Businesses have to be adaptable when navigating the business and legal impact of the COVID-19 pandemic. Our Resilience, Recovery & Renewal model supports organizations as they go through one of the key stages – shifting focus from crisis management to reopening mode.
To aid you in this process, we have developed a series of Reopening for Business checklists, which provide easy access to the key strategic issues that you need to consider as you look towards reopening. Navigate to the relevant area of law to find solutions on how to tackle the commercial challenges brought about by the pandemic, as well as potential opportunities to strengthen your business. Given the high-level nature of the resource, we would be happy to discuss issues further with you and contact details have been included in each section.
The content picks up on specific UK legislation, but also provides useful pointers that are applicable to multiple jurisdictions.
- Many antitrust agencies have demonstrated flexibility, granting exemptions from antitrust laws to allow competitors in certain industry sectors to collaborate closely in order to operate more effectively and better serve consumers. However, such exemptions apply only in very limited circumstances, and are temporary.
- Competitors united by a common threat - whether it be reducing demand or increasing costs - may find themselves having more contact with each other. Capacity reductions agreed at industry level, often referred to as ‘crisis cartels', may seem like a rational response to ensure that the pain is shared until normality resumes. However, absent any specific antitrust exemptions, the current economic climate will not result in less cartel enforcement or any tolerance of collusion.
- Businesses will soon have to take difficult decisions around their workforce, such as reducing/freezing salaries, and retaining staff. However, businesses that agree to fix wages or other aspects of financial compensation are at risk of breaking antitrust laws. This is true even if they do not sell competing products, but compete for employees. Simply exchanging information on compensation with other employers can be enough to break antitrust laws.
- Industry-wide initiatives: trade associations, joint lobbying activities and joint purchasing arrangements can help generate efficiencies and save costs.
- Consider whether and how to unwind specific Covid-19-related collaboration: what needs to end and how to manage that properly. If you have relied on Covid-19 antitrust exemptions/other concessions by regulators to coordinate with competitors during the pandemic, assess whether such collaboration can legitimately continue in the medium-long term.
- Competition law allows competitors to co-operate where, for example, jointly undertaken projects generate efficiencies which benefit customers, e.g. in the form of lower prices. Although the competition rules apply to this sort of collaboration, there are certain ‘safe harbours' if the companies' combined market share is below a certain level and the cooperation does not go too far. To rebut potential allegations that measures taken today to reduce costs have facilitated collusion or have weakened competition, ensure that any restructuring is carefully managed and that the parties are seen to be compliance aware.
- Consider conducting health checks /competition law audits to ensure that your business complied with the competition rules during the pandemic when people may have become de-sensitised to the antitrust risk.
- Ensure that your HR function receives antitrust compliance training so that they are able to spot the relevant risks.
- Continue to approach trade association and other industry groupings with caution. There is a risk that legitimate debates can stray into illegal areas and there are numerous examples of the strict enforcement of competition law despite the fact that the restrictive arrangements were carried out against a backdrop of genuinely difficult economic circumstances.
- Joint purchasing arrangements with competitors, when properly structured, can be a legitimate activity lowering prices for businesses and end consumers alike. However, antitrust authorities around the world are increasingly taking enforcement action against buyer cartels. The risk of antitrust fines is as significant for collusion on purchase prices as it is for a cartel on sales prices. Any joint purchasing arrangement should be carefully assessed and companies should ensure that their procurement teams and purchase managers receive adequate and tailored compliance training.
- Supply chains made need to be restructured to try to boost business in certain regions, or to minimise dependence on single supplier in one region.
- Consider whether restrictions in your distribution systems raise antitrust concerns, such as export bans, exclusive dealing, and resale restrictions.
- The lockdown has forced many retail stores to close their doors for months, leading to surplus stock. Many retailers may want to offer discounts when they re-open to entice consumers back. Remember that it is illegal for suppliers and retailers to agree on fixed minimum resale prices or maximum levels of discount.
Merger Control and Foreign Investment Review
- Divestitures of underperforming or non-strategic parts of the business are a way to reduce costs and raise cash (and offer potentially rich pickings for those buyers and investors with access to capital). The establishment of joint ventures may also be a way of achieving synergies and reducing costs.
- Acquiring assets, or even assuming control or ownership by enforcing security upon default, may well be a triggering event for foreign investment regulatory authorities where the new owner is ultimately foreign owned.
- The usual merger control rules will apply, but the economic climate may allow some flexibility in terms of having deals approved that would otherwise be a hard sell. A potential avenue to explore is the "failing firm defence" whereby a merger may be approved where one firm would be forced out of the market in the near future because of its financial difficulties if not taken over (though the bar for succeeding in this defence is high).
- Merging parties' high market shares are usually a red flag but it may be arguable today that they are a poor proxy of market power if small competitors have the ability and incentive to increase output in response to any attempt by the merged entity to raise prices due to overcapacity. Note that the UK Competition & Markets Authority's (CMA) starting point in its merger assessment will be to look at the prevailing conditions of competition. However, this assessment can be difficult when looking at dynamic markets (where the CMA has recently become more interventionist), due to rapidly changing market conditions. The CMA will consider what actions the acquirer would have taken absent the transaction and also whether the target would have become a stronger competitor over time. It will also consider loss of potential competition, and whether one of the firms which is not a current competitor has the capabilities to become a competitor in the future.
- Consider competition issues which may arise when acquiring key suppliers or key customers (‘vertical mergers').
- Remember to factor foreign investment review in your deal strategy. Many jurisdictions are increasing scrutiny of foreign takeovers of key strategic assets, some directly in response to the pandemic. While most cross-border transactions have a high likelihood of being approved, those in strategic sectors may encounter more scrutiny and face a prolonged approval process. Taking the time to identify a regulatory strategy early in the deal process can minimize the risk of delays, last-minute changes to the deal structure, or even failed transactions.
- Businesses selling scarce products may seek to capitalise on the tight supply-demand balance by increasing prices, or by imposing the purchase of non-essential products together with high demand products (so-called "bundling"). Due to a surge in demand or the failure of competitors, companies may suddenly find that they are ‘dominant' meaning that extra competition law rules apply to them. Charging excessive prices is an abuse of dominance in many jurisdictions.
- Some jurisdictions prohibit price gouging, or increasing prices to a level higher than what is considered reasonable, regardless of market power.
- The circumstances in which price increases and bundling may be legitimate requires a careful assessment of the specific market and company circumstances.
- Many organisations have faced severe business disruption and/or liquidity problems as a result of the pandemic and will have reached out to governments for support, either as part of generic/horizontal support available or to agree a tailor-made support package. In the EU, such financial support is prohibited unless it has been approved by the European Commission or exempt from notification.
- EU Member States have notified to the Commission several support schemes providing State guarantees or public loans at subsidized interest rates under the EU Temporary Framework, which were approved. In addition, EU Member States have adopted a myriad of measures applicable to all companies (e.g. deferment of tax and social contribution payments).
- Where such aid is not approved or exempt, it remains prohibited and businesses must understand that it may be recovered with compounded interest, for example, if challenged in national courts or as a result of a complaint to the Commission by a competitor whose Member State does not provide comparable crisis measures. Therefore, businesses should confirm in each instance that any form of support is appropriately structured and lawful under state aid rules.
To discuss any of the issues raised in the Antitrust checklist, please contact:
Liquidity Solutions and Access To Capital
- Government funding and support schemes implemented to support liquidity among eligible businesses are expected to come to an end in the coming months, leaving corporates and financial institutions needing to seek ongoing liquidity support elsewhere.
- If your business has made use of the government funding and support schemes, think about servicing repayments and eventual replacement of the funding provided thereunder.
- Central bank collateral funding schemes have allowed financial institutions to monetise some of the assets held on their balance sheet without needing to resort to securitisation or other asset funding techniques. Additionally, the Bank of England intends to haircut collateral with maturities beyond 2021 which is based on Sterling LIBOR. Market conditions in the medium-term may determine the need to consider alternatives in relation to financing of such assets.
- Banks may be reluctant to lend for fear of exposing their balance sheets in any recession coupled with concerns over excessive corporate indebtedness, creating a funding void and exacerbating liquidity constraints.
- Consider and map ongoing working capital and liquidity requirements, and test these forecasts against multiple economic scenarios.
- Ensure that the terms and conditions of any existing debt financing have been reviewed and, if necessary, borrower and debt providers have engaged to adjust any terms and conditions to ensure an on-going stable relationship in light of any impact on your business of COVID-19.
- For relevant corporates, ensure that you have investigated, sought advice on and, if appropriate, applied for the government-backed scheme suitable for your business. It is anticipated that loan schemes made available under the European Union Recovery Plan will provide another source of liquidity for certain green and digital investments.
- Corporate clients should identify any potential alternative sources of liquidity and funding (either through debt or equity), including those provided by non-traditional lenders (e.g. peer-to-peer lending, supply chain finance solutions and private debt funds).
