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COVID-19 Legal Resource Guide
March 16, 2020

Legal Issues Affecting Your Business Amid the Coronavirus Outbreak and Market Turmoil

 

Updated: March 29, 2020

The coronavirus (COVID-19) pandemic reminds us that our global communities are deeply interconnected.  In this uncertain time, we prepared a COVID-19 Legal Resource Guide. You will find key considerations and suggestions across various disciplines that may affect you and your business as we work together to respond to this global crisis, which is unprecedented in modern times. This guide is organized by topic area. We will continue to update and supplement our COVID-19 Legal Resource Guide with more detailed recommendations.

Table of Contents

Credit and Debt Facilities:  

  • Now is the time to check your credit and debt facilities and agreements. Below is a summary of various provisions in financing agreements that borrowers and lenders may want to examine. Some issues might be industry-specific and, as such, impact industries differently. All issues will be agreement-specific and necessarily will require careful review of specific agreements.
  • Material Adverse Effect/Material Adverse Change: At least one of these definitions can be found in almost every financing agreement. However, there are variations in the actual definitions as well as how they are used, including whether or not the definition covers only the financial condition and past performance of a borrower or whether it also includes a borrower’s prospects. Another common variation in the definition is whether the definition excludes general economic and market events. These definitions can frequently be found in representations that must be repeated upon each borrowing and separately may also be a condition to each borrowing. So, a borrower may decide that it can make a representation that no material adverse effect has occurred, while the lender may decide that the condition that no material adverse effect has occurred has not been met. This could lead to issues in borrowing. In some financing agreements, there are also events of default that are triggered if a material adverse effect has occurred; if it is triggered, an event of default would not only prohibit further borrowings but also would permit a lender to terminate its commitment and/or demand repayment of outstanding loans.
  • Borrowing Base: Borrowers with financing agreements that are dependent on collateral coverage based on a borrowing base may not immediately confront issues with borrowing availability or repayment resulting from insufficient coverage. But because borrowing base facilities are often calculated based on accounts receivables and inventory, borrowers may well face issues in the near future if customers delay payments and cause more receivables to become ineligible as they age. Another reduction in borrowing base may result from reduced inventory resulting from disruptions in the supply chain of goods arriving from other countries. Even if a reduction in borrowing availability does not result in unavailability of funds or in any requirement to prepay, it may trigger provisions to give the lender control over cash, the ability to require additional and more frequent appraisals and inspections, and the springing effectiveness of financial covenants.
  • Letters of Credit: Beneficiaries of letters of credit all know there are expiry dates. Financing agreements often delay maturity dates or payments dates to the next succeeding business day. However, unless otherwise provided, letter of credit expiry dates are not delayed and will occur as written. So far, there have not been any bank holidays, and banks remain open. But beneficiaries holding letters of credit should be mindful not to delay requesting any drawings they are able to make.
  • Sanctions: Financing agreements also cover government sanctions and prohibit companies from doing business in violation of sanctions imposed by governments or from doing business in sanctioned countries. These definitions vary, and sanctioned countries are sometimes defined as countries on which restrictive measures have been imposed. In light of the travel restrictions imposed by the United States on travelers from Europe as well as parts of Asia, covenants, representations and events of default in financing agreements also could be technically triggered.
  • Cessation of Business: Financing agreements also may have covenants as well as events of default that are triggered if a borrower ceases to conduct any material part of its business. In light of business closings and suspensions, these provisions also may well be triggered.
  • Business Interruption: Borrowers may be looking to business interruption insurance to compensate for some losses. Whether or not a claim would be paid will require careful review of the insurance policy. If a borrower receives any such payments, they can typically be added to earnings before interest, tax, depreciation and amortization (EBITDA) if they are not already accounted for in net income. However, receipt of such payments also may well trigger a mandatory prepayment under some financing agreements.
  • Financial Covenants: The most common financial covenants found in financing agreements are leverage ratios and interest or fixed charge coverage ratios. Both of these are usually based on net income or specifically EBITDA. With decreased revenue, EBITDA is likely be lower than projected, and without any reductions in debt, leverage ratios would increa­se and interest and fixed charge coverage ratios would decrease. The impact on interest and fixed charge coverage ratios could be ameliorated by the sharp drop in Libor during the past several days (now below 1%) but not as much as the actual decrease appears, because many rates have been locked in for the duration of the current interest periods and also because many financing agreements have interest rate floors.
  • Reporting: Reductions in EBITDA and the impact on financial covenants may well not be evident until the next quarterly cycle of financial reporting comes due or even another quarter thereafter. So, now is a good time for borrowers to be proactive and evaluate forecasts and to strategize about conversations with their lenders.
  • Cross-Defaults: Financing agreements typically will have cross-defaults to other financing agreements to the same borrower or affiliates of such borrower. Therefore, it is important to be aware that all financing agreements should be reviewed, as provisions triggering a default in one agreement would likely become a default in all other financing agreements.
  • Collateral Review: Lenders in turn should anticipate requests for waivers and amendments from borrowers as a result of one or more of the provisions discussed above. In the process of considering any such requests and generally in anticipation of some borrowers not being able to repay, lenders should take time now to review their collateral to see whether post-closing collateral deliveries have been completed, to perform an audit to be sure that collateral that is supposed to be delivered was actually delivered and is accounted for, and to be sure that lien searches reflect all filings made by the lender (and that there are no other lien filings). Lenders may also want to review the excluded assets definitions and consider taking additional collateral (for example, the tax regulations issued in 2019 provided some additional guidance regarding equity and assets of foreign subsidiaries as well as guarantees from foreign subsidiaries).
  • Additional Lender-Related Considerations:
    • While many of the points above will apply to lenders or borrowers, the following highlights certain considerations for lenders. As we learned during the 2008 financial crisis, the most common issues lenders face during a period of severe market disruption involve decisions regarding whether to fund revolving loan commitments and financing commitments for acquisitions and similar corporate transactions.
    • Revolving loan commitments: The first (and possibly last) step in any analysis is a determination as to whether the conditions to funding the revolving borrowing request have been satisfied. If so, the legal analysis is straightforward. If the conclusion is that conditions have not been satisfied, matters get more complicated. Considerations in this context include:
      • Will all similarly situated credits be treated the same, and, if not, what criteria will determine the differing treatment? Decision-makers must assume the decisions and criteria therefore will become known to clients, regulators and other constituencies.
      • If the decision is made to fund notwithstanding a failure of condition, an appropriate reservation of rights, communicating the same to borrowers and the reputational risks involved need to be considered carefully.
      • If the decision is made not to fund, a full record of that decision and the factors supporting that decision need to be preserved, and careful communication of that decision to the borrower must be undertaken.
      • If the decision is made not to fund, a plan must be in place to deal with the reputational and other consequences of that decision with clients, competitors, regulators, and potentially Congress and other public bodies.
      • Careful consideration must be given to coordination and communication with the other revolving lenders to ensure all are engaging in decision-making and have knowledge of all relevant facts and considerations.
  • Financing commitments for acquisitions and similar corporate transactions: While nearly all the considerations identified above are equally relevant in this context, other, more complicated considerations are present, including:
    • With the prevalence of Sunguard conditionality, the funding conditions are essentially limited to those in the acquisition agreement, including the representation and warranties qualified by the acquisition agreement’s definition of material adverse effect, which may have very broad carve-backs and exclusions. These need to be reviewed.
    • If both the acquirer and the target assert that the acquisition agreement closing conditions are satisfied, while this is not outcome determinative, it complicates an assertion of nonsatisfaction. It is critical in this context that all committing lenders engage in careful communication and coordination.
    • Communications with the acquirer need to be undertaken with extreme care to enable the acquirer to satisfy its obligations under the acquisition agreement and to avoid any appearance of improper conduct to avoid obligations under the acquisition agreement. Lenders need to fully understand all parties’ rights and obligations under the acquisition agreement.

