By Jedediah Wakefield, Todd R. Gregorian, Michael S. Dicke, Catherine Kevane and David Bell
COVID-19, a disease caused by the novel coronavirus, has now spread to at least 70 countries, including the United States. Our thoughts are first and foremost with the families of those directly impacted. In addition to the human cost, the virus has impacted transportation, manufacturing, supply chains and public markets, and may dramatically impact the global economy. These disruptions raise significant legal issues, and we are advising companies on a wide range of matters as they evaluate risks and develop plans to address these impacts. This alert addresses contract performance issues and public company disclosures.
The uncertainty about the severity of the COVID-19 outbreak has already had major commercial impacts in the United States, including travel restrictions and cancellations of conferences and other large events. These disruptions raise questions about when contracting parties will bear risks from non-performance.
Under basic principles of U.S. contract law, an event beyond a party’s control may excuse its performance under a contract. Some contracts expressly allocate risks for such events, often—but not exclusively— in “force majeure” clauses. Whether a superseding event excuses a party’s performance will depend on a host of factors, including:
Imagine, for example, a cancelled public conference. A vendor that had agreed to provide on-site services at the conference but who is now locked out due to a quarantine will have different arguments than a company that had agreed to provide online customer support services for the same event.
Myriad variations in the facts and contract language can affect who bears the risk of non-performance under a contract. Below are key considerations:
For companies facing the possibility that they will be unable to perform under existing contracts, or the risk of non-performance by counterparties, proactive and prompt review of relevant contracts, and early communication, may be critical. And companies who are currently negotiating agreements should consider whether to include provisions expressly allocating and mitigating the commercial risks from COVID-19.
The COVID-19 outbreak may also raise public company disclosure and other securities concerns.
SEC Guidance on COVID-19
In a January 30, 2020, statement discussing proposed amendments to management discussion and analysis (MD&A) disclosure requirements and the use of financial metrics, SEC Chairman Jay Clayton also noted that commission staff would monitor COVID-19 developments and may provide specific guidance “regarding disclosures related to the current and potential effects” of the virus. We previously analyzed the proposed SEC disclosure changes and the January 30 statement about COVID-19 here.
On February 19, 2020, the commission issued another statement on the topic, reiterating that the situation is “dynamic” and “the actual effects may depend on factors beyond the control and knowledge of issuers.” Nonetheless, because “how issuers plan and respond to the events as they unfold can be material to the investment decision,” the commission urges company management to engage with their audit committees and outside auditors to evaluate disclosure and accounting issues arising from COVID-19. Moreover, the SEC’s statement specifically noted that issuers “need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855.” The commission further remarked that issuers with specific questions about whether and how to disclose information about the effects of COVID-19 “are encouraged to contact SEC staff,” where “[r]elief may be available on a case-by-case or broader basis.”
On March 4, 2020, the SEC issued further guidance on disclosure issues as part of a grant of conditional regulatory relief for issuers (covered below). This additional guidance includes the following:
Exercise Caution If Commenting on Business Effects of COVID-19
Given the uncertainties about the geographic dispersion, severity and ultimate consequences of COVID-19, public company officials should exercise caution if they choose to comment on how the disease might affect their business prospects.
We encourage issuers to consult with counsel on whether impacts from COVID-19 implicate additional risk factors, MD&A or other disclosure obligations in the company’s specific circumstances.
SEC Provides Conditional Regulatory Relief
In its guidance issued on March 4, 2020, the SEC announced “conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws” in light of the impact of the coronavirus. According to the commission’s order, publicly traded companies may be provided with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020, subject to certain conditions, including a report on why the relief is needed. Additional extensions or relief may be extended as circumstances warrant. A more detailed discussion of the regulatory relief can be found in our related alert.
As with other extraordinary events or developments, companies should consider specific risks that they may face from this outbreak, whether related to the supply chain, customer behavior or other factors, and then, if warranted, ensure these risks are identified or covered in the risk factors in periodic filings. Many companies are adding to the “natural disaster” risk factor and have also updated international business and/or supply chain and clinical trial risk factors as well. Companies with significant operations in China or other heavily impacted regions may consider additional risks specific to their circumstances.
The situation with COVID-19 is evolving, and companies should continue to monitor government communications and guidance from the SEC and other regulators. The extent to which companies are impacted will vary, and it may be premature to develop detailed crisis-response plans. However, companies should consider identifying their main potential vulnerabilities and areas of impact, assign responsibilities for monitoring government communications and guidance, develop clear communications channels with both employees and decision makers and develop continuity plans to address reduced work force or other disruptions to the business. As a general matter, companies should be reviewing and refining their disaster recovery plans on a regular basis.
By Sheeva J. Ghassemi-Vanni and Minal Haymond
The spread of coronavirus impacts virtually all employers, but especially those with personnel who work in concentrated spaces, travel internationally or interact directly with the public in carrying out their job duties. Although the situation is rapidly evolving, employers can take proactive steps to mitigate the impact of coronavirus on their employees and businesses. Employers should recognize, however, that their approaches should be tailored to their businesses and workforces, and that certain preventative and remedial measures may come with attendant legal risks.
Hygiene and Infection Avoidance
If an employer becomes aware of suspected or confirmed cases of COVID-19 among its workforce, it should take the following steps regarding those employees (in addition to the above preventative measures):
Employers should be thoughtful when rolling out coronavirus measures in the workplace since certain measures involve a higher degree of legal risk and may give rise to claims by employees, including invasion of privacy and disability discrimination. To help mitigate legal risk, the measures should be reasonable and undertaken solely to allow the employer to assess whether remedial action should be taken to protect its workforce. Also, employers should act consistently regarding requiring employees to work from home or taking other actions related to a suspected or confirmed case of COVID-19; not retaliate against employees who reasonably refuse to perform job duties because of concerns about contracting the virus (e.g., an employee refuses to attend a large conference because of fear of exposure) and consult with counsel regarding the laws that employers should follow in pandemics.
As government agencies continue to investigate and monitor the coronavirus outbreak, employers should identify and implement appropriate measures for their workplaces to ensure that their employees, and the community, are safe during this critical time.
By Soo Hwang, Ran Ben-Tzur, Amanda Rose, Robert Freedman and James Evans
The U.S. Securities and Exchange Commission issued an order on March 4, 2020, providing relief for companies affected by the COVID-19 coronavirus outbreak. The order is meant to address U.S. companies located in areas affected by the outbreak, as well as companies with operations in those regions. The order provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.
Companies required to make filings under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, are exempted from the applicable filing requirement where the conditions below are satisfied. The above list of filings includes, among others, annual reports on Form 10-K, quarterly reports on Form 10-Q and proxy statements.
The most important condition for application of the order is that the registrant must be unable to meet a filing deadline due to circumstances related to COVID-19. In addition, a registrant who is unable to file on time and elects to take advantage of the order must meet the following conditions:
First, the registrant must furnish to the SEC a Form 8-K or, if eligible, a Form 6-K by the later of March 16 or the original filing deadline of the report stating:
Second, the registrant must file with the SEC any report, schedule or form required to be filed no later than 45 days after the original due date; and
Third, in any report, schedule or form filed by the applicable deadline pursuant to clause (2) above, the registrant or any person required to make any filings with respect to such a registrant must disclose that it is relying on the order and state the reasons it could not file such report, schedule or form on a timely basis.
Moreover, the order provides relief for companies that cannot deliver a proxy or information statement to a security holder after making a good faith effort for such delivery if the security holder has a mailing address located in an area where, as a result of the outbreak, the mail carrier has suspended delivery service of the type or class customarily used by the registrant or other person making the solicitation.