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The COVID-19 Impact on Startups and Investors

by | Mar 20, 2020 | General Counsel



Since the World Health Organization (WHO) declared Coronavirus (COVID-19) a pandemic, a global economic downturn is the world’s major concern today. As the virus continues to spread across the world and people and businesses are restricting their travel and large business events, young startup companies and investors are reacting differently to the turmoil surrounding the COVID-19 virus. It’s a difficult time for founders of early stage startups that just launched their first product to keep business growing. Silicon Valley’s top VCs are advising their startups and portfolio companies to prepare for troubled waters, especially for startups that need fund-raising urgently. They recommend conserving cash and spending less, and to brace for a possible uncertain fund-raising environment. Moreover, they recommend that founders should have at least two years of runway and raise funds, if possible. However, startups in some sectors are witnessing a sharp increase in business. Videoconferencing firms, for instance, are adding hordes of users as companies conduct meetings online. Gaming, streaming and online education content providers are all reporting a significant increase in users and time spent on their platforms. On March 4, 2020, the Securities and Exchange Commission (SEC) announced that it is providing conditional regulatory relief for certain publicly traded companies filing obligations under the federal securities laws. The impacts of the COVID-19 may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions. To address potential compliance issues, the SEC has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1, 2020 and April 30, 2020. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances. The SEC may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Legal Aspects Due to the current circumstances, many of the institutions are seeing their assets hammered. A significant impact on the financial market leads to the potential disagreement between startups and investors. Investors facing unstable financial situations and unprecedented disruption are struggling with the issue of whether they still need to meet their contractual obligations or their performance may be suspended or excused. Almost all contracts include a force majeure clause that relieves contractual parties of their obligations if performance is frustrated due to some unforeseeable event beyond the parties’ control. There are other doctrines under US law such as the frustration of purpose or impracticability or impossibility of performance, which may apply in certain circumstances. Every contract is specific, and to decide which clauses are applicable for a definite situation depends on the particular terms and conditions of the agreement. Force Majeure– it describes any event that is unexpected by all parties, not caused by any party, and affects the relationship between them, limits the ability of either to perform a duty or requires one to intrude on the privilege of the other. Contracting parties may use a “force majeure clause” to indicate that a party owes no liability to the other in the event such force majeure makes performance impossible. Force majeure may require acts of necessity to save lives or property. In most contexts, an act of God is also force majeure, although force majeure includes not only natural events but also acts by a human agency, such as war or labor unrest, that are usually not within the scope of acts of God. There is no precedent for whether a viral pandemic qualifies as an “act of God” unlike flash floods, earthquakes, and other natural disasters, where there is precedent. Frustration of Purpose – exists if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge. The necessary elements to establish frustration of purpose are as follows: ● There is some supervening act or event leading to the frustration; ● At the time of entering into the contract, the parties did not reasonably foresee the act or event occurring; ● The purpose of the contract has been completely or almost completely destroyed by this act or event; and ● The purpose of the contract was realized by both parties at the time of making the contract. If the purpose has been frustrated, a number of courts will discharge contractual duties even though the performance of these duties is still possible. The frustration of purpose example would include an emergency that prevents a person from executing a contract. Impracticability or impossibility of performance– the occurrence of an unanticipated or extraordinary event may make contractual duties impossible or impracticable to perform the purpose of the contract. Whether the performance is impracticable or impossible the court will assess the totality of circumstances and terms of the contracts such as an instance of unforeseen condition or circumstance, an unforeseen occurrence that must render an obligation expensive or difficult to achieve, extreme difficulties or expenses that arose unexpectedly by either side of the agreement. If the contract is discharged because of impracticability or impossibility, each party is excused from duties arising under the contract that are yet to be fulfilled. Have more questions regarding the COVID-19 Impact on Startups and Investors? Schedule a free consultation with us today!