Corporate/M&A Transactions:

    • Deal and Auction Dynamics; Timing: While the situation remains fluid and subject to daily changes, we are generally seeing existing merger and acquisition (M&A) processes continue forward on both the buy side and the sell side. That being said, in certain jurisdictions and in industries particularly affected by the COVID-19 outbreak, some deals are on pause as the parties evaluate the effects of the outbreak. This is likely to lead to price renegotiations and, in some cases, termination of negotiations if buyers are unsure whether they are overpaying for an asset under current circumstances. Buyers and sellers can expect last-minute halts where parties reevaluate and potentially renegotiate material terms (including prices). One tool to bridge such newly erupting valuation gaps might be the greater use of earn-outs to prove out the impact of COVID-19 on the business over time. If the pandemic continues to expand and the related market volatility persists, we expect an increasing number of sellers to reconsider if and when to launch new processes. Setting aside economic/market realities, there are also more practical concerns regarding commencing a process at this juncture (e.g., due to the logistical challenges of conducting in-person management meetings and on-site diligence).
    • Due Diligence: We have seen and expect to continue seeing certain buyers conducting due diligence on the overall economic impact of COVID-19 on the target business (including related contract terminations, renegotiations, triggering of force majeure clauses and ability to perform under existing contracts; revenue risk related to impact of travel restrictions, quarantine measures and other government-mandated initiatives; and the impact on the target’s operations (supply chain, inventory, payroll, invoicing, etc.) and acquisition pipeline (insurance coverage, general emergency preparedness, etc.).
    • Material Adverse Effect: While many customary acquisition agreement terms will be subject to greater scrutiny and negotiation in light of the COVID-19 crisis, we expect the definition of material adverse effect to be of particular interest and focus. At this time, because it is difficult to predict the lasting impact of the COVID-19 outbreak on any particular company or industry, there is no standard analysis of whether the effects of the COVID-19 outbreak on a particular business would justify a party’s refusal to close on a deal under a material adverse effect theory. However, we are seeing material adverse effect definitions now include specific exclusions focused on events such as the COVID-19 outbreak or the worsening thereof to the extent the effects are not disproportionate or materially disproportionate to the target’s business relative to other participants in the industry. We anticipate such exclusions will become more customary in the future, although the risk-shifting between sellers and buyers (e.g., as to which party will bear the risk of the COVID-19 outbreak even if not disproportionately impacting the target business) will remain a negotiated and fact-specific point, and leverage might shift as the situation develops.
    • Acquisition Financing: In our experience, lenders currently appear to continue to honor existing debt financing commitments. Buyers should consider their legal remedies under their commitment papers as well as any arguments from a relationship/reputational perspective (especially if the current disruption turns out to be of relatively short duration) vis-a-vis lenders to ensure that such commitments are complied with and buyers do not risk triggering reverse breakup fees as a result of the underlying acquisition agreements.
    • Representation and Warranty Insurance: Parties relying on representation and warranty insurance should be prepared to address policy exclusions relating to COVID-19 (e.g., with respect to supply chain interruptions or more broadly with respect to all losses arising out of business interruption related to COVID-19), which frequently are being requested by carriers. Insureds should try to limit these exclusions to specified jurisdictions or industries where COVID-19 is known to have had detrimental effects and to specified consequences to prevent underwriters from using a broad exclusion to avoid legitimate, unrelated claims. R&W Insurers’ due diligence should include the impacts of COVID-19 as an area of focus. Exclusions to coverage may be warranted with respect to heightened areas of concern or known or expected impacts to the target company's business. 

