On 19 October 2011, De Brauw sent out a legal alert that highlighted contractual aspects of the Eurozone crisis. The crisis has only intensified since then and politicians and news media are now openly speculating about a possible exit of one or several countries from the Eurozone.
Effective policy measures may still avert this scenario. Nonetheless, it is only sensible for multinational companies to continue planning for the substantial impact that a Eurozone break-up may have. Planning should be aimed at ensuring liquidity, mapping risks to the company and mitigating such risks where possible. In this legal alert, we will highlight some aspects that could be of relevance to your company.
From a legal perspective, we would anticipate that the following aspects could become relevant:
Currently, the Euro is legal tender throughout the Eurozone. In a breakup scenario, a country that exits the Eurozone may implement emergency legislation that converts all payment obligations under local law from Euros into the new local currency at a fixed conversion rate. Such conversion could adversely affect a company that used to receive payment in Euros and will now receive payment in the new local currency, as the new currency may depreciate rapidly versus the Euro. Such conversion may be avoided by ensuring that the laws of countries that are most likely to exit the Eurozone (such as Portugal, Italy, Greece and Spain) do not apply to (payment obligations in) contracts that are material to a company.
Customers located in countries that exit the Eurozone may continue to be required to make payments to the company in Euros. If the new local currency depreciates, such customers may no longer be able to meet their payment obligations. Parent companies of customers may allow their subsidiaries in such countries to file for bankruptcy under these circumstances if there is little chance that they will return to profitability. This risk can be addressed by requesting parental guarantees, letters of credit, and collateral, and by retaining title to goods until payment obligations have been met. Companies are also well advised to avoid pre-payments to suppliers in countries that may exit the Eurozone.
Companies that have operations in countries that exit the Eurozone will be faced with a situation where IT systems, such as point-of-sale systems, accounting systems and other administrative systems need to be switched over from the Euro to the new local currency. A company could suffer negative effects to its operations if the suppliers of the systems are not able to make the necessary changes on short notice. The effects may be (partially) mitigated by making advance contractual arrangements with relevant suppliers, to be able to retain rapid support and service in such event. This is especially relevant with respect to retail point-of-sale systems such as cash registers and electronic payment systems, which need to be operational in order to serve customers and generate revenue.
From a broader business perspective, we would anticipate that the following aspects could also become of relevance:
If a country leaves the Eurozone, there is a possibility that all funds denominated in Euros held in bank accounts in such country are frozen to prevent that large amounts are transferred to other countries. The funds may subsequently be converted into a new local currency. The new local currency may then slowly be released in order to avoid currency flight and rapid depreciation of the currency. Such freeze, conversion and slow release of funds will hold risks to the liquidity of a company, which will need to await release of its funds and has no certainty about the value of its assets in the new local currency. The risk can be mitigated by making sure that funds in general, and especially those denominated in Euros, are held outside the Eurozone and/or in Eurozone “safe haven” countries such as Germany, Austria and the Netherlands.
Suppliers to the company may currently pay for their base products in “strong” currencies such as the Euro, the U.S. Dollar and the Japanese Yen, and once their country switches currency, they may no longer be able to purchase these base products. This will put delivery obligations to the company at risk. This risk may be mitigated by ensuring that suppliers are located outside countries that most likely exit the Eurozone and by ensuring that back-up suppliers are available and on stand-by.
Countries that exit the Eurozone may suffer from a significant reduction in standard of living. The new local currency may depreciate quickly and the Euro may remain the de facto currency within the country (as is the case in some other countries that lack a credible local currency). As a result, a company may be faced with demands from key employees to continue to be paid in Euros rather than in the new local currency. If such demands cannot be met, key employees may switch jobs, which may be disruptive to the business. Possible disruptions can be addressed by ensuring that there is temporary replacement available for these employees that would otherwise choose to leave the company.
We are available for any questions you may have regarding the abovementioned general pointers and any additional issues specific to your business.