The COVID-19 pandemic raises critical and unprecedented issues for all organizations. How an enterprise responds to these challenges will influence how it fares through the crisis and its positioning for recovery afterwards. We believe that the issues below warrant special attention by senior management and directors.
Torys has prepared, or will be subsequently issuing, detailed bulletins that explain each issue, identify key considerations, and aim to provide needed guidance. Links to existing bulletins are included below.
1. Health and safety, and employment issues: Taking steps to safeguard the health and safety of employees is both a critical operational need and a legal duty. Protecting health and safety does not only mean minimizing the risk of COVID-19 infection; it also includes maintaining morale and cohesiveness through effective leadership and communication; and safeguarding the mental health of employees in a time of high stress, especially for remotely working and self-isolated employees. A difficult call to be made quickly is whether and when to implement employee layoffs if necessary to preserve cash to protect liquidity, while facilitating the access of those employees to employment insurance and other government supports (including potential employer top-up payments). Whether or not layoffs are necessary, consideration should be given to hardship relief for financially hard-hit employees. For more, you can read our bulletin on employer obligations relating to health and safety here; issues include maintaining a healthy workplace, the right to refuse work, the right to require attendance at work, layoffs and terminations, and employee privacy.
2. Government restrictions affecting your business: Rapidly evolving local, provincial, federal and international measures to contain the COVID-19 pandemic are imposing major restrictions on commerce that are affecting businesses and their employees. Organizations need to stay up to date on these developments (including potentially heightened restrictions to come), and to consider carefully the potential short- and medium-term effects on their operations, supply chain, access to customers, availability of employees, and other critical resources.
3. Corporate governance: Corporate directors need to identify and understand the risks to the company presented by COVID-19, and should carefully consider management’s plans for mitigating these risks. The organization’s short-and long-term viability must be assessed. Boards and committees should prepare to be nimble and act quickly to respond to a fast-moving environment—shorter and more frequent meetings limited to critical attendees and focused on vital issues may be more effective. Management should be directed to undertake reviews of liquidity and other financial needs, insurance, material contracts, and new corporate threats and opportunities. Appropriate stakeholder communications should be coordinated. Procedures should be put in place to enable prompt dissemination of information and decision-making throughout the organization.
4. Securities disclosure and other public company issues: Public companies must consider whether there are company-specific implications of the crisis that constitute material non-public information, whether that information requires immediate disclosure, and whether the company should restrict trading by insiders. They should consider whether to amend or withdraw any financial guidance they have issued. Public companies should assess whether they will be able to meet filing deadlines for audited and quarterly financial statements and other mandated disclosures, and if not, whether the recently announced relief measures are available to them. They should communicate with securities regulators if a late filing is anticipated and they are not otherwise eligible for relief measures. The crisis also heightens the importance of regular, effective communication with shareholders, debtholders and other stakeholders, while being mindful of selective disclosure restrictions. Companies should hold their annual shareholder meetings through “virtual meetings” or hybrid meetings where shareholders are encouraged to attend via webcast. A link to our bulletin on AGM virtual meeting planning is here.
5. Liquidity and cash flow management: Management must maintain a detailed understanding of the organization’s liquidity position, with the aid of appropriate stress testing. There must be clarity on the company’s debt and contractual obligations, availability of credit, compliance with key covenants and representations under existing debt facilities, cross defaults, and the potential need for waivers or other relief under lending agreements. Management will need to determine whether they can and wish to draw on available credit lines at an early stage, while still available, to provide additional flexibility. Early consultation with advisors on restructuring alternatives and other protective measures will be important. If solvency issues are foreseen, the organization should look into the availability of government assistance, consider strategic alternatives, and be mindful of the unique legal obligations and potential liability that may arise for insolvent entities and their directors and management.
6. Tax and government assistance measures: Major government interventions to ameliorate the economic impact of COVID-19 are being introduced on a massive and unprecedented scale. These measures include direct supports to businesses and individuals, as well as major changes to the tax system to facilitate liquidity. Additional measures are likely to be forthcoming. Organizations need to familiarize themselves with the key elements of these support and tax relief programs, and assess whether and how those changes can help.
7. Business continuity: Organizations should be preparing and implementing comprehensive business continuity plans to keep all critical functions operational. The integrity and continuity of the operational systems that enable an organization to run on a day-to-day basis have rarely been more severely tested. Organizations need to focus carefully on how to maintain their systems and protect them against interruption. A link to our bulletin on managing service disruptions is here.
8. Review of material contracts: It is essential for every organization to review its material contracts to determine whether its rights and obligations—or those of its contractual counterparties—are significantly affected by the crisis. Of particular importance are clauses dealing with material changes, force majeure, frustrating events, events of default, notification obligations, and termination rights. Insurance policies should be reviewed to determine whether losses may be recoverable. A link to our bulletin dedicated to COVID-19-related force majeure clauses is here.
9. Key personnel and succession planning: Organizations should review whether compensation packages for key personnel should be restructured to address the changing economic environment, including depressed stock price or other equity-related compensation, and unforeseen cash requirements. Consideration should be given to revisiting any previously planned senior executive or board transition, given the importance of steadfast leadership in a time of unprecedented disruption. Where a transition plan is being implemented, organizations should consider where an extended overlap period would be helpful. The organization should also prepare for the worst—with a continuity plan for possible emergency temporary succession.
10. New litigation risks: The pandemic is generating multiple litigation risks. Organizations need to be sensitive to class action risks arising from supply and service disruptions, changes to employment conditions, securities disclosure obligations, cyber vulnerabilities and other factors. Mitigation measures should be considered to manage those risks. Courts are shutting down or significantly curtailing operations, which increases the risk of missed limitation periods and limited access to judicial assistance with urgent matters. Organizations should consider their short- and medium-term need for access to the courts (including any urgent need for judicial assistance, such as to deal with emergency relief and insolvencies), and make special arrangements in advance with the courts, or pursue alternative dispute resolution options.
11. Opportunistic transactions: The dramatic economic changes brought by COVID-19 may create both unexpected risk and unexpected opportunity. Organizations need to be aware of the landscape in their industry—including considering whether the entity is susceptible to an unsolicited acquisition approach or an activist shareholder campaign; or alternatively, whether the organization is well-positioned to move forward with acquisition or other strategic transactions of its own in a time of unusual uncertainty. In the case of announced transactions that are currently pending, consideration should be given to whether the transaction can be completed under existing contractual provisions and whether buyers will be able to close, especially where they are relying on third party debt funding. Adjustments to the terms of these transactions may be necessary. In the case of new transactions to be entered into, special attention needs to be paid to risk allocation and financing arrangements. A link to our bulletin on key M&A issues in light of the pandemic is here.
12. Data security and privacy: Times of crisis and disruption can be opportunities for malicious actors to gain access to an organization’s electronic information systems, whether through phishing or other social engineering, or through a hack at a time when the organization is digitally overstretched. Organizations need to be alive to the privacy and data security issues that can result. These risks may be exacerbated by large numbers of employees working from home outside of normal supervisory regimes. A link to our bulletin on aligning your pandemic plan with your data security plan is here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