- Financial institutions should consider alternatives to central bank collateral funding schemes as a method for financing the assets on their balance sheet, including securitisation or warehouse financing.
- Financial institutions should (re)consider their role as providers of financial infrastructure and as market makers to promote the flow of liquidity to the real economy (for instance by enabling factoring, peer-to-peer lending and supply chain finance arrangements where external investors provide funding).
Restructuring and Distressed Investments
- The real economy is not expected to 'bounce back' quickly and some corporates, particularly in heavily impacted sectors (e.g. travel and leisure and retail), will continue to experience stress or distress. The volume of restructurings and insolvencies will likely rise in the coming months.
- Transaction restructurings (including of sovereign debt) will become increasingly common in the medium term and many investments may become distressed. The UK is in the process of implementing amendments to its insolvency legislation which give further tools to companies in financial difficulties.
- Many jurisdictions have recently introduced, or are in the process of implementing, new restructuring and insolvency tools. For example, in the UK, these include the ability for a debtor to seek a temporary moratorium and cross-creditor cramdown restructuring plans. Transaction participants (including trustees) should focus on restructuring options and scenarios in order to ensure timely management and intervention. Creditors will also need to be mindful of the political and regulatory background and reputational issues around enforcing their strict legal rights against corporates distressed due to the COVID-19 pandemic.
- Sponsor clients should continue to optimise their capital structure through liability management. Restructurings often entail a broad range of protagonists - the equity, senior debt, junior debt, bilateral country debt, trade creditors, unions, government(s) and management. Understanding early on where value breaks, who is driving the deal, conflicts of interest, and who can spoil a deal, are critical.
- Consider the potential of acquisition finance to deal with distressed investments, including through vertical integration and delisting (or taking private) of target entities. This may present opportunities to acquire businesses or assets at favourable pricing levels.
- Having emerged from an initial round of emergency waivers and amendments dealing with immediate financial and other covenant breaches, financial institutions will continue to need to devote resources to monitoring and managing existing credit exposures so they can act quickly.
Risk Management and Compliance
- Pre-pandemic topics such as Brexit, LIBOR discontinuation and ESG remain topical and are coming back into focus and need to be addressed.
- Regulators have re-iterated their requirement that financial institutions treat customers fairly at all times. In the UK, there are already investigations around the handling of sale of Government-lending scheme loans to customers and the UK Government itself issued (non-statutory) guidance "strongly encouraging all…businesses…to act responsibly and fairly in the national interest in performing and enforcing their contracts…to protect jobs and the economy."
- Regulators are taking a "business as usual" approach towards the operational monitoring and oversight procedures that financial institutions are expected to apply affording flexibility and forbearance. In contrast, regulators have maintained their tough approach over the risks of market abuse / financial crime.
- It is expected that a wave of regulatory enforcement and litigation may ensue. As in 2008, conditions of market stress and the use of business continuity regimes can present heightened exposure to conduct risk, as well as financial crime, such as market abuse and fraud. Similarly, financial institutions may face increased risk when afforded increased regulatory flexibility over compliance (e.g., over market trading).
- Continue to focus on Brexit and LIBOR discontinuation and implement measures to ensure that any required measures are adopted within the required time frames.
- Consider your regulatory obligations including the expectations of regulators in this COVID-19 environment and reinforce risk management and compliance procedures.
- Organisations should continue to take all steps necessary to prevent the risk of market abuse / financial crime and should continue to use enhanced monitoring, or retrospective reviews.
- Maintain and, if relevant, enhance your organisations’ operational resilience. In light of the risk of future pandemics, increasing vulnerability to cyber-attack and climate change, it will remain a priority for investment and focus in the future.
- To reduce the risk of regulatory enforcement and litigation, take steps to see that additional risks arising from the COVID-19 emergency are mitigated appropriately, for example employ enhanced monitoring, or retrospective reviews with respect to both conduct and financial crime risk.
- Technology is transforming banking and financial services by opening up the sector to competition, introducing new services and disrupting incumbent business models. The ability to cut costs through technology will be especially important as the number of non-performing loans grow and, in Europe, low rates of return for banks are squeezed even further.
- Digital solutions and home working will increase the focus on data privacy and cybersecurity obligations. With so many individuals in the financial sector working remotely there is an enhanced risk of cyber-crime − particularly for banks transferring processes to contingency environments operating on outdated security systems.
- The most successful financial institutions will invest in new technologies, they will be digitally nimbler not only in terms of their architecture and physical footprint, but in the way their deliver services and products to their customers. Clients should therefore focus on the potential technological and financial innovation solutions available to them and keep abreast of fintech and regulatory developments and market trends, while recognising the costs of doing so on their P&L.
- Ensure that your IT systems are capable of withstanding increased usage while ensuring information and data integrity and security.
To discuss any of the issues raised in the Banking & Finance checklist, please contact:
Ongoing Disclosure Obligations of Listed Companies
- Under the Market Abuse Regulation (MAR) there is an ongoing obligation to disclose inside information promptly, which might be challenging in the context of COVID-19.
- Periodic financial reporting requirements continue to be affected by COVID-19 and though there are potential dispensations available regarding delaying the filing of accounts, auditors are under ever increasing scrutiny and pressure. In that context, it is crucial that companies focus early on the most challenging elements of the periodic reporting statements and address these proactively with their auditors.
- Companies should ensure that their disclosure committees meet regularly and proactively to consider whether there is inside information regarding the company and if so whether there are legitimate grounds for delaying disclosure of this information.
- MAR disclosure policies and terms of reference of disclosure committees should be refreshed and adhered to - anecdotally, some companies have historically tended to take a more laissez faire approach but this is no longer likely to be viable in the context of the COVID-19 impact on the business.
- It is important to avoid falling into the trap of trying to "net off" good news and bad news, for example by delaying the disclosure of a particular piece of inside information until the scheduled date of release of financial results.
- Companies should liaise closely with their auditors at the earliest possible opportunity regarding:
- transparency on the effects of COVID-19 in half-yearly financial statements - in particular, companies should focus on:
- disclosures relating to significant uncertainties, the going concern assessment and financial risks;
- the impairment of non-financial assets, and
- the presentation of COVID-19 related items in the profit or loss statement.
- the application of IFRS9 - to ensure anticipated credit losses are calculated per IFRS 9 Financial Instruments and related disclosure requirements are properly met;
- Alternative Performance Measures - to ensure that, if and when including new APMs to address the impact of COVID-19, companies provide sufficient:
- narrative information regarding the modifications made, the assumptions used and the impact of COVID-19; and
- information on measures taken or expected to be taken to address the impact that the COVID-19 outbreak may have in their operations and performance.
- Interim management reports - companies should focus in particular on the following when drafting such reports:
- the impact of the COVID-19 pandemic on, among other things, the company's strategic orientation and targets;
- measures taken to address and mitigate these impacts and their progress, and
- where available, the expected future impact on the company's financial performance, position, cash-flows, the related risks and contingency measures.
Companies should also encourage their audit committees to enhance their oversight role.
Secondary Capital Raisings
- Institutional guidance has relaxed the traditional restrictions on non-pre-emptive capital raises, so companies looking to raise capital may consider a wider range of potential options including rights issues, open offers, placings, cashbox structures, and less traditional options such as hybrid securities or PIPEs. There will, however, still be intense scrutiny of any such capital raises.
- Before exploring its options, we would recommend that a company should be prepared to address potential questions that may be asked of it in this context, such as:
- (why) has the company paid dividends and or undertaken any share buybacks since the COVID-19 crisis began?
- what has the company done to limit or reduce executive remuneration and how does this align with what has been done in relation to workforce remuneration?
- what alternative sources of funding has the company sought from banks, the government or others and why is a secondary capital raising the best solution currently?
- what comfort can the company give that it won't seek a further secondary capital raising exercise in the short to medium term?
- what are the primary purposes of the capital raising - downside protection or facilitating implementation of a growth strategy?
- When considering which option would be most appropriate for a secondary capital raising, key issues to consider will include:
- timetable (the timeframe for completing different forms of capital raising can be dramatically different, from under a week to around two months);
- investor appetite and sentiment (it will be important to take, and be seen to take, steps to facilitate participation of large and retail investors to the extent possible, even where the capital raise is non-pre-emptive); and
- availability and cost of any underwriting capability.
Listed Debt Securities
- Existing debt may be coming up for redemption, necessitating some form of refinancing. The most obvious form would be a fresh issue with an extended maturity.
- The market is extremely volatile, with widespread closures across markets, asset classes and geographies. Windows for debt issuance are brief, so companies facing this situation and hoping to refinance debt with a fresh issue need to be ready to move quickly in order to take advantage of any moments of stability which create short market windows.
- If the effects of the COVID-19 outbreak continue to affect global markets in the next few quarters, we expect to see a significant increase in the restructuring of existing issued debt, whether through the exchange of old bonds for new bonds or through a consent solicitation to amend the conditions of existing bonds.
