COVID-19 Update - In Case You Missed It: Interesting Items for Corporate Counsel

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COVID-19 Resource Hub

You can view archived issues of this alert, and other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. If you’re currently sheltering in place, hoping to read something to take your mind off the novel coronavirus, well, sorry. Like the rest of the world, COVID-19 is almost the only thing we’re talking about and we, like you, are suffering from receiving too many communications and not enough information. This entry is certainly more of the former, but here’s hoping it provides some of the latter.

    L&E on the front lines.

    Not surprisingly, labor and employment lawyers are on the front lines of client inquiries, as they field questions like “Oh, dear God, what do I do?!?” A resource hub with materials is here, including links to materials from webcasts our specialists have hosted.

    Restaurants and bars.

    Aside from cruise ships and air travel (and of course the health care industry), the beverage and hospitality industry is likely hardest hit by COVID-19 in the short term, as government agencies order restaurants and bars to shut their doors and move to a delivery and takeout only model, and as customers get thin on the ground as they shelter in place. A resource hub from our industry group specialists, including information on the licenses you’ll need and how to get them as you shift your business model, is here. State agencies have been scrambling to issue new guidance and emergency rules to alleviate some of the hardship food and beverage businesses face, and our specialists continue to post key agency updates to the hub as they roll out.

    We have also fielded questions from clients on how deliveries should be made, what safety precautions and protocols should be taken (make sure staff follows strict hygiene protocols, take no chances with potential illness, leave food at the doorstep), and what liability limitations delivery services should put in place (a prominent liability waiver on your app or restaurant webpage would be a good idea). Some information is here and here.

    The sudden interest in force majeure clauses.

    Force majeure clauses, and common law contract principles of impracticality of performance and frustration of purpose, are top of mind for practically everyone. A client alert on the topic, and contact information for attorneys who can help you analyze your contracts, is here. Other alerts about force majeure clauses are here, here, here, here, and here.

    A new interest in business interruption insurance, and an old interest in enterprise risk management.

    Determining whether your insurer will cover your losses during the pandemic is also of immediate importance, and keep in mind that many of the insurance policies that may provide coverage for business interruption have extremely short deadlines for providing notice of a claim to the insurer. Resources for enterprise risk management are here. Other resources are here and here.

    A New Orleans restaurant has been the first out of the gate to file suit against its insurer, seeking a declaratory judgment (here) that its “all risk” insurance policy covers any civil authority shutdown of the restaurant due to the coronavirus, including coverage for business income losses. The complaint also seeks a determination about whether an order issued from the Louisiana Governor that banned gatherings of 250 or more people triggered a “civil authority provision” in the policy, and points out that the policy does not exclude viral pandemics. Press coverage of the suit is here and here.

    Keep in mind that your Board of Directors has general oversight duties, including with respect to risk management. We expect generally that companies will hold board meetings to document appropriate oversight of management while making sure the Board is not getting in management’s way. The results of a brief survey on the frequency of Board updates is here.

    Public companies scramble.

    Two weeks ago, most public company disclosure about COVID-19 was limited to risk factor enhancements. That has changed, and we expect companies to scour the public filings of early adopters – those public reporting companies with large exposures to China or other early hot zones – for disclosure trends (like, say, this one). Key disclosures and concerns will be:

    • Risk factors, obviously, likely sprinkled with disclosure about the effect COVID-19 has already had. For those who already published their annual reports, when COVID-19 seemed like a distant threat, it wouldn’t surprise us if additional risk factors start showing up in current reports on Form 8-K. The immediate risks – lost revenues, employee absenteeism, etc. – are easy, but we expect the risk of debt covenant breaches and other contract breaches will increasingly be emphasized. Forward-looking statement disclaimers likewise should be reviewed with COVID-19 risks in mind.
    • Management’s Discussion and Analysis of Financial Results (MD&A), where the effect of COVID-19 may be the only thing the investing public actually cares about at the moment, and where you are required to disclose information about “known trends and uncertainties.” (See the rule here, SEC guidance here, commentary here and here, and the most recent SEC enforcement action order on the topic here.)
    • Preparing to respond to COVID-19-related questions on your earnings call, because they will come up. See here, here, and here.
    • Remaining Regulation FD compliant, including considering whether any ad hoc responses during an earnings call in a rapidly changing environment merit a press release or a current report on Form 8-K, and making sure public disclosures are consistent with messaging to employees, analysts, shareholders, customers, and suppliers.
    • Whether trading blackout periods are warranted, for example if material non-public information regarding COVID-19 effects or mitigation efforts are broadly discussed within your company.
    • Items required to be disclosed on Form 8-K – say, for example:
      • specified officer terminations or changes in executive officer or director compensation,
      • terminations or material changes to material contracts,
      • acceleration of financial obligations (say, if you breach debt covenants),
      • goodwill impairments,
      • exit or disposal costs, including costs to terminate employees under FASB ASC paragraph 420-10-25-4, and
      • bankruptcy declarations.
    • Whether to update guidance, and when. We expect a flood of guidance rescissions, except perhaps for those companies that will benefit from COVID-19 (say, food delivery services or – and we still don’t get this – companies that make toilet paper). See here.
    • Inclusion of “subsequent event” disclosures in financial statement notes.
    • The potential for securities fraud lawsuits for those who exaggerate their preparedness or who underplay risks to their business.

    The SEC has issued orders and guidance related to COVID-19.

    • Its order allowing an additional 45 days to file Form 10-Ks and 10-Qs, upon filing a current report on Form 8-K with specified information, is here.
    • Proxy guidance, which includes guidance on holding a virtual shareholder meeting, is here, and commentary on the guidance is here, here, and here. (Even the Council of Institutional Investors, Glass Lewis, and ISS, which all hate virtual meetings, are cool with them this year. See here and here.)
    • Notice of the extension of comment periods on pending SEC rules until at least April 24 is here.

    Some additional resources for public companies are here, here, here, here, and here.

    M&A and HSR.

    We expect M&A activity to grind to a near halt in the near term, much as it did in the financial crisis in 2008-2009. That trend may be tempered somewhat by the extraordinarily low borrowing rates and by federal efforts to bolster the economy, but generally we are skeptical that traditional economic tools will overcome generalized anxiety and government mandates to not go anywhere or do anything. It also may be that, if some companies weather the pandemic well and still have cash, an M&A bargain-shopper boom will follow this summer.

    We expect parties that are negotiating purchase and sale agreements, or who signed but haven’t closed them, are carefully reviewing the agreements to determine whether the effects of COVID-19 will result in the breach of a representation or the failure of material adverse change (MAC) closing condition. Careful review of the definition of MAC or material adverse effect (MAE) is paramount, and we expect sellers will carve out from representations the potential effects of COVID-19. Commentary is here, here, and here.

    For those who are still doing M&A, note that HSR filings are being accepted only electronically and early termination is not going to be granted. More detail, including our own experience with e-HSR filings, is here.

    Rescind dividends to save cash?

    Three preeminent corporate law firms in Delaware issued their joint views, here, on a corporation’s ability to rescind dividend declarations and save cash to weather the effects of COVID-19. Per their analysis, the declaration of dividends creates a debtor-creditor relationship, but it may be possible to defer the record date and payment date, if not already declared, and the corporation should consider whether changed circumstances means a sufficient surplus no longer exists, which would make the payment illegal. A public company whose shares are already trading ex-dividend (that is, the value no longer reflects a pending dividend) should consider whether the juice of short-term cost savings is worth the squeeze of potential lawsuits from recent sellers.

    Litigation.

    Expect it. Securities class action lawsuits were recently filed against a cruise line and a pharmaceutical company. See here and here. More class actions, contract claims, and tort claims will follow. There also are frivolous suits ongoing, including this one, and probably more to come.

    Privacy and data security.

    As remote working quickly becomes the norm, make sure your business adequately manages data privacy and security risks. A checklist of principles and practices is here.

    Federal and state relief.

    Federal and state relief efforts plunge ahead, with the first of several COVID-19 relief bills enacted yesterday. See here. The U.S. government site for COVID-19 resources is here, the SBA’s site is here, and by now we expect every state has a COVID-19 information hub on its website (for example, Washington State’s is here). President Trump determined that COVID-19 constitutes an emergency under the Stafford Act (see here), leading many to ask what payments to individuals might be non-taxable under Section 139 of the Internal Revenue Code, which exempts from federal income tax amounts “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” Stay tuned here for potential guidance on the non-taxability of COVID-19-related disaster relief, and in the meantime peruse our client alert on the tax implications of the law signed yesterday here.

  2. In non-COVID-19-related news, the SEC recently amended the definitions of “accelerated filer” and “large accelerated filer,” here . Most significantly, the rule allows smaller companies with less than $100 million in revenues to forgo an auditor attestation on their internal controls over financial reporting (ICFR). The rules modify the cover page for Form 10-K, which the SEC just can’t seem to stop tinkering with, to add a check box for whether an ICFR auditor attestation is included in the filing. The rules also categorize more companies as “smaller reporting companies” so they have the advantage of scaled disclosure, increase transition thresholds for moving from accelerated to large accelerated filer status, and alter the tests for exiting accelerated and large accelerated filer status. The rules are effective 30 days after publication in the Federal Register. (So filers on the verge of filing their Form 10-Ks don’t need to sweat this.) The SEC’s press release, here, summarizes the rule. Commentary is here and here.
  3. The SEC also issued final rules that streamline disclosures for certain registered debt offerings, here. Commentary is here and here.
  4. The SEC has proposed rules, here, to “simplify, harmonize and improve certain aspects of the exempt offering framework.” A lofty goal, to be sure, and at a whopping 341 pages, the proposal will certainly give you something to do for much of the time you spend in isolation in the coming weeks. The SEC’s press release, here, summarizes the proposed rule. Among other things, the rules would:
    • Clarify how to move between exemptions without triggering integration issues;
    • Increase fundraising limits for Regulation A, Regulation Crowdfunding, and Rule 504;
    • Clarify that “demo days” are not general solicitations, and make more certain what communications do not constitute general solicitations; and
    • Harmonize disclosure and eligibility requirements, including bad actor disqualification provisions, across exemptions.

    Commentary is here, here, here, and here.

  5. The SEC approved Nasdaq’s change to its definition of “family member,” here. The definition now excludes stepchildren who do not live at home, which makes Nasdaq’s rule consistent with the NYSE rule. Nasdaq lays out the analytical framework for determining whether a stepchild who doesn’t live at home could affect a director’s independence, and perhaps by proxy whether that stepchild is actually loved, here. In addition to watching your Board engage in this heart-wrenching determination, make sure to update your D&O questionnaire to include the revised definition. (The rule also excludes from the definition of “family member” domestic employees. But no one seems to be in anguish about that.)
  6. Finally, we know what you are really clamoring for are words of assurance from a corporate law firm, traditionally a source of great national comfort. Our advice is this: wash your hands thoroughly, socially isolate, follow precautions, keep calm, and be nice to people. Consider how quickly your views on COVID-19 evolved from two weeks ago, imagine what they’ll be like two weeks hence, and get there now. Also, stop hoarding toilet paper.

Key Contributors

James M. Kearney
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