February 25, 2020

Coronavirus: A Disclosure Deep Dive

With everybody’s 401(k) plan smarting from the stock market’s belated realization that the coronavirus epidemic was actually a thing, this Nelson Mullins memo seems particularly timely. It takes a deep dive into the potential disclosure issues that the ongoing outbreak may raise for public companies. As this excerpt demonstrates, the memo is a great resource for issue spotting:

The impact of CV may have repercussions on a number of disclosure areas, including liquidity and capital resources, sources and uses of funds, gross and net revenues in the short, medium and long term, and other economic and noneconomic, personal and ESG considerations. Enhanced or additional risk factor disclosure related to CV pursuant to Regulation S-K Item 105 may be needed if it is or becomes one of the most significant factors that make an investment in the company or any offering speculative or risky.

Since SEC disclosure is increasingly principles-based, even if there is not a rule specifically dealing with a situation that a company may find itself in related to CV, the principles of full and fair disclosure apply. Companies should be mindful that their planning for uncertainties that may arise as a result of CV and their response to events as they unfold may be material to an investment decision, and should plan accordingly.

Consider other situations where disclosure of material nonpublic information may be necessary, such as if senior management or boards become impaired and are unable to serve or whether a “material adverse change” in “prospects” has occurred or is reasonably likely to occur. Business interruption insurance policies may be triggered. “Act of God” provisions may be applicable. Contract disputes may occur over CV related matters. Professionals should review and update insider trading policies, blackout periods and trading activity monitoring in light of new information related to CV.

As if that wasn’t enough, the memo also addresses a variety of other legal issues that may arise as a result of the outbreak, including potential labor and employment law, privacy, and even cybersecurity considerations.

Coronavirus: Implications for Contracts

It really is difficult to get your arms around the sweeping legal & business implications of the coronavirus epidemic. This Cleary Gottlieb memo picks up on one of the topics alluded to in the Nelson Mullins memo – the potential inability of companies to perform their contractual obligations due to the impact of the epidemic on supply chains. This excerpt addresses the potential availability of the “force majeure” clause to provide relief from contractual liability:

Force majeure clauses seek to define circumstances beyond the parties’ control which can render performance of a contract substantially more onerous or impossible, and which may suspend, defer or release the duty to perform without liability. They can take a variety of forms but most list a number of specific events (as well as more general ‘catchall’ wording to make clear the preceding list is not exhaustive) which may constitute a “Force Majeure Event” and excuse or delay performance, or permit the cancellation of the contract.

Matters such as war, riots, invasion, famine, civil commotion, extreme weather, floods, strikes, fire, and government action (i.e. serious intervening events that are outside the control of ordinary commercial counterparties) are typically included within the scope of Force Majeure Events.

The memo reviews how courts in the U.K., the U.S. & France have interpreted these clauses, and also discusses how common law doctrines of frustration and impossibility of performance may come into play in situations involving U.K. or U.S. contracts. It also touches on the right of parties to contracts entered into after October 1, 2016 under French civil law right to renegotiate those contracts based on a change in circumstances.

EU Blacklists The Cayman Islands & My Wife’s Book Club Gets Skunked

All this coronavirus stuff has made this morning’s blog pretty depressing, so I want to close on a lighter note. My wife is part of a neighborhood book club. Last week, it was hosted by a woman who lives across the street. At one point in the evening, she let one of the family dogs – “Hank” – outside. Hank is a very good boy, but he’s about as smart as you’d think a dog named Hank might be. So, he quickly ended up on the losing end of an encounter with a skunk.

Being a dog, Hank promptly retreated back into the house, whereupon he shared his “Eau de Pepe le Pew” with all the book club members in attendance. Regrettably, all of those women, including my beloved, returned home to their spouses reeking of skunk. As the neighborhood Facebook page lit up with late night tips on how to launder skunk out of clothing, it dawned on me that I live in a sitcom.

It’s at times like these when I fantasize of escaping from my suburban Ohio sitcom life – this week’s episode written & directed by Larry David – to an exotic location like The Cayman Islands. So, it kind of bummed me out to learn that according to this Debevoise memo, the EU just added my fantasy island to its “tax blacklist.” The memo discusses the implications of this action, which are most relevant for investment funds.

Okay, so that’s probably not real relevant to most of you, but I was just looking for an excuse to tell you about the skunking of the Wyndgate Farms book club. Have a good day, everybody!

John Jenkins