To plan ahead for this eventuality, we would recommend that companies carefully monitor their outstanding debt so as to identify potential problems as early as possible. Particular red flags to watch out for are:
- Liquidity problems - companies who anticipate issues meeting their payment obligations due to the impact of COVID-19 on their business' cashflow should contact us to discuss their options, and
- High-risk instruments - certain types of debt instruments are more likely to be subject to a default as a result of the impact of COVID-19. These include instruments that:
- retain insolvency event formulations that may be triggered should assets be less than liabilities, and/or
- contain covenants that require certain financial or asset ratios to be maintained, for example in relation to a profit and loss measure such as profit, revenue or EBITDA.
Companies should monitor these instruments carefully and, again, contact us to discuss their options if they perceive a risk that a default might be triggered.
Capital Markets Transaction Documentation
- On any capital markets transaction being undertaken, additional disclosure related to COVID-19 and its impact may be required in transaction documentation, and in particular in any prospectus.
As a minimum, we would recommend considering the following:
- COVID-19 specific risk factors to be included. These (where the listing is sought on an EU regulated market) should be focused, concise, specific (i.e. not generic) and corroborated by the content of the prospectus; and
- A recent developments section crafted to disclose the impact of COVID-19 on the company's business since the last audited accounts.
- As a result of measures implemented to stop the spread of COVID-19, deals are now being undertaken almost exclusively on a 'virtual' basis, which gives rise to logistical challenges in relation to diligencing, launching, signing and completing capital markets deals.
We would make the following recommendations to ensure a smooth transaction from start to finish:
- Due diligence - this is a vital element of most deals, so companies planning deals should prepare virtual datarooms and ensure key personnel are available for virtual diligence sessions.
- Roadshows - these should be brief and ideally conducted through electronic platforms and over the telephone – banks should be asked to consider their internal guidelines around conduct of roadshows and will need to consider availability of and access to key investors.
- Signing/Closing/ Settlement - though processes will be more challenging, with the personnel of most organisations working from home, these hurdles can be easily overcome with anticipatory flexibility and agility built into deal terms and any related definitions (for example, of business day). Parties should also be flexible in terms of certain conditions precedent requirements (for example, is it practical to deliver certified copies if the deal team is working remotely?).
To discuss any of the issues raised in the Capital Markets checklist, please contact:
|Nick O'Donnell||James Thompson|
Anti-bribery & Corruption: Compliance
- Cultural impact and compliance programme strain: The COVID-19 crisis has given rise to a perfect environment for compliance risks to emerge. Commercial pressures to quickly generate revenue in the Recovery phase (leading to riskier business practices), coupled with a compliance framework that has been deprioritised (in terms of budget and human resources) will result in instances of compliance misconduct that companies will need to guard against and resolve.
- Logistical challenges in implementation of compliance programme: Companies will find that the pandemic has an immediate and lasting impact on the operation of their compliance programmes. In-person due diligence, in-person training, audit and investigations are all examples of activities that will need to evolve post-pandemic.
- Compliance risks arising from COVID-19 crisis: The crisis has led to new and complex risks: i) administrative challenges arising from Government closure (e.g., re licences and permits); ii) supply chain delays that need to be resolved; iii) applications for Government loan schemes; iv) large-scale Government funded projects to prepare the country for future crisis or to stimulate the economy (notably around infrastructure) providing fertile ground for corruption; v) increased public official interaction arising from a greater proportion of companies becoming state-owned or controlled; and vi) pressure from Governments to provide charitable donations, with the private sector expected to contribute heavily.
- Communication is key. Employees and third parties need to know that compliance continues to be a priority and sit at the heart of the company's values. The most effective way to stress this is ensuring middle/senior management buy in and continuously deliver this message. Employers should also emphasise the importance of speaking-up/whistleblowing hotlines (and we note authorities have reported a surge in whistleblowing during this period). Lastly, if compliance budgets are being squeezed then working efficiently is key. Identify the highest risk areas and ensure that resources are concentrated there.
- To help safeguard against risks arising from reduced third party due diligence, companies should use previously vetted third parties where possible. For new third parties, abridged procurement processes and due diligence should be conducted, with publically available sources and online tools used to fill gaps in pre-pandemic processes. Remote, interactive training should be encouraged with refresher training provided where needed, but also empower local management to drive in-country activity. For oversight activities and investigations use remote solutions (video interviews/remote data gathering), but also lean on in-country external advisers to be your "eyes and ears".
- Use precious resources to identify these risk areas in higher risk markets, raise awareness and reinforce the need for adherence to the company's compliance framework. This will allow you to document the compliance steps taken during this period and defend them if necessary. For example, have documented reporting procedures for donations and try to ensure that you have oversight of how donated funds will be used. Also take time to consider whether legitimate public law reasons can be raised to exert pressure on authorities to take decisions (e.g. to not pursue certain cases).
To discuss any of the issues raised in the Compliance & Investigations checklist, please contact:
|Jo Ludlam||Sunny Mann|
Product Safety, Liability and Regulation
- There are product compliance and workplace safety risks to assess in connection with the provision of PPE to employees as lockdown restrictions are lifted and staff return to work. This is a major concern for businesses across many industries, given the short supply of and high demand for PPE that complies with relevant national PPE laws. This issue is likely to be particularly complex for businesses that have a worker / consumer physical interface.
- In response to the pandemic, some companies have diversified the products or services they offer and some have entered into new markets (e.g. producing hand sanitiser, PPE or ventilators) and/or entered into contracts with new suppliers due to supply chain difficulties. For many companies, decisions were made at speed during the initial phase of the crisis, without undertaking normal levels of due diligence. Companies should take stock and assess what measures are in place to manage the potential financial and reputational impact if safety issues arise with products placed on the market, as well as carry out due diligence checks which they did not have time to carry out initially.
- Companies should assess the derogations introduced by national authorities to normal product conformity rules and certification requirements. They should ensure that any PPE procured is compliant with national requirements and that the choice of PPE is fundamentally directed by a suitable workplace risk assessment.
- Companies should confirm that adequate processes are in place to monitor the quality and safety of products that have already been placed on the market. This includes checking that information about complaints, defects and safety issues would be shared appropriately within the supply chain. Companies should check that new parties that they contracted with during the crisis (such as component manufacturers) have good quality control processes in place, if this was not already done due to time pressure during the initial phase of the pandemic. Traceability systems should be reviewed to evaluate if they are fit for purpose or whether any improvements are required. Companies should also check that they have a good understanding of what measures are in place to manage their risk (e.g. insurance cover or any contractual indemnities or warranties in contracts with suppliers / component manufacturers). If companies designed or manufactured Rapidly Manufactured Ventilator Systems, check that they understand the scope and limitations of the indemnity offered by the UK government. Companies need to understand the potential financial and reputational impacts of product liability claims and/or regulatory liability in this space and how it may continue to evolve.
Holding Government to Account
- Regulators and governments around the world do not have a consistent approach to the pandemic in terms of lockdown rules, reopening rules etc. Ensuring consistency across a global business is highly challenging.
- Public bodies/governments are having to make quick decisions in times of crisis, but it does not mean that they are able to act outside the law. There are numerous examples of illegal and irrational decision making proposed as a matter of urgency, national security or in the name of protecting health and safety that are challengeable and can be overturned.
- Individual challenges to government support schemes are on foot in a number of sectors as is engagement on inquiries on specific issues including foreign investment in companies of strategic national importance. Further calls have already been made in the UK for an inquiry into decisions made in respect of the COVID-19 pandemic. Such an inquiry could potentially scrutinise issues such as: whether certain contracts should have been awarded during the crisis; whether any businesses sought to profiteer from the crisis; whether online platforms should have removed products with excessive prices; whether businesses breached consumer rights, for example by not offering refunds (although the UK Competition and Markets Authority has already set up a COVID-19 Taskforce to monitor and respond to consumer and competition problems arising from the pandemic). Select Committees could also review decisions made during the pandemic.
- Closely track regulatory developments in the countries where you are operating and convert the rules into clear guidance for the business and its employees. Log each decision, and its rationale so as to be in a position to explain and defend your approach (legally and from a reputational perspective).
- If your business is adversely affected by decisions made by governments/public authorities (i.e. restrictions on your ability to open, or to provide certain services, barriers on your ability to trade, actions related to shareholder participation by entities not incorporated locally, or financial support offered to others but not available to you), those decisions may be challenged and overturned. Grounds include unlawful state aid or breach of investment treaty rules, expropriation of property in breach of statutory or treaty rights or improper exercise of administrative powers. Public law arguments can be deployed effectively without need to resort to litigation, in order to influence and improve on the outcome. Consider lobbying directly or indirectly through industry bodies. Look also to any available investment treaty protections. See, for instance, our recent thought leadership on Global Nationalisation Risk (here).
