4. Data Privacy and Security – Government officials have emphasized the need for social distancing to slow the rate of COVID-19 infection. As a result, many businesses are implementing remote work arrangements. While technology has long enabled remote work, the current circumstances will tax these remote work systems to an extent not previously contemplated. You should examine policies on remote access to company systems and on the protection of business and personal information in light of the anticipated heavy volume of remote workers. Security features must meet the needs of the current circumstances, and may require enhancement. Likewise, since many employees will be new to remote work, it will be important to clearly communicate and enforce company policies on data security and to train or re-train employees on security measures such as dual authentication and encryption. Particular attention should be given to defense against phishing and similar nefarious activity, which tends to increase in times of crisis.

At the same time, businesses are faced with decisions around the collection and receipt of health-related information about their employees, visitors, and others, and must also consider data protection and disclosure obligations with respect to that information. A detailed client alert on data privacy issues under U.S. law is forthcoming and will be available at reedsmith.com.

5. Contractual Issues – Supply chain disruption is to be anticipated. Clear lines of communication with your key suppliers and service providers should be opened as an early warning system. Such communications can also give you visibility into the business continuity plans of your suppliers/providers and can facilitate thoughtful contingency planning. Secondarily, from the legal perspective, you should expect to see suppliers and providers invoking relief clauses from their contractual obligations. Of course, supply agreements are not the only contracts of concern. Other critical contracts, such as facility leases and customer contracts, will need to be examined for potential termination rights. Among the contractual issues to be examined are:

1. Force Majeure Clauses – A force majeure clause may excuse a supplier’s performance if an unforeseen event outside of the supplier’s control prevents it from performing. Similarly, certain customers may seek relief from contracts requiring them to purchase specified amounts of goods or services. The COVID-19 outbreak is not necessarily a valid basis for invoking a force majeure clause. The supplier/purchaser would need to clear several hurdles, including being able to establish that it could have performed, but for the outbreak. If the force majeure clause does not specifically identify the risk (e.g., pandemic), the parties may be deemed to have allocated the risk to the supplier/purchaser. For more detail on force majeure clauses, visit reedsmith.com.
2. Common Law – A variety of common law defenses may potentially excuse non-performance. Among those are impossibility (a supervening event has rendered a party’s performance impossible), commercial impracticality (a supervening event has rendered a party’s performance materially more difficult and expensive), and frustration of purpose (a party’s known principal purpose for entering into the contract has been obviated by a supervening event).
3. Statutory Law – In U.S. contracts for the sale of goods, the Uniform Commercial Code (UCC) (as codified by the relevant states) provides statutory relief for non-performance under specified circumstances. For example, UCC section 2-615 generally excuses performance when a party’s obligations have become impracticable due to unforeseen supervening circumstances not within the party’s control.

6. Public Company Disclosure and Related Issues – The outbreak of COVID-19 poses various issues for companies subject to SEC reporting and disclosure rules, including the following:

1. Risk factors – Companies should carefully review the risk factors included in their SEC reports to ensure that they are addressing all risks related to the COVID-19 outbreak (e.g., customers, suppliers, and service providers whose businesses have been negatively affected by the virus; quarantine of employees; cybersecurity risks; closure of manufacturing facilities; travel restrictions; reduced consumer spending; and uncertainty around the duration of the impact of COVID-19).
2. Earnings Guidance – Companies that have issued annual or quarterly guidance should determine whether such guidance remains reliable and update it if necessary. Companies that have not provided guidance to date but are considering doing so should proceed cautiously and ensure that they are comfortable with the guidance they intend to provide in light of current market uncertainties. Companies should also carefully review their forward-looking statement disclaimers to ensure that they have included risks associated with the COVID-19 pandemic.
3. Annual meetings – The consensus from health organizations worldwide to implement social distancing and avoid group meetings could impact a company’s ability to conduct in-person annual shareholder meetings. Companies should continue to monitor the situation and communicate with their proxy service providers regarding the possibility of, and procedures for implementing, a virtual shareholders’ meeting in the event that it becomes necessary or advisable to move in this direction. The SEC has issued guidance on this matter, which is available at sec.gov.
4. Periodic Reporting Relief from the SEC – The SEC has issued guidance providing conditional relief with respect to certain publicly traded company filing obligations under the federal securities laws. Companies who qualify may be granted an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. The SEC's full release is available at sec.gov.
5. Capital Markets – Given the turbulence and volatility in the capital markets, companies may find it difficult to obtain reasonable pricing or even consummate a transaction over the next few weeks or months. Liquidity should be analyzed in light of potential delays in capital raising efforts.
6. Share Buyback Programs – With depressed share prices, many companies with available cash on their balance sheets are considering share buyback programs. While the economics of such programs may be appealing, companies are encouraged to engage counsel to analyze the legal ramifications of implementing such a program at this time.

