the time spent in bankruptcy is significantly shorter, substantially less expensive, and the ultimate successful exit can be determined with greater certainty as to the outcome. Moreover, because the consents to the plan are obtained before filing, it is less likely that existing management will lose control.
It should note that because such plans often involve the issuance, cancellation, or exchange of securities, the anti-fraud provisions of the Securities Act would apply to disclosures which are made regarding any solicited vote.
Compared to an out-of-court restructuring of debt which usually requires unanimous consent, in a pre-pack, notwithstanding any requirements of the controlling debt documents, if the debtor need only obtain the consent of 50% of the number of creditors and two-thirds of the dollar value of the of the debt by voting members of each class, then minority dissenting class members can be bound by the plan. (See 11 U.S.C. § 1126(a)).
Although a pre-pack may take time to accomplish, the widespread nature of COVID-19 will cause many creditors to fear that they will recover little, if anything, in a Chapter 7 liquidation, and can be a desirable option for otherwise reluctant creditors.
The alternative to a pre-pack is a free-fall Chapter 11, where the resolution of a company’s debt is determined in the bankruptcy process. Although more costly, and time-consuming; when advance agreement of creditors cannot be obtained, and the business is otherwise sound, the delays which will likely result from an anticipated period of protection from creditors, can provide an extended period of protection and possibly encourage creditors with their own financial concerns to accept a less generous plan.
The various options available to organizations are vast and need to be selected and tailored to each firm’s specific situation.