- Public inquiries and Select Committees often attract considerable media attention, can involve hostile questioning for witnesses and the criticisms made by public inquiries or Select Committees can significantly damage an organisation's reputation. Those risks can be managed, for example, by preparation, good communications strategy and using legal arguments to influence and improve the outcome (e.g. by pushing back on unfair, irrational or factually incorrect conclusions).
- Companies may have been on the receiving end of direct contract awards made in lockdown on the grounds of urgency, or alternatively have missed out on contracts which were awarded direct to competitors.
- If you were the beneficiary of a direct award, consider whether the "urgency" justification still remains, or whether the contracting authority should now move to a competitive tender as the initial urgency has subsided. Companies should try and keep abreast of current and future procurement plans of contracting authorities to ensure that the direct award exemptions are not unlawfully deployed. Clients who are potential suppliers should ensure that they are effectively communicating their capacities and offerings to authorities, as there is less likelihood of having an open competition in which to do so. Additionally (and relating to the point above), in order for clients to get comfortable that the procedure is being run lawfully, it will be critical that they understand the authority's reasons for pursuing a particular procedure and to have opportunities to raise any concerns at an early stage.
Crisis Management and Response
- Clients should be thinking about how effectively to manage an uncertain future in terms of what the future of work looks like, what customer demand will be etc, and have an agile approach to making frequent changes to their operating models.
- Expand the organisation's crisis team into a "return nerve centre" which would be expected to be in place for the next year to 18 months, with the role of monitoring developments, collecting data, getting ahead of events and changes, making agile refinements to the business model and ensuring resilience to future challenges (e.g. a second wave). This includes learning valuable lessons from what has gone well so far and what could be improved.
- Companies need to be aware of the increased risk of becoming a victim of criminal activity both during the pandemic and as restrictions on the economy are lifted. For example, there have been a number of so - called "push payment" type frauds, in which large sums have been stolen from companies through the altering or hacking of emails to secure payments to fraudulent bank accounts. Cyber fraud/data theft is also on the rise. If there is an economic slowdown, we can expect to see more such frauds committed on companies in the future.
- Companies should ensure that they have robust procedures in place to enable them to spot and stop potential fraudulent conduct. For example, all staff, particularly those working in accounts who are responsible for making payments, should be familiar with how the most common types of frauds are committed and how to spot warning signs. Robust systems and controls should be maintained in relation to the sign-off of payments or expenditure. See, for example, this recent article on push payment fraud.
- Every member of the finance/account function (regardless of seniority) should be trained on these systems and controls.
Financial Institutions (see also FI-specific checklist, here)Key Issues
- Firms should be aware that their usual business models, on which their regulatory permissions and supervisory compliance are based, may need to be amended to maintain business as usual. For example, there may be licensing issues arising from the geographical relocation of staff or remote working.
- It is likely that firms will be placing more reliance on the provision of outsourced services during this time. Check that your business continuity and resilience measures would still satisfy regulatory inspection.
- Conditions of market stress and the use of business continuity regimes can present heightened exposure to conduct risk, as well as financial crime, such as market abuse and fraud.
- Given the unexpected nature of the Covid-19 outbreak, parties to commercial contracts may choose to make or face claims of force majeure or other concepts, such as frustration, material adverse change or illegality, in order to excuse delay or non-performance.
- Financial institutions may see revenues reduce and expenses increase, together with potentials calls on liquidity, for example, to meet client claims and collateral calls.
- Maintain close contact with dedicated supervisors (where relevant) or otherwise keep the regulator appropriately updated on material developments affecting the operations.
- Where business continuity plans are triggered, be prepared to present your plans to a regulator if requested. Be ready to demonstrate to regulators that senior management are exercising proper oversight over the operation of the firm's business continuity plans (e.g. by regularly reviewing how arrangements are working and documenting discussions).
- Identify any change in regulators' prioritisation of key risks and regulatory responses, adjusting compliance programmes and prioritisation accordingly. For example, where regulators relax the usual supervisory requirements, consider how to mitigate the increased risk of market abuse, for example, through enhanced monitoring. Consider increasing AML and CTF due diligence to meet this increased risk.
- Review contracts carefully for governing law and force majeure provisions, and form a preliminary view on their likelihood of a potential claim. For example, the 2002 ISDA Master Agreement contains a force majeure provision, but many financial contracts do not.
- Authorities and regulators are generally supportive of entities continuing to operate and many countries are providing flexibility in this regard, but organisations should be proactive in engaging with regulators if they get into financial difficulties.
Litigation and Arbitration Management
- Whilst the English courts have largely continued business as usual by utilising technological platforms to conduct virtual hearings, for companies involved in cross-border litigation some other jurisdictions have taken a much more restrictive approach. From an arbitration perspective, there has been a greater tendency to agree postponements and delays to timetables at the outset of Covid-19, however that tide has very much turned. Pending, active or paused disputes may therefore require closer attention as lockdowns ease.
- Virtual hearings have worked well in the circumstances and they are becoming more commonplace, even for trials and merits hearings. It will no longer be possible to use the current pandemic as an excuse for delays to dispute resolution processes so postponements will be much harder to come by without specific reasons supported by evidence. Post-lockdown we will likely see a greater use of virtual hearings than previously to reduce costs and increase efficiencies.
- Practical factors need to be taken into account, for example: (1) organisation and forward-planning are more important than ever before; (2) additional time may need to be built into your dispute process, for instance because of the increased complexity of disclosure and document review; (3) it will take longer to proof witness statements virtually; and (4) factoring in varied time zones for hearings where witnesses, experts, lawyers and arbitrators/judges are in different jurisdictions.
- Virtual mediations are proving popular and successful. Costs sanctions can be (and often are) awarded against parties who unreasonably fail to engage in ADR. The current economic uncertainties and pressures of Covid-19 can be used as leverage to bring an otherwise reluctant party to the negotiating table, to avoid or minimise the costs of a formal dispute resolution mechanism.
Restructuring and Insolvency
Creditor Side - Restructuring
- Commercial counterparties that owe debt may look to amend contractual terms to ease cash-flow burdens on them. For example, counterparties may request reduced fees, payment holidays/write-downs, or longer time-periods to pay.
Creditor Side - Insolvency
- Some companies may face issues with their contractual counterparties falling into an insolvency process. The counterparty will likely owe debts to various (secured or unsecured) creditors so care will need to be taken navigating the insolvency process.
Debtor Side - Restructuring
- Companies may have entered into long-term bilateral or syndicated loan agreements on terms which before the pandemic were manageable and serviceable. As a result of a consequence of reduced cash flow companies may now face problem repaying the debt pursuant to a pre-agreed payment schedule, or be in technical breach due to, perhaps, not being able to satisfy various financial covenant obligations. If so, companies may seek to restructure the contractual terms upon which the debt they owe rests to its creditors.
Debtor Side - Insolvency
- Companies may face cash-flow problems resulting in a decreased ability to pay debt as they fall due. If so, the company will find itself in an insolvency process either because it has voluntarily subjected itself to a court-administered process to seek to restructure its debts or because, perhaps, the company's creditors have issued winding up petitions against the company which can result in the company's liquidation.
- Consider the strategic importance of commercial relationships including in respect of supply chain management, monies outstanding, and reputational issues. Consider whether the client relationship is worth investing energy into, or whether it would be preferable to terminate it.
- If the relationship is one of value, consider what financial incentives you would be prepared to offer to ease cash flow pressures on your counterparty. For instance, consider (permanently or temporarily) amending payment terms, reducing scope of works, and offering discounts. Discussion and negotiation will be necessary to ensure all issues are considered, and any agreement to amend a pre-existing agreement needs to be properly documented in accordance with the terms of the underlying agreement.
- If, as a service-provider and creditor, you are reluctant to offer additional services without payment, then consider requesting prepayment (in whole or part), additional security (guarantees?), and shorter periods between invoices and payment times. Consideration needs to be given to ensure any amended terms do not fall foul of "preference" or "transaction under value" rules. Additionally, consider whether there is any security or guarantees that can be called upon if the counterparty defaults.
- If your counterparty falls into insolvency it is important that you act with speed and accuracy to ensure that the debt owed to you is submitted into the insolvency process i.e. typically, submit a "proof of debt" in good time.
- In a liquidation scenario consider repayment by means of insolvency set-off.
- If a company seeks to amend the payment terms with its creditors then it needs to invest time and energies in a credible and incentivised amendment agreement; whilst reminding creditors that they will likely recover more of their debt in a restructuring than through an insolvency process.. Proper documentation of amended contractual agreements is vital.
- If faced with a winding up petition then consider whether to dispute it on the basis that the sums in question are the subject of a dispute.
- Insolvency proceedings can be means of financial rescue or the process by which a company is put into liquidation. The most common insolvency processes in England and Wales are Administration and Liquidation. In those cases, an independent third party (usually an accountant or a government official known as the Official Receiver), is appointed as the Liquidator or Administrator of the company. The Liquidator or Administrator may close the business down or try to sell it. Whilst they are assessing what to do, the Liquidator or Administrator may operate the business and it is important to cooperate with the Liquidator or Administrator at all times.