Corporate Reporting, Disclosure and Governance Updates:  

    • Corporate Oversight: The fundamental duty of a board of directors is oversight of the business. This requires a “good-faith effort to implement an oversight system and to monitor it.” In rare cases, directors could be personally liable for failure to observe this so-called Caremark In the current emergency, each board therefore will want to assess the risks facing its business, which may be immediate or in the future. Topics for consideration may include status, outlook and contingency planning regarding operations and personnel matters; any impact on the availability of key personnel; liquidity and finance arrangements; impact on customers, distributors and suppliers; and revenue and expense outlooks. Boards that handle these matters through committees, such as risk management or oversight, may wish to meet on these topics nonetheless or otherwise receive updated information. Depending on the established board calendar, a special meeting and follow-up meetings may be appropriate. Boards and Committee minutes and other records should be produced contemporaneously to evidence the Board’s diligence and oversight.
    • In light of this guidance, companies should consider including disclosure in proxy statements informing shareholders of the possibility that the location or date of the annual meeting might be changed as a result of developments related to COVID-19. Whether a company can hold a virtual shareholders meeting depends on the law of its place of incorporation and its governing documents. The Delaware General Corporation Law (Section 211) permits such meetings. The New York Business Corporation Law (Section 602) requires a physical meeting location but allows virtual shareholder participation. The Maryland General Corporation Law (Section 503) provides that the board may determine the place of a meeting of the stockholders or that the meeting may be held virtually but that at the request of a stockholder, the board must provide a place for the meeting.
    • SEC Filing Relief: On March 4, the SEC issued an order granting a 45-day extension for SEC reports (other than 13Ds and Section 16 filings) due between March 1 and April 30. This conditional regulatory relief requires that the company convey, through a current report on Form 8-K, a summary of why relief is needed in its particular circumstances. Publicly reporting companies that take advantage of this filing extension should review the reporting covenant in their debt documents to confirm continued compliance despite the late filing permitted under the SEC’s relief order.
    • Earnings Releases and Guidance: Companies are taking varying approaches to earnings releases and issuing earnings guidance. Certain companies are providing earnings guidance excluding the COVID-19 impact and are continuing to include COVID-19 disclosure in the forward-looking statements legend. Many companies have withdrawn 2020 guidance as a result of uncertainty surrounding the outbreak of COVID-19, which includes foreign and potential domestic travel restrictions.
    • COVID-19-Related Disclosure: Companies should evaluate securities law disclosure obligations and best practices to keep stockholders updated on COVID-19-related developments. When companies disclose material information related to the impacts of COVID-19, they should take the necessary steps to avoid selective disclosures and should disseminate such information broadly. Companies should consider whether they need to revisit, refresh or update previous disclosures to the extent that the information becomes materially inaccurate. Also, a company that is aware of COVID-19-related risks that are material to investors should refrain from engaging in public transactions with its securities and should take steps to prevent directors, officers and other corporate insiders from engaging in transactions in the company’s securities until investors have been appropriately informed about the risks.
    • Incentive Compensation: Compensation committees should review the performance metrics under their incentive compensation arrangements, especially for incentive arrangements that have an annual or shorter performance periods, to determine whether those metrics still provide the proper incentives for employees and appropriately align behaviors with desired outcomes. For companies that have not yet finalized performance metrics, consideration should be given to the impact of COVID-19 in establishing the performance targets. In light of the elimination of the performance-based exception to 162(m) of the tax code, a change in the performance metrics should not impact the deductibility of compensation for non-grandfathered arrangements. Depending on the structure of the bonus program, changes to the performance metrics might trigger an 8-K filing or need to be disclosed. Any such changes should be discussed with counsel in order to determine what actions might be required.

HSR Filing Procedures:

    • Under the Hart-Scott-Rodino (HSR) Act, M&A transactions with a value of over $94 million generally require a filing with the Federal Trade Commission’s (FTC) Premerger Notification Office and the Department of Justice (DOJ) and the expiration or early termination of a waiting and review period before the transaction can be consummated.

    • In response to the COVID-19 emergency, the FTC and the DOJ instituted a temporary e-filing system for HSR filings and suspended the granting of early termination of the HSR waiting period. The agencies have since announced that they will resume the practice of granting early termination effective March 30, 2020, subject to certain limitations, when both agencies have determined that no enforcement action will be taken during the waiting period.

    • In a blog post, the FTC indicated that early termination will be granted only as time and resources allow, with early termination being granted in fewer cases and more slowly than under normal circumstances. The FTC also emphasized that early termination is not a right and that parties should not reach out to request early termination. Meanwhile, the FTC noted that competitive concerns will continue to be investigated fully in each case, with doubts being resolved against early termination. The resumption of early termination is subject to change in light of the circumstances.

    • Under the e-filing system, the agencies require electronic submission of filings via Accellion. Filers must email the FTC to request a link for uploading their documents and follow the prescribed document format for DVD filings. After normal agency operations resume, parties may have to provide the agencies with hard copies or DVDs of filings made through the e-filing system.

    • Other than the limitations on early termination and the requirement of e-filing, there are no changes to the HSR procedures. The HSR waiting period remains 30 days for most transactions and 15 days for certain transactions in bankruptcy. Parties to M&A transactions subject to the HSR filing requirements that are on a tight closing timetable will need to consider the implications of the limited availability of early termination of the HSR waiting period. 

Force Majeure and Acts of God:

    • For suppliers and service providers and their respective customers, the invariably dormant and boilerplate force majeure and acts of God clauses (“FM Clauses”) are now center stage. The impact of FM Clauses are discussed elsewhere in this Guide, too.
    • If a contract has an FM Clause, the precise language and scope are important. Is there an event definition for “force majeure” and “acts of God”? Does the contract specify what performance is excused, and for how long? Does the contract state what efforts the nonperforming party must make to overcome the force majeure and/or acts of God event? To what extent if any must the other party mitigate the damages in these circumstances?
    • Even if there is no FM Clause, extra-contractual doctrines excusing performance such as impossibility and mitigation of damages might apply to the provider and customer respectively. These need to be reviewed for the relevant jurisdictions.
    • Going forward, it is critical that applicable contracts include (or, depending on your perspective in the contract, exclude) “epidemics” in the definition(s) of force majeure and acts of God and careful consideration be given to each party’s obligations and rights in an FM event.
    • We expect that case law will proliferate as the current pandemic renders performance impossible. It will be fact- and contract language-specific, requiring close ongoing attention.

Fund Investment Management:

    • Fund sponsors should be reviewing the disclosures in their PPMs or Registration Statements under the Investment Company Act and Form ADV and likely updating them to ensure the risks associated with the coronavirus on their fund and investment strategy are covered. The SEC has ordered that registered fund 1940 Act filings may be delayed, but only if advance notice is provided to the SEC and other conditions are satisfied. The SEC has stated that the Commission will not bring enforcement actions as a result of delayed 1933 Act Prospectuses not being provided to existing holders, but the requirement to furnish new investors with current prospectuses is statutory.

