The effects of COVID-19 and associated government response raises a number of legal issues for businesses to consider. These include:
- Your people, including health and safety, privacy, employee leave entitlements, and potential restructurings.
- Contractual matters, including complying with contractual obligations, force majeure and frustration clauses, and specific issues concerning leases.
- Financial issues, including potential breaches of financial covenants, potential insolvency and restructuring options.
- Insurance cover, including the potential for cover under business interruption, travel insurance and other policies.
- Corporate governance, including directors' duties and continuous disclosure obligations for listed companies for listed companies and regulatory relief granted for issuers raising capital and for financial reporting obligations.
Set out below are further details on these key legal considerations for businesses when coordinating a response to the impacts of COVID-19 and associated actions.
It is important that your team is keeping up to date with your legal and regulatory obligations and updated guidance from relevant authorities in order to ensure that the team can quickly respond to, and comply with, these new obligations. Please do not hesitate to contact us if we can assist.
- Workforce: Managing the impact on your workforce is likely to be foremost on your mind. Planning resourcing strategies, implementing new flexible working arrangements and other policies if staff have to self-isolate, while managing business critical functions and the impact on vulnerable employees, raises questions including:
- Employee leave: None of the rules on annual leave, sick leave and alternative leave in the Holidays Act clearly apply to a compulsory or voluntary self-isolation situation in which the employee is not unwell. In response, the government has now introduced “COVID-19 leave”. A range of possible scenarios could arise within your workforce. Our article 'Coronavirus – updated practical tips for employers in an evolving situation' sets out some general principles to guide your planning for these situations, including the government’s most recent support package announcements.
- Restructuring: When considering any restructuring process, employers will need to bear in mind their duties of good faith under the Employment Relations Act. These are summarised in our article 'Coronavirus – update practical tips for employers in an evolving situation'. In addition, as alternatives to redundancies, employers could consult with employees to see if they would agree to a reduction in salaries voluntarily, however, any variation to an employment agreement will need the employee's consent.
- Health & Safety: Employers must manage the health risks to workers and other people affected in the workplace, taking them seriously and treating employees in good faith. Employers should plan ahead and work with staff and unions to address likely scenarios arising from COVID-19. All employers should have a plan for what might happen in a wider outbreak situation, and ensure that employees are aware of that plan in advance. Our advice is communicate early, and communicate well.
- Privacy: It is essential that you maintain good privacy practices. A number of exceptions to general privacy restrictions may apply where personal information needs to be collected or disclosed to support the response to COVID-19. However, particular care must be taken with personal health information. For example, in some circumstances an event organiser can give attendee information to the health authorities, an employer may need to inform other employees if an employee is self-isolating and/or displaying symptoms and, in some circumstances, it may be appropriate for an employer to temperature screen in the workplace. Exceptions to general privacy restrictions will also apply to some information updates to customers and suppliers.
- Force majeure and frustration
A key issue is whether the impacts of COVID-19 might allow you (or your counterparty) to avoid your contractual obligations.
- Force majeure: The starting point is to assess whether your contracts have a force majeure clause that excuses the parties from their contractual obligations and liabilities if they are prevented from performing because of a specified event. The wording of each clause will be critical in determining whether it is triggered by the impacts of COVID-19.
- Doctrine of frustration: If your contracts do not contain a force majeure clause, the common law doctrine of frustration might apply to release you (and your counterparty) from the contract – but only if the impacts of COVID-19 make performance impossible or radically different to what you agreed.
- Other potentially relevant provisions: When reviewing your contracts, it is important to consider the whole range of provisions that might be affected. These include material adverse change clauses, financial covenants, change in law, cessation of business and termination.
- The importance of getting it right: In all cases, you should be careful in asserting that you are not required to perform. If it later turns out that your force majeure cause did not apply, or the contract was not frustrated, you may have wrongfully repudiated the contract and be liable for damages resulting from that repudiation.
- Customer and supply contracts
Evaluating the impact of COVID-19 on your key customer and supply chain contracts will be key to assess you and your counterparty's ability to perform.
- From a customer perspective, you should be assessing your rights if a counterparty to any of your key contracts is unable to perform. Urgent steps may include implementing disaster recovery plans, sourcing alternative or back-up supply arrangements (including checking termination rights, exclusivity obligations and minimum purchase commitments) and enforcing “no-discrimination" or “most-favoured customer" rights.
- If you are a supplier, you should be assessing the impact on your ability to discharge existing contractual obligations and service levels. Where relevant, you should be reviewing relief provisions, such as rights and obligations under force majeure frameworks, the doctrine of frustration, change in law provisions and contractual flexibility on forecasts and delivery times.
- In either case, it is essential to ensure that contractual notice obligations are followed and alternative arrangements are properly documented.
- Lease obligations:
Where there is an emergency or legal reason preventing use of premises, leases may provide for rights for either the landlord to shut the building or for the tenant's obligations to pay rent and outgoings to be suspended. Individual leases will need to be checked to understand your rights. Key Bell Gully contacts are: Jane Holland, Toni Forrest and Karl Anderson.
Careful monitoring of your financial position and that of your counterparties is key to protect your position as well as understanding potential consequences and contingency measures in your financing documentation:
- Financing: As the impacts of COVID-19 are felt, consideration should be given to whether there is a need to increase the frequency of internal management and financial reporting. A close understanding and watch on key triggers under your debt financing obligations, including financial covenants and events of default should be in place if you are anticipating financial difficulties. Early engagement with your funders should be considered. Key Bell Gully contacts are: Murray King and Dave McPherson.
- Insolvency: With economists predicting a deep recession, you should be alert to insolvency risks, both for your own organisations and for your key suppliers and creditors. This includes understanding how a change to your company's financial position, liquidity, or asset values might affect its finance documents, or the availability of finance in the near future. Renegotiations and restructurings can take a number of different forms, which are best considered well in advance of the need arising. You may also wish to consider the implications of key suppliers or creditors becoming insolvent. This will help ensure that appropriate security arrangements are in place and enforceable, and that enforcement or recovery decisions are made strategically. Key Bell Gully contacts are: Dave McPherson, Tim Fitzgerald and Amon Nunns.
While business interruption insurance policies tend to cover the consequences of physical loss or damage to property, individual policies should be reviewed to see if they may respond to the impact of COVID-19. Other policies, such as travel and liability policies, may also respond in particular circumstances. It is important to assess potential cover and give timely notice of any potential claim or circumstances to your insurer. Key Bell Gully contacts are: David Friar and Jennifer Coote.
- Directors' duties: It is vital that directors continue to ensure that they comply with their directors' duties, and that directors continually re-assess what that entails in fast-changing circumstances. While solvency tests are required to implement a number of ordinary course corporate actions (such as paying dividends), the risk of insolvency can affect directors in other, more immediate ways. If the company is nearing insolvency, directors need to ensure that they are not allowing the company to recklessly trade or enter obligations that they do not reasonably believe that the company can meet when due. Directors will need to ask the right questions of their businesses, analyse information closely, increase their vigilance and seek professional advice as these circumstances require. They will also need to consider the effect of changing asset values, or the effect on their balance sheets of the financial challenges facing debtors. Documenting the reasons for decisions made in these times is also crucial. Key Bell Gully contacts are:
- Extreme times require extreme measures. Our article “COVID 19: Access to capital and financial reporting - regulators provide support for listed issuers and other FMC reporting entities” explains the regulatory relief granted by the FMA and NZX on 19 March 2020. These measures include granting additional time for FMC reporting entities to produce their audited financial statements and release their full year and half year results announcements to the market. Waivers have also been granted to help ensure issuers are able to access sufficient equity capital urgently if needed, including increasing the threshold for placements from 15 per cent to 25 per cent without having to obtain shareholder approval. Importantly, issuers relying on the “quoted financial product” exemption will still need to publish a cleansing notice to ensure the market is fully informed. We recommend issuers consider starting the process of assessing whether a cleansing notice can be given at an early stage, given the likelihood of difficult assessments of information in the current climate.
- Continuous disclosure, future performance guidance and trading halts:
Our update COVID-19: Issues for NZX listed companies published last week, reiterates the importance of the fundamental continuous disclosure obligations. A number of companies have already provided revised guidance or updates to the market, withdrawn or suspended guidance or gone in to trading halt pending a further announcement. As you focus on what the rapidly evolving situation means for you, consideration should be given to:
- An assessment of whether information is material and needs to be announced is difficult where there is a high level of uncertainty and incomplete information. Unfortunately, while there is an exception to the disclosure obligations if the information is “…matters of supposition or is insufficiently definite…", that exception would not relieve disclosure if the core facts that would be expected to materially impact the company's share price were known to a reasonable degree, even though all relevant information is not known to that standard. Ensuring that managers and employees are aware to new impacts to the business and are reporting this information promptly is crucial in these times.
- If you have announced future performance guidance, the NZX will expect companies to disclose immediately if their assessment is that there is a reasonable expectation that their actual results will differ from guidance and, if such difference (and all relevant circumstances) was announced to the market, the price of the company's shares would be materially impacted. If you are aware of material information in the public domain, you may also need to make an announcement to prevent a false market developing as a result of that third party information.
- Trading halts may be available in certain circumstances to assist you to manage your continuous disclosure obligations or to give the market an opportunity to digest material information, but are not generally available to avoid generally trading in a volatile market or to delay the release of material information. Applications for trading halts need to be made to NZX Regulation and are considered on a case-by-case basis. You should ensure you are familiar with this process in case it is quickly needed.
- Where average market capitalisation is rapidly changing, this may also result in the thresholds for major transactions or related party transactions under the NZX Listing Rules becoming much lower than previously was the case and requiring the need for shareholder approvals.
If you have any questions about the matters raised in this article please get in touch with the contacts listed, or your usual Bell Gully adviser.
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Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.