- Alternatively, debtors may seek to use what is known as a "Scheme of Arrangement" to reorganise their debts. This is a technical judicially-monitored process and needs to be carefully considered and managed at every stage.
To discuss any of the issues raised in the Dispute Resolution checklist, please contact:
The Distressed M&A Sales Process
- The COVID-19 pandemic is likely to give rise to a substantial number of "distressed M&A" opportunities, where the seller or target is in some degree of financial distress and a buyer is sought on a relatively urgent basis. This may well give rise to strategic opportunities for companies in the recovery phase.
- The sales process itself will depend on whether or not the transaction is driven by the target board before an insolvency event arises or is conducted under a formal insolvency process (whether liquidation or administration). In each case, it will usually be effected by way of auction (although the marketing of the assets may be more limited than in conventional M&A).
- The tactics that a buyer may use in the purchase will also depend on the circumstances of the target, i.e. whether the sale is led by the board, lenders or an insolvency practitioner. Tactics may include credit-bidding (where a secured lender is permitted to bid for and purchase its collateral using the debtor's outstanding debt as payment) or the introduction of a "stalking horse" bidder to provide certainty of a bid at a fixed or quantifiable price. A buyer may even consider a "loan-to-own" strategy (by buying the target's debt) to gain control of the company.
- The earlier that a buyer becomes aware of opportunities in distressed M&A, the better its position in the sale process will be, enabling it to arrange financial support for a bid and retain the best team of advisers for the process.
- Prospective buyers should monitor prospective targets and businesses in the press (particularly the applicable trade press) and online. It may be appropriate to register with insolvency practitioners at accounting firms interested in targets within specified sectors, with a specified profile, etc.
- If it knows of the target's circumstances, a buyer should assess the potential advantages of acquiring the target before an insolvency event occurs. Doing so may, in particular, help to avoid the impact on the target's business of the insolvency event, even if it involves the payment of more consideration than would perhaps be payable to an insolvency practitioner. Buyers may therefore consider a direct approach to a target that may be in a distressed financial position.
Structuring the Deal
- Typically, a buyer will want to structure an acquisition as an asset sale, allowing it to choose the assets that it wishes to acquire and leave behind liabilities, including unknown or contingent liabilities.
- The most-frequently encountered risk in these transactions arises from the application of mandatory insolvency laws, in particular the risk that a transaction can be unwound and assets "clawed back" if they are transferred at an undervalue (which may even give rise to personal liability of the directors of the target).
- The seller's need for maximum deal certainty will usually have an impact on the availability of typical buyer protections, such as MAC termination rights, the scope of "gap covenants" and very limited warranty cover (if any).
- The board of a distressed seller will pay particular regard to their statutory and other duties: their wish to limit the risk of personal liability may have an impact on the deal structure and negotiations.
- Buying the target at its market value should minimise the risk of creditor challenge.
- Buyers may wish to acquire the assets from an insolvency practitioner or through a formal insolvency process in order to eliminate the risk of a transaction being challenged by creditors after the transaction has taken place in the event that the seller becomes insolvent or enters into an insolvency process.
- Pre-packaged administrations (or "pre-packs") are an often used way to mitigate claw-back risk: they involve the transaction being negotiated with the insolvency practitioner, who is waiting in the wings pending a formal appointment, and who then signs the sale agreement immediately upon, or shortly after, being formally appointed. That process carries the additional benefit of speed and usually the preservation of the business as a going concern.
Due Diligence and Valuation
- One of the characteristics of a distressed M&A transaction for buyers is the "as is, where is" nature of the transaction. Warranty cover is likely to be extremely limited and the target is bought with the title that it has to the assets, in their present condition. The risk for the buyer is accordingly higher than in a traditional M&A transaction and the pricing of any offer would ordinarily reflect that additional risk.
- There is often little time for full due diligence and/or limited access to or availability of due diligence materials. Vendor due diligence is rare and the timetable for the transaction is usually very tight.
- The COVID-19 recovery period will likely only add to the challenges the distressed buyer will face as opportunities for site visits and access to physical documents and people will remain limited.
- Sellers are keen to achieve up front deal certainty. Fixed price consideration is the norm and sellers may seek to achieve that certainty by requiring comfort in the form of letters of credit, break fees and/or deposits, etc. Completion accounts are rarely attractive to sellers in a distressed M&A sale and deferred consideration (such as an earn-out) would ordinarily also be unappealing to the sellers.
- Buyers and their advisers must focus their attention on the critical issues and more material risks. The focus of the exercise will not differ to any material extent from a traditional M&A process but pricing and allocation of risks identified in due diligence may require creativity.
- If it proves difficult to evaluate the quantum or likelihood of a risk arising, buyers may consider placing a sum into escrow to be used as security against the risk.
Warranty Protection and W&I Insurance
- In distressed M&A transactions, the sellers (including liquidators and administrators) will rarely provide warranty protection to the buyer in respect of the target's financial and commercial situation.
- In respect of Warranty & Indemnity (W&I) insurance, underwriters have typically not been prepared to offer coverage at all, or certainly not extensive coverage, where there has not been a customary due diligence and disclosure process.
- A new feature of the W&I market is the fully synthetic policy, where the insured interacts directly with the insurer and no warranties are given by the seller or administrator. Instead, a package of warranties is agreed between the buyer and the insurer - which can be very attractive to the sellers because it becomes the buyer's issue and need not involve them. That said, these policies are typically more expensive than a traditional W&I policy and the insurers will nonetheless expect some due diligence to be undertaken on the assets (with a corresponding impact on the timetable for, and cost of, the purchase).
- It is common for sellers to include an "anti-embarrassment" clause in the sale documentation: a requirement that the buyer makes an additional payment for the sale assets if certain trigger events occur - usually the sale of the assets or a substantial part of them within a period after the distressed sale, typically between one and three years after closing of the sale, for a price in excess of that paid on the original transaction.
- In distressed M&A transactions, a business is likely to be sold at something of a discount to the "market value" to reflect the distressed nature of the sale and the lack of contractual protection a buyer might receive. That discount may be greater in the COVID-19 recovery phase where there could be limited visibility on when demand may return, and as to what the "new normal" will look like.
- In view of the various difficulties referred to above around valuation and pricing risk, buyers should consider whether there may be scope for a lower up-front price and an enhanced anti-embarrassment payment or a longer time period during which the clause applies. An obvious alternative would be a debt-for-equity swap, especially when there may be greater confidence in the recoverability of the target's business.
- Merger control rules and foreign investment review will be relevant considerations for many deals. Please refer to the Antitrust section.
To discuss any of the issues raised in the Distressed M&A checklist, please contact:
|Kathy Honeywood||Nick Bryans|
- Should re-opening be on a full or phased basis, taking into account business needs as well as health and safety requirements?
- Interaction with the Coronavirus Job Retention Scheme: if an employer is claiming a grant under the CJRS, an employee's furlough period must have lasted for at least three weeks.
- The CJRS has been extended to end July 2020 in its current form, and further to end October 2020 with modifications (such as requiring employer contribution to the furlough pay).
- Furloughed employees undertaking alternative work.
- Many employees will need to make alternative childcare arrangements, if possible.
- Employers should evaluate whether some sort of phased re-opening with either a partial return of some functions or staggered schedules makes the most sense in their own circumstances, and what works for one business may not be appropriate for another. The decision will depend upon factors such as location, sector, business type or size, and the health status of workers, as well as specific employee concerns.
- Employers should consider whether to retain some parts of its workforce on furlough, given the extension of the CJRS. Full details of the scheme rules for the period August to October 2020 remain to be confirmed, but they are reported to include a requirement for an employer contribution to the furlough pay and to include permission for part-time working (in contrast to the current no-work rule).
- Some employers may have permitted furloughed employees to take other temporary jobs during this period, and may have already specified the minimum notice they will give employees of the ending of their furlough. Even if furlough arrangements were silent on this point, it would be sensible to give some notice to employees of their expected return to work date.
- Other employees will need time to arrange alternative childcare arrangements before they return to work. Employers should be ready for flexible working requests as well as occasional requests for emergency time off for dependents.
Workplace Safety and Prevention Strategies
- Employers have a duty of care to their workforce under the Health and Safety at Work Act 1974 and must take reasonable precautions to protect the health and safety of employees. This duty includes a duty to conduct risk assessments.
- Employers have a duty to consult with employees about health and safety.
- The UK government has published "Working safely during coronavirus (COVID-19)" guidance covering the following types of workplace:
- Construction and other outdoor work
- Factories, plants and warehouses
- Labs and research facilities
- Offices and contact centres
- Other people's homes
- Restaurants offering takeaway or delivery
- Shops and branches
- In order to comply with the general duty of care, employers must assess the specific risks of COVID-19 infection in their workplaces and implement appropriate risk reduction measures. Employers should apply the government's "Working safely during coronavirus (COVID-19)" guidance where possible and be able to explain any departures from it.