    • Existing investors will likely be reaching out with questions about the impact of the coronavirus on their management team and their ability to conduct their business during this time. Managers should develop talking points or FAQs related to this to ensure consistency in messaging to investors.

    • Managers should review and consider implementing portions of their business continuity plans as more and more employees will work from home and given that certain employees may become incapacitated. Fund boards should be provided updates as to the efforts being made and risks that surface, as well as efforts being made to address them.

    • With a March 31st redemption date approaching for many hedge funds and interval funds, and given serious liquidity stress being observed in various asset classes, fund managers should be considering liquidity management mechanics (e.g., redemption suspensions or gates) that may be available to them under the fund’s governing documents given they will need to balance the needs of the existing investors with those of the redeeming investors. Valuation policies and procedures should be reviewed as well. As assets become less liquid, it is possible that the marks assigned to an asset will not be consistent with the price that can be secured in a sale of such asset given the stress in the system.

    • As employees work from home and connect to the office remotely, fund managers should review data protection policies and procedures to ensure compliance with state and federal privacy laws with respect to client and investor data.

    • Given short sale bans are being implemented in various countries, fund managers should prepare for the possibility of such bans in the United States and other jurisdictions or even the closure of trading markets in various jurisdictions for an extended period of time.

    • Managers should coordinate with their service providers (e.g., auditors, counsel and compliance consultants) to ensure that they will be able to provide certain key services over the next several months (e.g., the provision of audited financial statements for their funds and assistance with the annual update of the Form ADV or any other regulatory filings).

    • In this regard, ^ the SEC also extended the deadline for certain Investment Advisers Act filings, i.e., Form ADV and ^ Form PF, if certain conditions can be satisfied by the fund manager. Fund managers should diligently review ongoing SEC pronouncements to maximize their flexibility with respect to ^ filing and other ongoing requirements.

Employment Issues:

      • COVID-19 is having a profound impact on employment relationships. Identified below are key issues employers should be considering as they seek to navigate the crisis. These issues are discussed in more detail in a separate Employment Alert.
        • Under the Occupational Safety and Health Act, employers have an obligation to provide a safe working environment for employees.
      • Consider potential precautions to limit the risk of transmission in the workplace, including:
          • Banning nonessential business travel and instead encouraging virtual meetings and interactions
          • Requiring employees who have traveled to high-risk countries (including China, Iran South Korea, and most of Europe, including Italy) to self-quarantine for a minimum of 14 days
          • Requiring employees who have symptoms consistent with COVID-19 or the flu to stay home
          • Requiring employees to self-quarantine when a member of their household contracts COVID-19 or is required by governmental authorities to self-quarantine
          • Requiring employees to disclose travel to restricted areas or exposure to COVID-19 so that appropriate precautions, including self-quarantine, can be taken
          • Accommodating concerns of individuals at higher risk, such as those with a history of respiratory illness
          • Instituting regular deep cleaning of offices and facilities
          • Considering permitting or requiring employees to work remotely
      • Employers should not purport to regulate employees’ conduct outside the workplace, such as personal travel.
      • If an employee has a confirmed case of COVID-19, appropriate steps must be taken to alert coworkers of potential exposure and to otherwise limit risk of transmission.
      • Some employees may refuse to report to work due to fear of potential exposure. Employers need to determine whether to discipline such individuals if they do not have a particularized justification, such as a history of respiratory illness.
      • Determine how to treat absences for various reasons, which implicates paid sick leave, short-term disability, the Family and Medical Leave Act, paid family leave, vacation and paid time off, and other applicable leave laws and policies.
      • The new federal Emergency Paid Sick Leave Act of 2020, passed by the House of Representatives as part of the Families First Coronavirus Response Act, will require covered employers to provide up to two weeks of paid leave to employees who miss work because of COVID-19-related issues. In addition, the new legislation provides for paid FMLA leave for specified COVID-19-related absences (after the first 14 days of absence) in an amount of not less than two-thirds of the employee’s regular rate of pay. 
      • Employers that shut offices must consider whether they are legally obligated to or will otherwise choose to continue paying employees who will not be working remotely.
      • Prior to implementing a furlough or layoff in light of current business conditions, an employer must consider whether the WARN Act applies and how to take advantage of exceptions to the act’s notice requirements.
      • Impact on high-deductible health plans: The IRS, in Notice 2020-15, published guidance that allows high-deductible health plans (HDHPs) to provide testing and treatment for COVID-19 with either no deductible or a lower deductible and still remain an HDHP. This means that individuals who are enrolled in an HDHP still will remain eligible to contribute to a health savings account even if the HDHP covers COVID-19-related costs prior to meeting the deductible. Generally, under an HDHP, a minimum deductible must be met before any benefits are paid under the plan. The removal of this requirement with respect to COVID-19 is intended to remove legal and administrative barriers with respect to testing and care. All other aspects of HDHPs remain unchanged. Notice 2020-15 does not require sponsors to allow for pre-deductible treatment; rather, it is an option that a sponsor can implement. Sponsors of HDHPs who desire to provide this coverage should discuss with their insurers and administrators whether and how to implement this change.

Real Estate:

        • Sales/Acquisitions of Real Property: Buyers may raise and sellers should consider how to assess/respond to the following items, some of which are related to transactions that are under contract and others that address negotiating contracts of sale:
            • Renegotiated purchase prices
            • Extended diligence periods (to assess the impact of COVID-19)
            • Financing contingencies/extended periods of time between contract signing and closing (in light of the potential difficulties in obtaining financing)
            • Representations regarding tenants/occupants being quarantined due to COVID-19
            • Condemnation provisions that include temporary takeover by local governments to house COVID-19 victims
            • Delays in closing or termination of contracts based on force majeure, condemnation and/or failure of tenants to deliver required estoppels due to the impact on tenants’ businesses; buyers, when facing a time-of-the-essence closing where a closing condition cannot be satisfied as a result of COVID-19, may request open-ended or lengthy extension rights to be able to extend until conditions can be satisfied rather than being required to terminate the contract
        • Closing Considerations: Title companies may not be able or willing to issue title policies if governmental offices required for title searches and/or the recorder’s office are closed.
        • Real Estate Financings — Borrowers:
          • Borrowers should commence the refinancing process early in light of the fact that it may be more difficult to obtain financing (particularly for asset classes such as gaming, co-living/co-working and hospitality) despite historically low interest rates or to refinance on favorable terms (e.g., nonrecourse).
          • With respect to existing real estate loans, borrowers concerned about satisfying one or more loan covenants should review their loan documents to assess whether force majeure or similar provisions might be applicable and otherwise should reach out to their lenders to discuss temporary relief prior to such issue becoming a default.
          • Real Estate Financings — Lenders:
          • Lenders should consider adding representations and covenants in their loan documents addressing quarantining of tenants/occupants, local governments taking over properties to house virus victims and reduction of borrowers’ net operating income due to increased operating costs and reduced cash flow from tenants whose businesses have been affected by COVID-19.
          • Lenders concerned that borrowers might breach their covenants or make force majeure or similar claims should review their loan documents to assess and prepare for such scenarios.
        • Leases: Tenants may raise or cause and/or landlords should consider how to assess and respond to the following items:
          • Tenants’ requests for rent relief
          • Increase in tenant bankruptcies
          • The extent of insurance coverage for business interruption due to the COVID-19 pandemic
          • Pandemics as force majeure excusing/allowing delay in performance under leases
          • Amendments to leases for operational changes such as increased janitorial services
          • Concerns over certain types of tenants (e.g., those providing co-working space)
          • Leases with percentage rent and the effect of significant declines in business
          • Termination rights for failure of a retail tenant to meet an applicable financial test
          • Note that many significant Real Estate Board of New York landlords have agreed to halt evictions for the next 90 days (though CHIP has separately raised concerns about any such moratorium).
        • Condominium/Coop Matters:
          • Subject to the discussion above regarding real estate contracts of sale generally, it is expected that new purchase contracts for condominium units and co-op apartments will continue to be signed and all cash closings will continue so long as government offices and title companies are open for business. However, there is some concern that individual unit lenders and their counsel have not yet readily adapted to escrow closings through title companies. We understand that banks are beginning the process of exploring ways to facilitate such escrow closings.
          • With regard to registrations of public offerings with the New York State Attorney General’s office, as of now, the AG’s office is working on a staggered schedule and may soon be working largely remotely. The AG’s office is reviewing options for emergency regulatory relief to minimize nonessential pro forma offering plan and amendment submissions and to suspend certain hard-copy signature and filing requirements.

Derivatives and Structured Products Implications:

        • Market Closures and Other Trading and Pricing Disruptions:
          • Market participants should identify trades in their portfolios that are susceptible to disruption due to market closures, trading suspensions, and the unavailability of rates or other pricing information; assess the likelihood of disruption based on the location and resilience of the applicable market; and understand the consequences of potential disruptions and applicable fallbacks.
          • To the extent applicable, the International Swaps and Derivatives Association (ISDA) equity derivatives, foreign exchange (FX) and currency options, and commodity definitions provide for applicable fallbacks, such as valuation or settlement delays, migration to substitute pricing sources and, in some instances, early termination of the transaction. Applicable fallbacks prevail over the standard force majeure provision included in the 2002 ISDA master agreement (see below). Market participants also should assess whether those standard fallbacks have been amended or deactivated, for instance, via master confirmation agreements.
          • Market participants also should monitor market advisories and related guidance provided by industry associations, such as ISDA or the Futures Industry Association and regulators, such as the ISDA guidance on the consequences of the recent extension of Chinese Lunar New Year in connection with COVID-19.
        • Notice Delivery Requirements:
          • Certain notices, including those related to events of default and termination, typically require delivery in person, via courier or by registered mail and are typically effective upon receipt. Other delivery methods apply only if they are specified in the agreement. Market participants should be aware of those provisions, as they might be unable to deliver notices or effectiveness may be delayed, impacting termination and valuations. Counterparties may consider amending their agreements to address those issues.
          • Market participants also should ensure that they are able to monitor receipt of notices that may have adverse consequences and that they are in a position to react accordingly.
          • Certain agreements, such as master repurchase agreements, may contain additional flexibility.
        • Unscheduled Holidays:
          • Market participants should consider the impact of any unscheduled holidays on their derivatives trades. Any day falling during such a period likely will not be a business day under the relevant contract, and valuation, settlement and payments dates might be postponed as a result. This may create liquidity issues at large trading entities as well as a potential for mismatch with trades that may not impacted or might be differently impacted, which in turn might affect trading and arbitrage strategies.
        • Valuation Issues:
          • The market volatility created by the COVID-19 pandemic in certain markets will have implications for the value of trades referencing affected assets. This may increase margin calls and create liquidity implications for traders in those markets. For investment funds, net asset value-linked provisions might be triggered and have potential termination and super-collateralization repercussions.
        • Specific Force Majeure Considerations:
          • The 2002 ISDA master agreement contains a force majeure provision that is triggered if on any day a force majeure or act of state prevents the specific trading office of the counterparty or the counterparty from performing or if performance becomes impossible or impracticable and beyond the control of such office or party, as long as the circumstance may not be overcome by the affected party using all reasonable efforts. The provision applies prospectively as well and is triggered if performance would be prevented if it were required on any day. If the force majeure is still continuing after a waiting period of eight local business days, either party may terminate all or some of the transactions, which would then, in most cases, cash settle at that time. Other agreements may contain a similar force majeure provision (or a variation thereof).
          • Market participants should monitor regulations that may hinder their ability to perform in light of the COVID-19 pandemic, such as those imposing quarantines and restrictions on travel and movement of persons.
          • Standard force majeure provisions might have been amended to impose some additional requirements on counterparties, such as the obligation by the affected counterparty to take reasonable actions to prevent the occurrence of a force majeure. Also, in most instances, financial institutions are required by regulations to have business continuity procedures in place. Such provisions and regulations can curtail the ability of a counterparty to rely on a force majeure provision.
          • With respect to payment of cash and transfer of financial assets, as long as payment and clearing systems and intermediaries remain operational, a force majeure appears unlikely to be triggered. However, the delivery of physical commodities is more likely to be impacted, and a force majeure could be triggered, depending on the circumstances.
          • Market participants also should consider the consequences of specific trading and settlement disruption events under equity, FX and commodity derivatives definitions (see above). Applicable fallbacks under those products prevail over the force majeure. For example, many physically settled commodity transactions likely will incorporate fallbacks such as cash settlement or postponement of settlement, which would likely curtail the ability of a counterparty to rely on a force majeure provision.