A more detailed discussion of legal issues impacting U.S. public companies is forthcoming and will be available at reedsmith.com.

7. Mergers and Acquisitions (M&A) – The COVID-19 pandemic is impacting M&A transactions in various ways, including:

1. Pricing – Buyers and sellers are revisiting private company valuations in light of the disruptions in the public markets. For deals that have not yet progressed to definitive documentation, repricing discussions are to be expected. In this uncertain valuation environment, earnouts can be an effective way to share valuation risk.
2. Due Diligence – For transactions in the due diligence phase, buyers should undertake an enhanced examination of the target’s liquidity and access to capital, commercial insurance programs, employment law issues (with a particular focus on compliance with today’s evolving legal landscape), critical commercial agreements (with a particular focus on force majeure and other performance relief clauses), supply chain stability and viability, and health/welfare plans. While the impact of the COVID-19 pandemic on a target will be difficult to assess in the immediate term, buyers should carefully examine the target’s response to date, the target’s own projections of potential impact, the target’s business continuity plans, and the target’s risk management functions to evaluate the target’s ability to successfully navigate this crisis.
3. Completion Risk –

1. Material Adverse Effect (MAE) Clauses –  For purchase agreements that have already been executed but have not yet closed, the parties will need to examine (1) whether the scope of their MAE clause covers adverse effects arising out of the COVID-19 pandemic, and (2) whether, even if so, the clause requires disproportionate impact on the target to trigger an MAE. For purchase agreements signed before the outbreak, there is likely to be a high degree of variability in how those questions are answered. Even though COVID-19 is not likely to be mentioned specifically (unless the purchase agreements were signed very recently), the MAE clause may include “epidemics” or “disease” or other similar events. For purchase agreements still in the negotiation stage, the MAE clause will almost certainly directly address COVID-19. As a known risk with as yet uncertain impacts, the parties will need to agree on what COVID-19-related impacts would trigger a termination right for a buyer. Options include a “material worsening” of the pandemic, a pandemic of a duration exceeding a specified length of time, and/or a disproportionate impact of the pandemic on the target’s business relative to other businesses in the target’s industry.
2. Operating Covenants During the Executory Period – Sellers will need to consider their ability to operate in the ordinary course during the executory period. Buyers will need to be cognizant of legal mandates that impact the target’s ability to operate in the ordinary course. (See, for example, New York’s mandatory 50 percent workforce reduction, which goes into effect on March 20, 2020.)  Purchase agreements sometimes provide that a target’s obligation to operate in the ordinary course is excused by compliance with applicable law.
3. Necessary Governmental Filings – For transactions requiring a Hart-Scott-Rodino (HSR) filing, or merger transactions requiring a secretary of state filing, or other transactions which cannot be consummated without governmental action, buyers and sellers need to be cognizant of the possibility of delay due to a reduced governmental workforce or outright closures of applicable regulatory offices.
4. Drop-Dead Dates – For purchase agreements that have not yet been signed, the parties should consider extended drop-dead dates, to accommodate likely delays in regulatory approvals, contractual consents, and financing activities. The parties can also consider a simultaneous sign and close.
5. Financing Risk – In leveraged transactions where (i) there is no financing condition and (ii) the lenders have provided limited condition commitment letters, the lenders would be permitted to withdraw their committed funding only under extremely limited circumstances. COVID-19 should not have an impact on already committed funding and the buyer’s ability to borrow at close should not be impacted. That said, if credit markets tighten and lenders find it more difficult to syndicate loans, applicable flex provisions will be implicated and buyers should evaluate the impact of those potential increased costs and more burdensome terms on their businesses. In the event a lender breaches its financing commitments, buyers will likely have an obligation under the purchase agreement to arrange for alternative financing (which may become difficult in this environment) or pay a reverse breakup fee if unable to close. Finally, for transactions that have been signed and that have a financing condition, there may be an increased risk that the financing cannot be arranged and that the financing condition will be utilized.

d. Indemnification, Risk Allocation and RWI Exclusions – 

1. Representations and Warranties – Buyers will likely seek COVID-19-related representations, especially relating to business continuity plans and workforce health and safety. As there are several typical representations that also could be deemed breached as a result of the pandemic (e.g., the undisclosed liabilities representation), it will be important for sellers to state that the COVID-19 representation is the sole representation relating to pandemic risk.
2. Representations and Warranties Insurance (RWI) Policy Exclusions and Indemnification – RWI underwriters have begun to include COVID-19 exclusions in policy language. As such, a buyer’s post-closing recourse in respect of COVID-19-related matters will likely be limited to escrows, holdbacks, or claims against sellers. Again, as this is a known risk of as yet undetermined scope, a risk that cannot be transferred to an insurance provider, the parties will need to think creatively about how to allocate this risk among themselves. The options could include cost-sharing indemnifications (where the seller and buyer each take a percentage of the pandemic losses up to a capped amount) and shared remediation control (where the seller retains some control over how the pandemic losses are remediated, mitigating against the risk that the buyer over-spends the seller’s money).

8. Debt Financing Issues

1. Financial Covenants – Borrowers should closely review the potential impacts on their financial covenant compliance and consider if a conversation with their lenders is needed. Even in covenant-lite structures where a COVID-19-related drop in earnings may not create a near-term financial covenant default, the loss in earnings may have negative impacts on a borrower’s ability to operate and implement its business model well into 2021. Borrowers should review existing definitions (such as “Consolidated EBITDA,” “Consolidated Net Income” and similar terms) in their credit documents and consider using the flexibility prevalent in many credit agreements to maximize add-backs, manage the timing of cost-savings and restructuring initiatives, and minimize the impact on their covenants. Careful analysis of the exact wording is important. It may be wise to involve advisors and auditors in order to appropriately classify the applicable line items and determine if such add-backs are permissible under applicable accounting standards.
2. Short Term Waivers and Other Strategies for Loosening of Covenants –  For those credit agreements with financial maintenance covenants, borrowers should consider utilizing voluntary prepayments and equity cures, requesting additional flexibility or, in some cases, requesting covenant relief. When reviewing options, sponsors and borrowers should consider the alternatives that would have the most impact and any applicable limitations on those alternatives. For those seeking a waiver, borrowers should review the required consent threshold and the likelihood of success. Where a borrower anticipates a longer-term problem as a result of the COVID-19 pandemic, a borrower should consider talking to its lenders early about working to reset covenants to reestablish sufficient headroom in light of anticipated business changes. This will likely involve consent fees.
3. Consider Accessing Liquidity with Draw-Downs – Among other things, borrowers should pay attention to upcoming liquidity needs and should consider drawing under available revolver capacity while they can, particularly if a breach of upcoming financial covenant tests could occur. In most cases, the potential for future non-compliance with a financial covenant will not limit the borrower’s ability to draw today. That said, borrowers should be mindful of representations and warranties that must be true upon each revolver drawing and carefully review them to confirm that the impact of COVID-19 has not rendered any representations or warranties untrue in any material respect. Additionally, borrowers with asset-based loans will need to consider the impact COVID-19 may have on the amount, valuation, and eligibility of their receivables and inventory under their borrowing base, and the potential effect on liquidity if a lender establishes or increases reserves against the borrowing base in anticipation of adverse changes. Finally, borrowers should be aware that, for credit facilities that have not yet closed, lenders may seek to introduce anti-cash-hoarding provisions, which would limit or eliminate a borrower’s ability to draw funds and hold cash in anticipation of impending adverse events.
4. Revaluing Assets Supporting Secured Facilities – In anticipation of any “Default” or “Event of Default”, lenders will likely perform a collateral review to make sure there are no gaps in documentation or lapses in security interests. Lenders may rely on a “further assurances” clause to require borrowers to clean up any deficiencies. For asset-based loans, borrowers will want to consider whether there are scheduled or potential re-evaluations of the assets comprising the borrowing base that would affect the availability of credit under the secured facility. For example, reserve-based loans will be undergoing borrowing base redeterminations in March 2020, and this could result in many borrowing base deficiencies under those agreements, which would require mandatory prepayments of the outstanding loan amounts and potentially cause liquidity issues for borrowers.
5. Margin calls – Some lenders may “mark” (determine the value of) assets supporting a loan facility. To the extent that the lender determines that a deficiency in valuation exists, it may have the right to require the borrower to post additional collateral or pay down the facility until the valuation is no longer deficient. Margin calls can substantially affect the operating costs of a borrower. To the extent that the borrower does not have cash to make the margin call, it could cause defaults on the financing and in the worst cases, push the borrower into bankruptcy.
6. Material Adverse Effect Considerations –  Lenders are reluctant to call “Events of Default” based on material adverse effect provisions, but it is always necessary to consider this in light of global and domestic economic and other market events. Companies should examine the MAE definition in their credit documentation to consider whether any defenses may be available in the event that a lender calls an “Event of Default” based on the occurrence of such effect or prospective effect. Companies should consult with any applicable regulatory experts who may provide advice as to the particular industry affected by the event and whether any relevant defenses may be available.

Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you many face related to COVID-19.

For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com