- Broadly speaking, COVID-19 risk mitigation involves:
- social distancing and limiting contact between colleagues and any other visitors
- issuing reminders of good hygiene practices
- providing adequate hand washing facilities, hand sanitiser and tissues
- cleaning communal areas
- issuing employees with information on the symptoms of the virus and what to do if they have concerns
- paying special attention to employees who are deemed vulnerable, or extremely so and advised to shield
- isolation for those who are showing symptoms, or share a household with those who do
- limiting travel, whether within or outside the UK
- The government recommends publishing COVID-19 risk assessments on a business's website and "expects" businesses with more than 50 employees to do so. Although this is not a legal requirement, it is nevertheless advisable to comply where possible.
- Employers should use existing health and safety consultation processes where possible. In a unionised workplace, this might involve union health and safety representatives. For workforces, or parts of workforces, where there are no such representatives, consultation could be with elected health and safety representatives or direct with the workforce.
Testing and Health Screening
- Employees' medical information is special category data under the GDPR, and therefore should only be collected or processed if there is a substantial public interest, or a public interest in the area of public health, in doing so. It may be challenging in strict data protection law terms, but the ICO (the UK's data protection regulator) has said generally they will take into account the compelling public interest in safety and the development of the COVID-19 situation in the UK now indicates that this type of intrusion into privacy should be temporarily justifiable on public health grounds.
- COVID-19 diagnostic testing is now available from public health services to anyone who develops symptoms.
- Given the obligations on employers to take reasonable precautions to protect the health and safety of all employees, we consider it would be a sensible and prudent instruction to ask employees to disclose that they are, or share a household with someone who is, showing symptoms of COVID-19, as well as the result of their diagnostic test.
- Businesses in sectors which cannot implement full remote working (such as manufacturing, food production and essential retail) have in some cases introduced temperature testing at their facilities. Employee and employee representative feedback has generally been positive, as it enables employees to keep actively working. Any temperature testing would have to be carried out sensitively and proportionately, and the employer should provide a privacy notice to employees to explain what will happen to the data. A key recommendation is to retain as little data as possible if you do initiate these tests; for most employees it won't be necessary to retain any data at all once they have taken a test on entry into the workplace each day.
- There is a very small risk that this measure would be considered disproportionate by the ICO, especially if forced on all employees or visitors as a blanket measure and continues to be enforced as the UK outbreak starts to ease. However, the regulator says that it will take a pragmatic approach to enforcement, and there is a definite trend towards testing in manufacturing and hospitality in particular.
Managing Employee Concerns About Returning to the Workplace
- As employees are asked to return to the workplace, some may raise concerns for their safety at work, especially if they or a member of their household has a pre-existing medical condition that could put them or their family member at risk if they catch COVID-19.
- Where an employee has a health condition that makes them vulnerable, they may also be disabled under the Equality Act 2010. If so, an employer is required to make reasonable adjustments which may include continuing working from home arrangements for a further period.
- Flexible working requests, including from those who need to be at home to care for children.
- Employers need to be mindful of workers' concerns, and to encourage them to come forward to discuss their worries as soon as possible.
- Complying with health and safety consultation obligations can assist in engaging and reassuring the workforce.
- Employers should deal with flexible working requests in the normal way, but remaining conscious of the unique circumstances in which everyone finds themselves.
- There may be employees who have some anxiety about the return to work, the use of public transport, the proximity to many people. Even if these employees are not disabled, employers owe them a duty of care and must preserve the relationship of trust and confidence. In simple terms, employers should be seeking to understand the concerns and how reasonably those concerns can be addressed in handling the return to the workplace, including where feasible changing start and finish times, phasing the return in stages, or delaying it altogether.
- As well as implementing workplace safety measures, employers need to ensure compliance by the workforce.
- Employers should secure workforce engagement in order to assist with a smooth reopening process.
- Many employers will have created a COVID-19 working group. Keep the group, but its work should transition from crisis to recovery. This group, or your communications team, should draft employee communications to ease the transition and answer questions that workers may have, and consider other forums through which employees can get information, such as virtual town hall meetings or dedicated hotlines.
- On a more general level, managers should remain in regular communication with their teams to ensure they are kept up-to-date with new procedures, leave entitlements, and to share concerns whether about work or their personal circumstances.
- These communication channels could assist or complement compliance with health and safety consultation.
- There are a number of claims which could be associated with business closures and reopening:
- Claims arising from contract variation or alleged underpayment of wages (e.g. furlough; pay reductions).
- Claims arising from workplace safety.
- Health and safety detriment claims.
- Discrimination claims (e.g. a failure to make reasonable adjustments for a shielding employee).
- Over recent months, employers have had to take swift action to respond to a constantly evolving situation. The Coronavirus Job Retention Scheme, changes to statutory sick pay and the frequently changing government guidance has been challenging for all employers. The role of HR during and after this period remains crucial.
- As businesses return to work, they must consider how to handle possible employee claims that may arise from measures already taken, and decisions yet to be made.
- Employers should comply with their statutory and contractual obligations to employees, including those which require collective consultation with employee representatives. Employees should be encouraged to raise concerns on an informal basis, but if necessary, employer policies on whistleblowing, grievances, disciplinary issues and capability concerns should be followed.
To discuss any of the issues raised in the Employment checklist, please contact:
Data Privacy & Security
- Remote working and business disruption increase the risk of a cybersecurity incident.
- Increased use of digital channels for advertising, marketing and selling goods and services will continue throughout the crisis and beyond. Opening up and expanding digital channels which necessarily involve the collection of personal data means online privacy, cookies and electronic direct marketing compliance are particularly important.
- If reopening bricks-and-mortar retail and other premises and you intend to collect additional information from visitors that are not employees or staff (e.g. temperature checks etc.), data protection compliance will need to be addressed.
- Check technical security measures, including employee training, are appropriate to the new environment, both to reduce the risk of a breach and comply with legal obligations regarding data security.
- Be prepared to deal quickly and effectively with any breach, understand notification requirements and stress test business continuity plans.
- Review online privacy, cookies and electronic direct marketing compliance of any external facing websites, both for consumers but also business to business customers.
- If carrying out checks or obtaining additional health related information from visitors to your premises, address data protection compliance (e.g. privacy notice information, legal basis for processing, Data Processing Impact Assessments etc.).
Commercial and Business Operations
- The crisis and resulting slowdown will continue to affect commercial relationships. Contract parties may be in financial difficulties, or in breach as a result of disruption. Supply chain restructuring, reassessment of business needs or other business transformation may lead to a desire to renegotiate or exit ongoing contracts.
- For new or renegotiated contracts, the crisis puts a spotlight on boilerplate clauses which are not typically heavily negotiated, for example force majeure and termination for insolvency or change of control.
- Understand, and look beyond, your contractual rights: what are the commercial and reputational consequences of terminating, alleging breach or invoking force majeure? For example, the UK government has issued formal guidance on responsible contractual performance in the current crisis.
- Consider proactively engaging with counterparties to renegotiate contracts to deal with the current situation, for example to take COVID-19 out of the scope of existing force majeure provisions and expressly deal with the consequences of any further disruption.
- Be aware of changes in the regulatory and legal environment that may impact commercial agreements - for example, the UK has recently announced reforms that will affect your ability to exercise contractual rights to terminate on insolvency (see this alert for more information).
- Review templates for fitness-for-purpose in the current environment, and consider how further disruption should be dealt with. Existing force majeure clauses may not be the best contractual mechanism to deal with coronavirus-related disruption, and other termination triggers may need careful examination. Business continuity plans will also need to be scrutinised and updated.
Consumer and Digital Commerce
- The reopening of bricks-and-mortar retail and other consumer-facing sites requires new measures to facilitate and enforce social distancing, keep sites clean and reduce transmission risk, and protect employees.
- Increased use of digital channels for advertising, marketing and selling goods and services will continue throughout the crisis and beyond. Opening up and expanding digital channels brings new legal and compliance issues.
- Social distancing and closure of physical stores has accelerated a shift towards direct-to-consumer sales models. This shift is likely to persist beyond the end of the immediate crisis as businesses explore new ways of reaching customers.
- Consumer terms, particularly cancellation and refund rights, are under increased scrutiny by both regulators and consumers themselves. Consumer-facing businesses are likely to see an increase in the exercise of these rights and a greater willingness to challenge the validity or fairness of their terms - particularly in the travel and events industry.
- Both existing and new legislation to prevent price gouging i.e. inflating prices of hard to come by products such as face masks and hand sanitizer.
- Check specific requirements under local laws and guidance before reopening consumer-facing sites, and continue to monitor closely for changes. For more information, see our alert.
- Consider both current and future legal and regulatory requirements for digital projects, to futureproof them.
- Ensure that new routes to market do not result in a permanent decrease in footfall at bricks-and-mortar stores, by incorporating bricks-and-mortar into omnichannel options by enabling consumers to order, pick up and return online orders from high street stores. Consider ways of re-purposing the bricks-and-mortar store experience.