Insurance Coverage

      • The key coverage issues for commercial policyholders are to likely be business interruption claims, as businesses see meaningful disruptions — in demand and in supply chains — arising from the pandemic and related public health measures.
      • The importance of prompt notice to a company’s broker or carrier cannot be overstated. Failure to notify a carrier as soon as a possible claim becomes known often can be invoked as a defense of coverage.
      • Exclusions should be carefully considered; often pandemics and epidemics are excluded. There also might be exclusions for acts of civil authorities, such as state or local bans on gatherings over a certain size. However, early indications are that many policies are at least ambiguous on such points and may respond. Each policy should be considered independently of any other policy, as forms vary significantly from market to market and carrier to carrier.
      • Going forward, insureds might have a new appetite for captives, risk retention groups, purchasing groups or other customized ways to purchase risk protection. These always should be considered thoughtfully with a view to tax, accounting, regulatory and administrative issues.
      • The New Jersey legislature is considering a bill that would specify that insurance policies covering business interruption shall be construed to cover the pandemic. This coverage would apply to policies issued to insureds with fewer than 100 full-time employees in the state of New Jersey, and in force on March 9, 2020.

Business Restructuring: 

      • Prior to the COVID-19 outbreak, we were seeing an increase in business restructurings and distressed transactions (whether going-concern sales or liquidations). Certain industries (e.g., retail and pharmaceuticals) were harder hit.
      • However, the pandemic and the resultant market turmoil will not be confined to any one industry (although some — airlines, hotels, cruises, sporting and entertainment, shipping, manufacturing reliant on foreign parts and, of course, retail — may be hit harder). Energy, oil and gas are suffering additional disruptions.  Suffice it to say, the impact across numerous industries and sectors will unfold over time but is not expected to be limited.  As lenders and other funding sources assess immediate and near term options, access to capital that supported “amend and extend” restructurings may tighten up, forcing a more immediate focus on business restructuring. 
      • Debt Document Review: It is important to review your key debt documents and consider, among other things, operational and financial covenant compliance, impact on revenue, liquidity, and supply chain disruptions and attendant cost increases.
      • Lender Communications: Anticipate increased communication between borrowers and agents, especially on the potential impact of COVID-19 on projected revenue/receipts, business disruptions, increased costs and employee matters, among other operational matters. Where lender consent may be required in order to take an action, anticipate increased time, including from additional internal procedures and information requests (e.g., cash flow reports).
      • Impact on Transactions: Transactions, including asset sales or debt (re)financings, might be delayed or canceled. Whether or not there are remedies against the other party for not proceeding, the delayed or canceled transaction could adversely impact a company’s status quo and ability to continue to operate outside bankruptcy. Parties need to assess the likelihood of the transaction proceeding and evaluate Plan B. This could include whether sale transactions are better suited to “363 sales,” depending on any valuation changes or other changes affecting the assets to be sold or liabilities to be assumed. This also means that private equity, funds and other parties with capital may see an increase in “363 sale” acquisition opportunities and should be prepared to respond quickly.  
      • Material Contracts: Review your material contracts, including with customers, vendors and other suppliers, to assess rights if performance is delayed or canceled, and consider the corresponding impact on operations. Assess the availability of alternate providers of key services and goods.
      • Seek the Proper Advice: It is important to make sure that you obtain the proper advice from professionals and advisers — including legal, financial and operational consultants — sooner rather than later. Important steps can be taken now to proactively address issues that likely will arise in the coming months, and such actions will be reviewed in the future under the proverbial “restructuring microscope.” Create the proper record based on reasoned advice. Where appropriate, consider alternative strategies to preserve business operations and value.
      • Manage Communications to Key Stakeholders: It is essential that businesses proactively manage their communications to key stakeholders, including lenders, employees, customers/clients, vendors and suppliers. Companies should consider whether they have sufficient internal resources for their strategic communication outreach and, in any event, coordinate with their legal and financial advisers on their crisis event communications.

Bank Debt Investments: 

      • Par versus Distressed:The vast majority of U.S. bank loans traded in the secondary market settle on either par or distressed forms published by the Loan Syndications and Trading Association (LSTA). The distressed forms offer significantly more protection for buyers of bank debt, including representations, warranties and indemnities specifically designed to guard against certain credible risks (such as equitable subordination or disgorgement) inherent in a restructuring or a bankruptcy proceeding. Credits that have been trading on par documents now may be sufficiently stressed that investors should consider the advantages of settling trades with the protections provided by the distressed forms.
      • At the Time of Trade: In the absence of a “shift date” published by the LSTA, there is no clear guidance as to whether a trade should settle on par or distressed documents. Clearly, bank loans trading below 80% indicate that the market is recognizing financial concerns. Market practice requires that determination of the type of trading documentation be negotiated by the parties “at the time of trade.” Thus, when entering into a new trade, it is critical that loan market participants consider the differences between par and distressed documentation and whether the allocation of risk for a particular credit warrants distressed forms.
      • Shift Date: Upon request, the LSTA will determine the date on which the market convention for transferring a particular borrower’s debt has shifted from par to distressed documentation. The LSTA provides a framework for selecting the shift date, which is designed to promote efficiency in the loan market. In determining the shift date, the LSTA analyzes and reviews trade data provided by dealers and market makers. Loan market participants investing in a new credit should be aware of a shift date, and if no shift date exists, they should consider requesting one from the LSTA.

Taxes:

      • Treasury Secretary Steven Mnuchin announced that the April 15 deadline to pay federal taxes owed for many individuals and business will be extended by 90 days. Taxpayers must still file their income tax returns by the April 15 deadline or seek an extension, but individuals may defer payment of up to $1 million of the income tax liability reflected on such return, and corporations may defer up to $10 million of such tax liability, for up to 90 days without penalties or interest.  Other extensions, such as for payment of estimated or other taxes, or for filing the returns themselves, may be forthcoming.  No official Treasury statement has been issued.
      • Any relief granted by the U.S. Treasury does not automatically extend to state and local tax filings and payment obligations, which require action by the individual states. A handful of states, including California and Connecticut (discussed below), already have adopted emergency measures. New York State and New York City have not done so as of yet.
        • Connecticut has extended the filing and payment deadlines for certain tax returns due March 15 by at least 30 days. The filing date for Pass-Through Entity Tax Returns is extended to April 15, and the payment deadline is extended to June 15. The filing and payment deadlines for Unrelated Business Income Tax Returns and Corporation Business Returns are extended to June 15. The Connecticut Department of Revenue will adjust due dates for filing and payment of state income taxes to align with any specific, actionable announcement from the IRS.  In light of Mnuchin’s announcement regarding a federal payment extension discussed above, the due date for income tax payments should be extended for 90 days.
      • Parties also often have contractual provisions requiring them to provide or entitling them to receive tax information by specified dates (such as for Schedules K-1s from partnerships). You may wish to review these obligations/rights in light of federal and state extensions as well as due to possible difficulties with complying.
      • Taxpayers may wish to revisit the amount of any estimated tax payments made or to be made with respect to 2020 in light of changes to projected financial results.
      • We note that the tax reform legislation enacted in 2017 makes it more difficult to utilize losses. Net operating losses can no longer be carried back to obtain refunds and can be used to offset only 80% of taxable income. In addition, significant limitations on the deductibility of net interest expense were adopted, the cost of which increases as income declines relative to interest expense. 
      • Equity values are relevant in many tax contexts, such as whether a transaction qualifies as a reorganization, the annual limitation on the use of net operating losses following an ownership change and whether a foreign corporation is a passive foreign investment company. Taxpayers should be mindful that market declines could have significant implications in these and other contexts. 
      • The Emergency Paid Sick Leave Act of 2020, which was passed by the House and will be considered by the Senate this week, would provide employers refundable tax credits for all or a portion of sick leave and family leave that is paid pursuant to the act (see a summary of the act in the Employment section of this Guide). The credit would be funded with the employer portion of payroll taxes paid by the employer on wages of all of its employees for the applicable period(s).  A similar credit would be available for self-employed persons. The credit would be capped, both in terms of the daily wages or self-employment income covered — generally (i) $511 per day for sick leave to care for oneself or (ii) $200 per day to care for a family member or if a child’s school is closed and for family leave — and in terms of duration of the credit (generally 10 days for sick leave and 50 days or $10,000 for family leave). The legislation authorizes Treasury to implement rules to prevent abuse of the credit. Documentation and forms to demonstrate the right to the credit will be forthcoming.
      • The U.S. Tax Court announced that it will reschedule trials and hearings as needed. It is expected that state and local tax agencies will take or have already taken similar steps.
      • The IRS is easing enforcement actions. According to an internal alert sent to its employees, the IRS will stop some enforcement actions, including notices to delinquent taxpayers and collection actions such as levying wages and bank account funds and filing federal tax liens.

Insurance Industry:

      • The insurance industry seems well positioned to withstand and even find opportunities in the COVID-19 pandemic. Globally, carriers have unprecedented levels of capital, and alternative capital sources such as insurance-linked securities and securitized reinsurance continue to be robust.
      • Very early indications suggest that given the nature of the losses sustained in the economy (business interruption primarily), insurance losses may not be catastrophic. 
      • At the same time, health carriers in the United States have come under state and federal emergency mandates in recent days to waive cost-sharing (such as deductibles and copays) for COVID-19-related care. Carriers should consider these mandates carefully in administering benefits in the near term. 
      • The pandemic should heighten sensitivity among consumers and businesses to the need for health coverage, which could stimulate demand in the medium term. In addition, the trend toward more customized distribution and products in personal lines will continue as consumers conduct even more personal finance and shopping online and on mobile devices.
      • The National Association of Insurance Commissioners has converted its upcoming national meeting to virtual-only format, including a public session on March 20 about state responses to the COVID-19 pandemic.

      • The New York Department of Financial Services is extending by 45 days the deadlines by which regulated entities have to make certain required periodic filings. These include annual cyber certifications. Details are here.

      • New Jersey’s pending legislation, requiring certain business-interruption policies to cover the pandemic, would permit carriers to recover those losses from amounts assessed on industry by the NJ Commissioner of Banking and Insurance. 

Land Use (New York City)

Updated: March 20, 2020

  • Governor Andrew Cuomo issued an Executive Order on March 18 mandating that businesses, except those performing essential services and functions, reduce in-person workforces by 75%. Construction is included on the list of essential businesses and consequently it appears that the construction industry is exempt from the Executive Order.

  • Cuomo issued an Executive Order on March 13 that permits government bodies subject to the Open Meetings Law to conduct meetings remotely, provided that the public has the ability to view or listen to the meetings and that the meetings are recorded and later transcribed.

  • The Department of Buildings is instituting temporary rules to drastically reduce walk-in traffic to its offices. Please see further instructions in the link below:

https://www1.nyc.gov/assets/buildings/pdf/covid19_application_processing_response_sn.pdf 

  • Mayor Bill de Blasio issued an Executive Order on March 16 suspending ULURP, the landmarks designation process, and other procedures applicable to the city planning and land use review processes, to the extent they impose limitations on the amount of time permitted for the holding of public hearings, the certification of applications, the submission of recommendations, any required or necessary voting, the taking of final actions, and the issuance of determinations. The suspension will have to be renewed every five days but is expected to be renewed for the foreseeable future. It is possible that the City Council will pass legislation to formalize a longer-term suspension of the ULURP process. Per the mayor’s Executive Order, the City Planning Commission will not meet until further notice. https://www1.nyc.gov/site/planning/about/press-releases/pr-20200316.page. The Department of City Planning is accepting applications at its offices at 120 Broadway on Mondays and Thursdays, by appointment only. Applications can also be sent via FedEx, USPS or UPS. Emailed applications are not considered filed/received until payment and copies have been accepted.

