As COVID-19 continues to disrupt markets and industries globally, our business clients are facing significant internal and external challenges with how to identify and plan for issues caused by the global pandemic. For businesses, such challenges range from protecting and supporting employees and customers, to contributing to evolving efforts to battle COVID-19, to fighting for survival by preserving liquidity and to adapting to new and dramatically different operating conditions.
Given the rapidly-evolving situation, each issue requires a detailed understanding of the operational and legal implications affecting families, institutions, local and international businesses, customers, suppliers, vendors, employers and investors. Withers is ready to assist clients navigate these problems, anticipate potential areas of concern and implement effective and timely solutions.
We have developed the following checklist of practical steps, business assessments, potential legal issues and resources that any client and business owner should be considering to manage ongoing operations while being pro-active whenever possible. We are continuing to monitor the developments and will provide updates as necessary. Our coronavirus checklist is intended to help identify some of the challenges your business may face, areas that might require particular attention and various benefits imposed by state and federal governments, self-regulatory organizations (“SROs”), and U.S. regulators.
In Part 1 of this checklist, we discuss general contract considerations, insurance considerations, workplace considerations and regulatory considerations.
The following issues and considerations are not intended to reflect the entirety of challenges and questions you may have. Like most other situations, once an issue is identified, details matter, and understanding them in context is paramount. Careful consideration must be taken to analyze each issue thoroughly. While this checklist is not and should not be considered legal advice, clients who may be impacted by one or more of the topics discussed below are encouraged to contact us with questions.
General contract considerations
Identify key provisions of existing material contracts that affect your business, your customers’ and your suppliers’ obligations, including specifically the following terms:
- Force Majeure Clauses
- Contractual Threshold Amounts and Milestones
- Escrow Terms, Milestones and Breakpoints
- Material Adverse Change/Event
- Termination Rights
- Events of Default and Remedies
- Timing for Delivery/Supply and Grace Periods
- Payment Terms and Price Adjustments
- Notices to Financing Sources and other parties
- Timing and Procedures for Notification for the above
While drafting and negotiating contracts, businesses should, in addition to the above provisions, consider the following changes, not only with respect to coronavirus but also future outbreaks of infectious diseases:
- Consider additional due diligence (financials, contingency plans, insurance requirements, dependency on specific suppliers/customers/geographies).
- Consider effects on compliance with/ability to meet conditions.
- Consider the possibility of travel restrictions and court closures in drafting contracts to permit teleconferences and video conferencing for arbitrations and similar matters typically conducted in person.
- To the extent any budgets have been or are required to be provided or received, consider if and how to revise or adjust them to account for potential business disruptions.
- Consider your options if supplier is unable to deliver or a distribution channel is shut down.
Review all insurance policies to assess potential coverage for resulting losses to property or profits and potential claims by third-parties. Examples of coverage most likely to be applicable include:
- Business Interruption Insurance – covers loss of income due to interruption of business; although policies typically require physical loss to property, an infestation/contamination rendering premises uninhabitable may trigger coverage (contingent business interruption) – loss resulting from disruption of customers/suppliers/utilities/attraction properties; in addition to the physical damage issue, policies should be reviewed carefully for any bacterial/virus exclusions.
- Liability Policies (Commercial General Liability, Directors & Officers General Liability, Errors and Omissions) – cover various types of claims against the company and/or its directors and officers; depending on the nature of the company’s business, it may be prone to liability claims that arise from the response to the virus.
- Event Cancellation, Travel or Trip Cancellation Policies – cover losses from having to cancel events or travel; policies must be carefully reviewed for trigger and infectious disease coverage/exclusions.
- Civil Authority – covers loss resulting from prevention (or restriction) of ingress/egress to policyholder’s premises by government authority; could apply to quarantines affecting customers or employees or travel bans by government entities; may or may not require physical damage to be triggered.
- First Party Property Damage – may apply to damage to or loss of use of real or personal property as a result of viral contamination, if not otherwise excluded, or inability to sell product “damaged” by virus.
- Specialized Policies or Coverage Extensions – communicable or infectious disease coverage, brand protection, adverse media, or reputation coverage in place for some businesses.
- For all types of coverages it is critical to review deadlines and notice requirements and other relevant provisions to ensure that coverage is not compromised by a failure to follow required procedures.
- Review workplace policies to consider what measures may be necessary to protect employees from the current coronavirus outbreak, including guidelines for social distancing, working from home, protective gear, etc.
- Consider alternatives to work-related travel to affected areas, and consult with counsel regarding other potential measures to implement around business and personal travel.
- Review/prepare policies for operations for multiple scenarios and locations.
- Review business continuity plans and policies to prepare for closures in offices and facilities; confirm remote access to systems and consider stress testing.
- Identify critical functions that cannot be performed remotely and devise solutions to perform these functions.
- Consider personal resilience programs for employees.
Communication with employees:
- Avoid alarmist or speculative language.
- Provide only factual information based on official guidance from governmental authorities and agencies.
- Be mindful and respectful of hardships some employees may have endured, or are continuing to endure.
Center for Disease Control (“CDC”) recommendations:
- Review recommendations to determine best course of action to address how the outbreak may impact the workplace, including evacuation plans.
- Communicate with employees and governments in the event of possible exposure.
- Provide protective equipment if warranted and consistent with OSHA guidance.
- Companies should monitor applicable federal, state and local public health department guidelines and regulatory requirements, as well as advisories from governments and regulators.
- The recently passed Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) expanded Section 7(a) of the Loan Program administered by the Small Business Administration (“SBA”) by introducing the Paycheck Protection Program (“PPP”) that will provide financial assistance for small businesses affected by the pandemic with a budget of $350 billion. The CARES Act also expanded and provides $10 billion of additional funding for the SBA to expand the existing Section 7(b) Economic Injury Disaster Loan Program.
- As the PPP provides forgivable loans to small businesses that keep their employees on the payroll, the program ran out of cash within days due to heavy demand. An additional $310 billion in funding has since been passed, but the program reopened to a crush of applications as business owners scramble to secure aid, raising concerns about how long the second round of funding may last.
- Companies with multiple office locations should seek to create a consistent position/message (at least in the same jurisdiction) to avoid being perceived by counterparties as taking contradictory or inconsistent positions or actions.
In Part 2 of this checklist, we discuss financial reporting and disclosure considerations, investor communication considerations, financing documentation considerations and M&A transaction considerations.
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