- Review consumer terms and conditions with the increased likelihood of challenge in mind. Consider practical, legal and reputational issues with holding consumers to the letter of your terms or delaying the payment of refunds. For example, see this alert on the UK Competition and Market Authority's guidance on refunds and cancellations.
- Keep up to date on pricing rules and ensure that you do not fall foul of any new legislation introduced at short notice.
- The crisis has generated new opportunities and imperatives for collaboration. As these collaborations mature and eventually terminate, thought needs to be given to the ownership of resulting IP, the return of confidential information, and any ongoing liability for products or services produced under the collaboration.
- However, the ongoing disruption may lead to delays and difficulties meeting agreed milestones in both existing and new collaborations.
- Remote working and rapid restructuring of supply chains and other business operations present significant challenges to protection of trade secrets.
- Increased use of digital channels to advertise and sell products involves making a huge body of protected content available to a potentially enormous, global audience. Combined with the greater ease with which infringers can unlawfully utilise digital content, this leads to greater difficulty in protecting your IP, defending against infringement, and clearing third party rights.
- Check the termination provisions of collaboration agreements: is the term limited, and what are the parties' termination rights? What are the consequences of termination?
- Where a collaboration agreement leaves gaps - for example, in relation to ownership of any newly created IP, understand the default position and consider whether it can / should be addressed.
- Consider building flexibility into milestone dates and associated payments so that both parties are clear on the consequences if these are not met.
- Maximise trade secret protection as far as legally and practically possible. Limit dissemination of confidential information and refresh employee training. Ensure provisions in agreements provide adequate protection and check that processes to recover or delete confidential information held by departing employees and contract counterparties are fit for purpose in a remote working environment. For more information, see this alert.
- Assess IP protection, including contractual relationships with third parties, for its fitness for purpose in a digital context. Do you have all of the rights and protections you need for the uses and audiences you are targeting? Are you taking the right enforcement measures to reduce infringement risk from a practical perspective (e.g. limiting audiences, building in technological protection measures)?
To discuss any of the issues raised in the IP, Data & Technology checklist, please contact:
|Michelle Blunt||Steve Holmes|
Pension Contribution Levels
- Post pandemic, UK employers have taken different approaches with regard to the level of pension contributions paid to defined benefit (DB) or defined contribution (DC) arrangements.
- Some employers have reduced or suspended employer contributions, where legally possible. For example, some employers with DC arrangements have reduced their contributions to the minimum level permitted under UK auto-enrolment legislation, whereas, on the DB side, a number of employers in distress have agreed to reduce or suspend deficit recovery contributions until the end of June 2020 in accordance with Regulator guidance.
- Employers may look to restore contribution levels in the coming months because it is legally mandatory, deadlines under previous agreements have been reached or for general employee relations reasons.
- Employers should monitor and potentially revisit these decisions to ensure their approach remains appropriate and legally compliant.
- If a decision is taken to restore pension contributions to their pre-COVID-19 levels, employers should work closely with trustees of occupational pension schemes or pension providers, as applicable.
- Particularly on the DC side, the agreed contribution increase strategy should be shared with employees and any relevant trade unions as early as possible.
Enhanced Employer/Trustee Engagement
- As encouraged by the UK Pensions Regulator, employers with DB schemes are engaging closely with the trustees so that the trustees, as unsecured creditors of the employer, can monitor the impact of the current situation on the employer's financial strength (this is often referred to as the employer "covenant").
- Employers should continue increased engagement with DB trustees during any recovery period and should ensure governance structures exist to manage the process, e.g. frequent financial disclosures, meetings with senior management etc.
- If not already in place, confidentiality agreements could be entered into with trustees to manage the flow of financial information and the sharing of it with professional advisers.
Increased Employer Covenant Support for DB Scheme Trustees?
- Given the UK economy forecasts, trustees may request further funds and security. On the assumption that many employers will be facing affordability challenges, appropriate funding options include alternatives to increased cash contributions.
- As regards triennial valuations, trustees and employers are already considering potential implications of the new Regulator DB Funding code to be consulted on in the Autumn.
- Employers should consider possible funding solutions early in funding discussions and work with trustees and advisers to explore pros and cons.
- Well-established alternatives to additional cash funding include company guarantees, escrow arrangements and asset-backed funding agreements.
Liability/Risk Management Exercises for DB Schemes and Wider Restructuring Options
- There may an opportunity for employers to consider DB scheme de-risking / restructuring exercises to mitigate the financial risks associated with DB liabilities. There are various options available, delivering results ranging from general cost savings and funding certainty to full discharges of DB pension liabilities.
- Options should be discussed with professional advisers as each employer and DB scheme will have different rules, aims and features. Possible solutions include:
- scheme restructurings (such as pensionable salary caps, plan closures/mergers and switches to DC benefits);
- RPI to CPI inflation switches;
- member-consent benefit options (such as pension increase exercises);
- streamlined governance options such as pooled investments or common trustee boards;
- liability transfers to insurance vehicles ("buy-ins" and "buy-outs"); and
- potential innovative risk transfer and collateral support structures.
- Employers should engage with trustees and the Pensions Regulator (if applicable) about possible options as early in the process as possible.
Enhanced Pension Trustee Governance
- DB scheme trustees face many challenges during this period and trustee governance will be high on their agenda. In particular, the crisis has necessitated the use of virtual trustee meetings and closer attention to decision-making and governance matters more generally.
- This shift to using technology more effectively is positive and should be encouraged. Employers should note that trustees will be working closely with their advisers to draw on lessons learned to ready themselves for the Pension Regulator's new single code of practice on governance (being consulted on in the Autumn).
To discuss any of the issues raised in the Pensions checklist, please contact:
- The Coronavirus Act 2020 introduced a temporary restriction preventing landlords terminating leases for non-payment of rent for the period from 25 March -30 June 2020. Some tenants have chosen not to pay rent for the March quarter. However, rent (together with interest) remains due and will become immediately payable on 1 July (unless that period is extended by the government).
- Tenants should consider the required repayment of any unpaid back rent and, if necessary, liaise with landlords to agree repayment arrangements and. Where not already sought, tenants may consider approaching landlords for temporary rent concessions to mitigate the return to full rental payments. Any such arrangements should be documented properly in writing.
- Government-implemented health and safety restrictions such as social distancing may necessitate physical alterations to premises, and/or the change of use of certain designated areas (such as canteens).
- Parties should (where relevant) check their lease provisions relating to alterations and use and apply for and obtain any requisite consents (such as landlord, lender or planning) before carrying out any works or alternate use.
Social Distancing Implications
- Social distancing requirements will need to be addressed in common parts of multi-let premises (for example, lobby and lift spacing, reviewing fire evacuation procedures, and limiting ‘touch points').
- Social distancing within premises will also be required to comply with government requirements.
- Parties should collaborate to ensure all health and safety concerns are addressed, and check service charge provisions in leases to clarify whether any extra associated costs should reasonably be passed through the service charge.
- Parties should ensure their duty of care responsibilities to occupiers, visitors and staff are fulfilled, and consider any additional safety measures (including enhanced cleaning regimes) that may need to be implemented.
Restructuring Property Holdings
- Landowners, landlords and tenants may find their property requirements have change as a result of the COVID-19, for example through redevelopment potential or altered space requirements.
- Parties should check lease terms (where relevant) to assess any upcoming lease expiry, rent review and/or break dates and any keep open obligations and consider appropriate actions.
- Landowners may consider e.g. sale and leaseback transactions as a cash-flow generator, or look at redevelopment or alternative use planning applications to address changing market trends.
Government Intervention Schemes
- UK government has introduced various schemes to help business deal with the economic implications of the COVID-19 crisis, including:
- business rates holiday for retail, hospitality and leisure premises for the 2020/2021 tax year
- Retail, Hospitality & Leisure Grant Fund (RHLGF). Under the RHLGF, a one-off grant of up to GBP 25,000 (amount based upon rateable value) may be available for each eligible property whose business rates value is less than GBP 51,000. Such grants would constitute state aid but would not breach EU state aid rules unless the de minimis threshold is exceeded (this has been temporarily increased to EUR 800,000 per undertaking
- Business Rates relief is automatic and does not require a separate claim, but you should council if you do not think you are getting the relevant discount
- If you have an eligible property, your local authority should contact you with details of how to claim under the RHLGF. Claimants will be required to confirm that the de minimis threshold of EUR 800,000 will not be exceeded, and that they were not an ‘undertaking in difficulty' on 31 December 2019. Those claiming in respect of multiple properties should be aware that if they accept grants that cumulatively exceed the EUR 800,000 threshold, and thus EU state aid rules are breached, there is a risk that the UK Government will be required to recover that amount from them at a later date.