  • The Board of Standards and Appeals (BSA) will be holding its review session and public hearing on March 24 by teleconference using Zoom.  More information is available here https://www1.nyc.gov/site/bsa/index.page 

  • The BSA is strongly encouraging applicants to submit application materials electronically. New applications will not be deemed accepted until reviewed and approved by staff. Follow-up submissions on active applications must be submitted electronically. Additional instructions regarding applications and submissions can be found on the BSA’s website, https://www1.nyc.gov/site/bsa/index.page. Finally, the BSA is strongly discouraging in-person review of case files and archival materials.

  • The Landmarks Preservation Commission (LPC) has canceled all public hearings through the remainder of March. LPC encourages electronic submission of all application filings, submissions and correspondence. Additional instructions regarding applications and submissions can be found on LPC’s website, https://www1.nyc.gov/site/lpc/index.page.

  • The Land Use Department has been coordinating with consultants to ensure that all land use applications can continue to progress through the pre-certification process and be timely filed.

  • This is, of course, an evolving situation with rapidly changing guidelines from public health experts, and therefore this information remains subject to change. Please contact the Land Use Department or the relevant land use agencies directly for the latest information.  

See Real Estate Considerations for additional information that may be relevant to development rights transactions.

Business Immigration:

Cybersecurity:

      • Beware! According to news reports, hackers and other cyber fraudsters are attempting to capitalize on opportunities presented by the increased numbers of people working from home. It is therefore extremely important that a company’s employees engage in good cyber-hygiene practices when working remotely, including:
        • Employees should not use public Wi-Fi to access their company’s systems (and should generally limit their access to public Wi-Fi when using any mobile device).
        • Make sure all devices have secure passwords.
        • Employees should not forward work documents to personal email, which is much easier to hack.
        • Employees should scrutinize email addresses carefully to make sure each communication is actually from the person they think it is from. 
        • Subject any unusual requests – including, for example, last minute changes to wire or other payment instructions – to additional levels of verification. Pick up the phone and verify.
        • Employees should be on heightened alert for emails or voicemails from individuals asking to send or wire money or to provide confidential or other valuable information. 
        • Employees should be on heightened alert for phishing scams and scrutinize all links before clicking on them.
        • Note that recent phishing scams attempt to capitalize on COVID-19 fears (e.g., encouraging recipients to click on links to purchase masks, hand sanitizer, and other COVID-19-specific safety and medical devices or to connect to helpful information from reputable organizations such as the Centers for Disease Control and Prevention or the World Health Organization). 
        • Employees should be careful working in public spaces to make sure screens and papers are not visible to others.  
        • Do not use text messages or other social media applications for work. 
        • Generally exercise good common sense. 

Matters Generally Affecting Companies in Europe:

      • In Europe, the legal issues arising from the pandemic generally parallel those arising in the United States. And as in the United States, additional unexpected issues might arise, so watchwords for businesses should include “Take nothing for granted.”
      • The following are some high-level points to keep in mind:
      • Employment: Immediate issues presented to employers include complying with their obligations to safeguard their employees, such as alerting them of and protecting them from dangers; ensuring business continuity, generally including working remotely; paid leave for employees not working (including full or partial sick leave); and possible dismissals. These measures must comply with country-specific requirements in Europe.
      • Tax and payroll charges: European governments are planning and implementing a myriad of tax deferral and relief measures designed to alleviate short-term cash flow issues as well as losses caused by the massive economic disruption in progress and to delay some filing deadlines. Only when details become available can these measures be assessed.
      • M&A and P/E: Impact of the pandemic will include heightened due diligence on relevant issues; increased attention to reps/warranties on issues possibly impacted by COVID-19 and to material adverse effect language; and, potentially, hesitation to use locked-box pricing mechanisms, which are largely used in European deals and generally assume continuity of profitability. There may be attempts to renegotiate some deals signed but not closed, in particular those with material adverse effect clauses (although material adverse effect language may exclude the pandemic). Perhaps most important for this sector, distress of some strategic players or investors may create attractive acquisition opportunities.
      • Securities regulation: Impact of the epidemic will have to be taken into account in complying with disclosure rules applicable to listed companies throughout the European Union (EU), including timely disclosure of significant nonpublic information and presentation of risk factors and future outlook (specifying assumptions used). Audit trail and voice-recording requirements will continue to apply to staff working remotely.
      • Financial and other contracts: In case of a current or expected breach, relief available will depend on the basic tools of contract analysis: the facts, applicable contractual language and applicable law. Note that in civil law systems, force majeure might excuse nonperformance whether or not the contract includes a clause to that effect.
      • Insurance: Most business interruption policies will not cover pandemic-caused losses, but wording should be reviewed before deciding not to make any claim. Event cancellation coverage may provide relief to some. If a company’s actions or failure to act in connection with the pandemic could be subject to litigation, coverage under errors and omissions, directors and officers, and other liability policies should be reviewed carefully.

Merger Control Filings in Europe:

      • At the EU level, merger, acquisition and creation of full-function joint ventures meeting certain revenue thresholds are subject to pre-merger control filing with the Directorate-General for Competition (DG COMP) of the European Commission under Regulation (EC) No. 139/2004 (EU Merger Regulation).
      • DG COMP announced that business continuity in the enforcement of the EU merger will be ensured. However, companies are encouraged to delay originally planned merger notification until further notice when possible.
      • Effective Monday, March 16, the DG COMP will temporarily accept electronic submissions by email on the functional mailbox of the merger registry (comp-merger-registry@ec.europa.eu) by putting the case team in copy if one has been assigned or through the Trusted Document Exchange platform (eTrustEx) for registered users. The delivery of the paper original will be arranged at a later time. Hand deliveries to DG COMP will remain possible. As before, the delivering party must call the Merger Registry prior to making a hand delivery.
      • There are no other changes in the EU Merger control procedure. The 25-working-day time period for the Phase I investigation and the 90-working-day time period for the Phase II investigation still are applicable. However, DG COMP announced that services are likely to face difficulties in collecting information from third parties, such as customers, competitors and suppliers, in the coming weeks and to face limitations in terms of access to information and databases and information exchanges following the remote working measures taken. This situation should be considered by notifying parties.

 

 

Authors and Editors

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