March 23, 2020

Drawing Down Your Credit Line? You’ve Got Plenty of Company

As forecasts of the economic impact of the Covid-19 crisis become increasingly dire, it looks like many companies are taking a page from the financial crisis playbook and drawing down their credit lines to provide a liquidity buffer. Here’s an excerpt from this FEI newsletter:

Drawing down credit lines has become the cash-flow salvation for senior-level financial executives that have seen revenues come to an abrupt halt because of the coronavirus outbreak. Over the past week draw downs shot up with both public and private companies joined the line for liquidity. Public Fortune 500 companies like Boeing Co. and casino operator Wynn Resorts are reportedly tapping their credit lines to the tune of $13.8 billion and $850 million, respectively. Private companies are also joining the scrum, with PE firms Blackstone Group and Carlyle Group each urging their portfolio companies to draw down their credit lines to avoid a cash crunch.

The article notes that so far, banks have been accommodating these draw downs with help from the Federal Reserve, which has opened the liquidity spigots – and it says that so long as the Fed continues to provide funding, the banks are likely to continue to lend.

Annual Meetings: NY Temporarily Permits Virtual-Only Meetings

Some states, like Delaware, provide a lot of flexibility to companies that want to hold virtual annual meetings. But there are a number of states that either prohibit virtual meetings, impose impediments to them, or have provisions in their statutes that make the permissibility of such meetings unclear.  New York falls into this latter category, as this excerpt from a recent Sullivan & Cromwell memo points out:

New York’s Business Corporation Law (“NYBCL”) does not expressly provide that a meeting of shareholders may take place solely by remote communication, although Section 602 of the NYBCL allows a board of directors, where authorized, to implement reasonable measures to allow participation and voting at shareholder meetings by electronic communication. (A bill seeking to amend Section 602 of the NYBCL to expressly permit virtual-only meetings is currently pending.) The NYBCL also specifies that a company holding a shareholder meeting by virtual means must provide between 10–60 days’ advance notice, and such notice must include logistical details of how shareholders can participate in the meeting.

Sullivan & Cromwell now reports that late last week, in response to the Covid-19 crisis, NY Gov. Andrew Cuomo signed an executive order temporarily permitting New York corporations to hold virtual annual meetings. This excerpt summarizes the order:

The executive order provides that the Governor temporarily suspends subsection (a) of Section 602 and subsections (a) and (b) of Section 605 of the New York Business Corporation Law (“NYBCL”) “to the extent they require meetings of shareholders to be noticed and held at a physical location.”

Although the executive order suspends certain aspects of the meeting notice requirements under Section 605(a) of the NYBCL relating to a physical meeting location, companies incorporated in New York remain subject to all applicable shareholder notification and disclosure requirements under their governance documents, federal securities laws and stock exchange listing rules.

While the governor’s action will help New York corporations (at least through April 19th), another major jurisdiction with some funky provisions in its statute relating to virtual meetings has yet to provide its corporations with any relief – I’m looking at you, California.

Covid-19 Cash Crunch: Rethinking Dividends

The suddenness of the Covid-19 crisis has left many companies rethinking their liquidity needs. Those that declared a cash dividend before the crisis hit but haven’t yet paid it may be reconsidering whether that dividend is still a good idea. The problem is that there are several Delaware cases holding that once a company declares a dividend, it creates a debtor-creditor relationship between the company & its shareholders.

This recent memo from Morris Nichols, Richards Layton, Potter Anderson & Young Conaway provides some guidance on alternatives that may be available for companies that find themselves in this position. Here’s a suggestion for companies with record dates that haven’t yet passed:

If the record date for determining stockholders entitled to receive the dividend has not yet occurred, the board may determine to defer the record date and payment date for the dividend. The DGCL does not prohibit changing a record date or payment date that has not occurred. Accordingly, subject to any requirements under the certificate of incorporation, such as those relating to required quarterly payments of dividends on preferred stock, where the record date has not occurred, a board could change the record date and payment date for a dividend that has already been declared to a future date, so long as the payment date occurs within 60 days after that new record date.

The memo also points out that, even if the record date for the dividend has passed, there may be constraints prohibiting its payment. If the board is unable to determine that, at the payment date, the corporation has sufficient “surplus” (as defined in the DGCL) available to pay the dividend, or if the board believes payment of the dividend would leave the corporation insolvent, then Delaware law would prohibit the payment of the dividend.

Tomorrow’s Webcast: “Activist Profiles and Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.

John Jenkins