Insolvency Intervention Measures
- The Corporate Insolvency and Governance Bill currently passing through Parliament introduces some temporary restrictions on the service of statutory demands and winding up petitions against tenants as a means to recover overdue rent. These restrictions last until the later of 30 June and the date 1 month after the Bill becomes law.
- Keep an eye on the expiry date of these measures where rent remains unpaid without landlord's agreement. Tenants should where relevant liaise with landlords to try to agree a rent repayment schedule rather than risk recovery action.
To discuss any of the issues raised in the Real Estate checklist, please contact:
- Groups will need to reassess tax positions in terms of cash flow, intra-group financing and onerous intra-group contracts.
- The optimal structures for cash and liquidity management will need to be identified.
- Transfer pricing will be a key factor, in particular the COVID-19 impact on arm's length pricing based on unpredictable financial results, unexpected costs, treatment of subsidies.
- If a group has trading losses, it will need to review whether there are any opportunities for loss planning.
- Consider capacity for and tax consequences of restructuring of group debt e.g. ensuring that funding needs of borrower companies are met and bearing in mind limitations on interest deductibility.
- Where necessary, take proactive steps to amend the terms of finance agreements or to refinance debt where practical, permitted by law and where it does not create new tax liabilities.
- Groups should reassess current transfer pricing arrangements to determine whether change is needed in order to manage liquidity, risk and the group's effective tax rate.
- Many countries allow trading losses to be carried back and set against the profits of previous accounting periods. Consider whether conditions for carry-back are met and whether carry-back is the best way of using losses.
Access to Capital
- Re-alignment of group debt structures may be necessary to ensure that entities are able to support their existing debt obligations.
- In view of recent currency fluctuations, any restructuring will need to take account of potential tax issues arising as a result of foreign exchange gains and losses.
- Consider whether borrowers are able to take advantage of lower interest rates and whether parental guarantees are needed to support subsidiary borrowing. Consider the tax and transfer pricing consequences of such arrangements.
Restructuring and Insolvency
- Existing group debts may need to be cancelled, released, assigned or waived.
- Restructuring to preserve profitability and limit losses may involve the transfer of assets or trades, winding up certain operations or selling or winding up some operations.
- Consider the tax consequences of release of intra-group debt and whether any reliefs (e.g. for connected parties) are available.
- Assess the tax consequences of a group reorganisation. For example, can the assets of insolvent group members be transferred within the group and what are the tax consequences?
- Dealing with losses and maximising available reliefs by sharing losses among group members will require an evaluation of functional and risk profiles.
- Groups may consider debt buy-backs and debt equity swaps.
- Most countries allow trading losses to be surrendered to other group members provided conditions are met. Consider whether it is appropriate for losses to be shared among the group to the extent permitted by law. This will depend on the nature of the losses, the contractual arrangements in place, and the functions performed, assets owned and risks managed by each member.
Supply Chain Optimization
- The impact of COVID-19 on entities within the supply chain could mean that profit allocations can no longer be justified and that different benchmarks need to be used.
- It may be the case that critical assumptions underlying advance pricing agreements have been breached.
- Re-evaluate the functional profiles and levels of profit for all parts of the supply chain and analyse which party is ultimately bearing the risk associated with decisions currently being made.
- Changes may be needed to reduce levels of guaranteed profit in entities that are limited-risk distributors, contract manufacturers or sales agents.
- Document all agreements that support such decisions and ensure they appropriately reflect any supply chain shifts.
De-listings and Take Private
- There may be economic and regulatory advantages for some public companies in de-listing. This will create opportunities for other groups to acquire newly de-listed companies to compliment or expand their existing operation.
- Following an acquisition, groups will need to undertake a post-acquisition integration and restructuring exercise and tax planning will be an essential part of this.
Risk Management and Compliance
- Many tax authorities have adopted a lenient approach during lockdown, e.g. by "pausing" enquiries and extending deadlines. However, in many cases, this is now ending and companies can expect close scrutiny of their arrangements and any restructuring.
- Increased tax authority focus could result in litigation over disputed amounts of tax.
- Business should conduct "audit-readiness reviews"
- All correspondence and decisions should be carefully documented.
- Businesses should be aware of alternative dispute resolution mechanisms including mediation since these might be preferable options to court hearings in some cases.
- With individuals e.g. directors able to work from home, possibly in a different country from where they normally work in an office, there is a danger that this could give rise to a permanent establishment, creating a tax liability for their company.
- The current OECD-led initiative to introduce a new global system for taxing the digital economy is still proceeding and is likely to bring about major reform. If the OECD fails to find consensus, countries around the world will introduce their own digital taxes (some already have).
- The European Commission is introducing a new system to modernise VAT for cross-border business to consumer (B2C) e-commerce transactions. The start date has been delayed from 1 January 2021 to 1 July 2021 because of COVID-19.
- While tax authorities and the OECD have published guidance on this, it's essential to plan to ensure that arrangements fall within the guidance and meet the necessary conditions in order to avoid creating any additional tax liabilities.
- To the extent that they are not doing so already, companies should keep a close eye on progress towards a global solution and monitor the introduction of unilateral taxes in order to plan for the financial and regulatory impact.
- Businesses should plan for the introduction of the new system and ensure that all the necessary procedures are in place to comply.
To discuss any of the issues raised in the Tax checklist, please contact:
Sanctions & Export Controls
- Significant focus on China in light of ongoing geopolitical developments, and continued tightening of trade and investment controls.
- Existing sanctions against Iran and Russia may also tighten, in particular with the Trump Administration pushing for snapback of Iran sanctions lifted under the Joint Comprehensive Plan of Action (JCPOA).
- Wider focus of export controls, including a focus on medical supplies and PPE in the context of COVID-19, as well as pre-existing efforts to widen export controls to cover emerging technologies such as AI, and to enhance restrictions related to cybersecurity, telecommunications, and monitoring technologies. National security considerations feeding into export licensing decisions going forward are likely to include not only military use, but also broader economic, human rights and public health implications.
- Similarly, there is an increased focus on national security considerations in the context of foreign investment and M&A, with authorities expressing a particular interest in foreign ownership of export controlled IP and foreign involvement in the manufacture of export controlled items. The UK is expected to update and expand its foreign investment framework in the coming months. In response to the economic impact of the pandemic, other countries have recently extended foreign direct investment controls beyond national security to strategic areas such as healthcare and economically vulnerable areas such as leisure and tourism.
- Disruption to export control authorities' ability to issue licences and classification opinions due to COVID-19 operational restrictions and prioritisation of COVID-19 licensing decisions, with a resulting impact on supply chains involving controlled items.
- Significant reforms to export control rules remain under consideration in key jurisdictions, including China, the US, and the EU.
- Political developments will have a significant impact. A Biden victory in the US election in November could signal a return to Obama-era foreign policy, including the US tightening restrictions on Russia, easing the embargo on Cuba, and attempting to re-enter the JCPOA. Additionally, the UK's departure from the EU's sanctions and export control framework will almost certainly result in divergence in the medium term, with the UK likely to operate a stricter regime than the EU.
- Keep informed of new developments affecting your business in order to plan for potential disruption to supply chains.
- Conduct a basic risk assessment of your business (and supply chain) to identify products that may be considered to be sensitive (e.g., medical supplies, cybersecurity, telecommunications, AI, monitoring technologies, defence) and thus, likely to be more exposed potential changes in legal framework.
- Consider diversifying supply chains in order to mitigate the impact of new restrictions, particularly where manufacturing goods that might be deemed essential under a broad "national security" definition.
- Carefully consider sanctions and export control compliance issues in the context of M&A transactions.
- Where acquiring a business that deals in controlled items or owns strategically important IP, ensure that any foreign investment analysis is conducted at an early stage in order to manage the process appropriately.
- Consider targeted government engagement in order to ensure your business's voice is added to the debate on widened export control restrictions.
- Current trade wars increase the potential for safeguard tariff measures to be imposed by the UK/ EU (e.g. anti-dumping duties; retaliatory tariffs) depending on conduct adopted by other jurisdictions.
- Companies need to diversify supply chains to avoid being dependent on sourcing / manufacturing from one particular jurisdiction, as well as customer portfolios.
- Potential for increased scrutiny and enforcement of fines by HMRC as governments scrutinise public finances post-crisis.
- Lack of resources (e.g., due to being furloughed or redundancies) increases the risks of customs compliance failings occurring within the supply chain.
- Monitor developments around trade wars carefully, take part in government consultations/lobbying and assess what mitigation options might be available (e.g. alternative suppliers; change manufacturing locations) if these measures are adopted by the UK/ EU.
- Consider cost implications of diversifying supply chains and assess where and how supply chain efficiencies can be achieved.
- Address customs compliance misconduct that occurred during the crisis, including by closer monitoring of third party customs agents/ freight forwarders.
- Consider virtual training opportunities to refresh customs compliance knowledge.
- Consider targeted government engagement in order to ensure your business's voice is added to the debate on widened export control restrictions.
To discuss any of the issues raised in the Trade checklist, please contact: