Steps for Businesses to Consider as Coronavirus Spreads
As the number of COVID-19 coronavirus (“Coronavirus”) cases continues to increase, and with the World Health Organization raising its threat assessment of Coronavirus to its highest level, employers and businesses are becoming increasingly aware of the legal challenges that are likely to arise.
At Stroock, we have established a multidisciplinary task force focused on Coronavirus-related issues. Our aim is to provide holistic guidance for our clients’ varied legal needs. Some key issues to consider are set forth below.
General Business Considerations and Contracts
- Assess your potential exposure resulting from the Coronavirus outbreak, including as it relates to supply chains, human resources, ability to perform obligations, technology limitations and impact on revenue and investments.
- Consider whether the Coronavirus outbreak constitutes a force majeure under existing contracts and whether to declare force majeure under existing contracts. Prior to declaring a force majeure event, review requirements for doing so and beware of unintended consequences (e.g., obligation to mitigate consequences, repudiation of a contract if incorrectly declaring a force majeure event, ability of other party to terminate exclusivity provisions, etc.). Consider that competitors are likely facing the same issues.
- Incorporate into pending contracts a force majeure provision that expressly includes as force majeure events (i) pandemics, epidemics and global health emergencies, and (ii) delays relating to obtaining supplies, parts and other products from China, Korea or other impacted areas.
- Monitor any governmental edicts, actions or declarations (e.g., Switzerland has banned gatherings over 1,000 people), as formal laws by a governmental entity may be already expressly included as force majeure.
- If the Coronavirus outbreak does not constitute a force majeure event under existing contracts, consider whether the defenses of “frustration” and “impossibility” are applicable (the applicability is limited and will vary depending on the governing law of the applicable agreement).
- Consider whether the Coronavirus outbreak is a “material adverse change” or “material adverse effect” under existing agreements.
- Review dispute resolution provisions dealing with terminations or defaults caused by or directly or indirectly related to Coronavirus.
- Consider whether the Coronavirus affects your or your counterparties’ ability to perform under a contract and meet deadlines.
- Review contracts to determine upcoming deadlines and be proactive in providing written notice of actual and/or potential delays or other material impacts of the Coronavirus.
- Consider how the Coronavirus may impact “best effort” clauses and the like.
- Consider how travel restrictions might impact inspection rights and rights to be present at governance meetings.
- Review insurance policies and determine whether the policies expressly cover damages arising from a pandemic or communicable disease (e.g., business interruption, business income, “key man,” employee coverage, liability, any specific policies covering pandemics or disease-related losses, director/officer liability, etc.).
- Consider whether insurance policies will cover actions taken by the employer, supervisors, managers, etc., with respect to the Coronavirus.
- Determine whether any notices must be given to insurers under existing insurance policies.
- For ongoing cases, obtain a list of upcoming deadlines over the next six months and be proactive in preserving witness testimony.
- Be proactive in seeking extensions in respect to deadlines and continuances of hearings and trials to the extent Coronavirus impacts discovery or witness availability.
- Consider how travel complications might impact witness/counsel travel.
- Evaluate company policies relating to remote working, sick leave and family leave and determine whether any revisions are necessary. Pay particular attention to flexibility of policies with respect to caring for sick family members, waiving requirements for doctors’ notes, and permitting employees to take leave when schools and day care providers are closed.
- Prepare a specific crisis management policy for dealing with pandemics.
- Consider protocols for employees who become subject to quarantine (placement on leave, use of sick days, vacation days, etc.) and reintegrating employees successfully removed from quarantine protocols.
Preparation and Communication:
- Prepare a pandemic preparedness plan or guide if one does not already exist.
- Identify a pandemic coordinator and/or team with defined roles and responsibilities for preparedness and response planning. Include on the team staff with expertise in equal employment opportunity laws, human resources and risk management and make sure such team and any guides they put forth are accessible to all employees (including alternative versions to address employees with disabilities, multiple languages, etc.).
- Communicate with employees regarding Coronavirus, including providing information on how the virus is transmitted, what the employer is doing, FAQs and links to reliable resources.
- Encourage employees to stay home when sick.
- Increase frequency of environmental surface cleaning to remove viruses from frequently touched surfaces and objects and encourage employees to do so in their personal spaces.
- Stock up on cleaning supplies that have been recommended as effective.
- Provide tissues, hand sanitizer, disposable wipes and no-touch disposal receptacles for use by employees and visitors.
- Avoid asking employees questions about any known or suspected medical condition or medical history and treat employees uniformly. If you ask employees about personal travel plans, do not single out any particular groups of employees for travel restrictions, quarantines or any other policy based on their national origin, ethnicity or other protected status.
- Encourage employees to follow good hygiene practices (e.g., hand-washing, coughing and sneezing into a tissue or the crook of the elbow instead of the hand, staying home when ill, etc.).
- Communicate with vendors, suppliers and providers of temporary workers about the importance of workers staying home when sick.
- Employers of unionized workers may wish to open a dialogue with union business agents or other representatives about the application of workplace rules and leave policies.
- Consider requiring anyone returning from an affected area to work remotely or take leave until the incubation period of 14 days has passed (or such other time as recommended by the Centers for Disease Control and Prevention).
- Consider suspending non-essential business travel to affected areas.
- Evaluate remote working capabilities and confirm that the company’s IT infrastructure (e.g., servers, back-up servers, network bandwidth, etc.) can handle a significant amount of, if not all, employees working remotely. Technological solutions will facilitate these work from home arrangements, inclusive of videoconferencing capabilities.
- Consider alternatives to travel (many providers are waiving cancellation fees) and in-person meetings and conferences.
- Cross-train employees where possible in anticipation of increased absences.
- Consider whether a transaction will be delayed or impacted due to the Coronavirus (e.g., travel restriction-related delays, delays in conducting due diligence, a delay in signing a lease or guaranty because the parent company of a tenant is based in an impacted area, delayed inspection of construction progress, unscheduled holidays delaying deadlines, supply chain issues — see below — etc.).
- Consider options to mitigate the impact on construction projects of the supply chain effects noted under “Supply Chain” below and consider rights and remedies under construction contracts.
- In order to mitigate any slowdowns in transactions, property owners and brokers should consider new technologies allowing for virtual tours of assets to be used in place of physical asset tours and inspections.
- Prepare for a spike in litigation due to construction delays, missed deadlines on purchase and sale agreements, leases and contracts generally.
- Prepare for potential default claims.
- Review leases and consider potential responses to rent abatement applications.
- Determine whether any parts for equipment needed with respect to building maintenance, repair and replacement originate from areas impacted by Coronavirus and whether there are viable alternatives given availability, delays and pricing impacts.
- Inquire with tenants regarding the amount of employees working remotely and whether scaling back utility usage is feasible.
- Consider limitations on large scale events and reasonably restricting amenities (e.g., cafeterias, fitness centers, etc.).
- Communicate with tenants regarding steps being taken and preparedness.
- Global demand for increased “remote” or “work from home” job fulfillment, in certain industries, will create immediate need for creation, supplementation and leveraging of more sophisticated technology and related investments.
- Landlords may consider new technological advances in building ventilation systems in helping to reduce the spread of airborne diseases.
- Retail malls may suffer as a consequence of shoppers choosing not to gather; percentage rent declines.
- Inquire with landlord’s property management personnel regarding availability and procedures.
- See also Employment issues above.
- Consider impact on tenant improvements, delivery dates and move-out dates.
- Consider impact on mortgage rates, U.S. Treasuries and property values.
- For open-end funds, consider impact on redemptions.
- Potential for workouts and lender forbearance.
- For construction loans, consider impact on key completion dates, cost overruns and potential force majeure
- Consider impacts on underwriting on assumptions given anticipated economic slowdown.
- Consider Coronavirus impact on revenue (for example, businesses relying on foot traffic such as “bricks and mortar” retail, sports and entertainment venues) and potential need for lender forbearance, financial restructuring or bankruptcy protection.
- Significant disruption in world markets, supply chains and consumer concerns could push other companies to consider restructuring.
- Anticipate payment and covenant defaults by affected individual and corporate borrowers; this could lead to a rise in bankruptcy filings.
- Lenders should prepare for value impairment across asset classes and corresponding collateral coverage erosion.
- Market climate could lead to large swings in debt trading prices, with control positions changing hands to opportunistic investors.
- Anticipate that the impact of Coronavirus may be relevant when assessing financial projections submitted in connection with bankruptcy proceedings (e.g., factored in when proving feasibility of a plan).
- Determine your suppliers and their upstream suppliers several tiers back to understand exposure.
- Determine whether products are being sourced from areas impacted by Coronavirus and, if so, whether there will be a delay or temporary halt in distribution.
- Determine if the same or substantially similar products, if possible, need to be sourced from other vendors and regions.
- Consider the impacts on contracts, products, services and pricing if a substantially similar product cannot be sourced from another vendor or region.
- Consider whether contracts with suppliers and consumers need to be renegotiated (however, stay alert to “price gouging” regulations).
- Consider providing written notice regarding impact on ability to perform due to Coronavirus.
- Consider suppliers’ potential liability for not being able to perform.
- Consider reconfiguring the design of your supply chain, if possible, to either incorporate secondary, backup sources or to source locally.
- Consider impacts of reduced consumption as consumers may be subject to quarantine and/or travel restrictions.
- For managers that periodically calculate the net asset value of their funds to calculate management fees, investor subscriptions and redemptions, investor reporting, asset maintenance requirements, and other operational purposes, such managers should consider whether the Coronavirus outbreak has impacted the value of their assets.
- Managers should review their valuation policies.
- Review fund agreements (e.g., partnership agreements, side letters) and disclosure documents.
- Given the sharp decline in the public markets, managers should prepare for the possibility of increased redemptions in coming months, consider their proposed liquidity levels and review their fund documents for potential suspensions.
- Funds with ongoing offerings should consider providing additional disclosure to their existing and prospective investors regarding the potential impact of the Coronavirus and other pandemics on their performance and operations.
While the financial, commercial and social impact of the Coronavirus outbreak is undetermined, businesses would be well served to perform assessments of the impact of this global outbreak and prepare for the outbreak to continue increasing before it stabilizes. Businesses should reach out to their counsel and other service providers to understand their rights and obligations under material agreements as well as to ensure that their service providers have plans in place to minimize disruptions to their ability to provide services to the business.
For More Information
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.