Following the wider outbreak of the coronavirus (COVID-19) around the world, radical—and sometimes controversial—actions have been and are further expected to be taken by national, federal and local governments and authorities in affected countries. Given the scope of these actions, along with widespread impacts of the crisis on employment, supply chains, pending M&A activity, capital markets and more, boards are urged to take action now to ensure the health of contingency plans, mitigate risks, tackle immediate priorities and ensure business continuity and stability.

This high-level checklist can help corporates and portfolio companies of private equity funds navigate current uncertainties related to COVID-19.

IN DEPTH

Following the wider outbreak of the coronavirus (COVID-19) around the world, radical actions have been and are further expected to be taken by national and federal governments as well as federal and local authorities in affected countries. The primary objective of such actions, some of which are controversial and the subject of much discussion among scientists, politicians, the media and the public, is to alleviate the rapid speed at which the virus spreads so to ensure that already overburdened national health systems can cope with the anticipated influx of COVID-19 cases. These actions, combined with inevitable employee absences, are expected to significantly affect the way in which companies operate their businesses and manage their risks in the short- to mid-term.

The potential scope and term of many of these actions are largely unknown, will vary from country to country and between federal states and regions, and are not yet understood in full. The COVID-19 crisis also provides significant challenges to pending M&A, capital markets, financing and restructuring transactions. Last but not least, new investment opportunities will arise as a result of the crisis.

Boards need to take action now in order to check the health of contingency plans, mitigate risks, tackle immediate priorities and ensure business continuity and financial stability. To assist in this process, McDermott Will & Emery* (McDermott) has put together this high-level checklist designed to support companies in navigating current uncertainties. This checklist has been prepared from a general legal and best-practice perspective for corporates and portfolio companies of private equity funds in the United States, United Kingdom, France and Germany. (For recent developments in Italy, please see our update here.) To address any questions in connection with COVID-19, particularly in this changing environment, an agile approach and tailored responses will be required that take into consideration applicable laws, policies and guidelines in the relevant countries as well as recent developments.

The outbreak of COVID-19 is moving quickly, and some of the considerations in this checklist may fall rapidly out of date. This checklist reflects our considerations as of 13 March 2020 and has not been updated since then. This checklist is for general information purposes only and should not be construed as legal advice or any other advice on any specific facts or circumstances. It cannot serve as or replace specific advice for individual COVID-19 related questions and matters and no one should act or refrain from acting based upon any information herein without seeking professional legal advice. For specific legal advice on COVID-19 please contact your usual McDermott contacts and experts.

I. General Crisis Management – Cross-Functional COVID-19 Task Force

Establish a dedicated task force reporting to the CEO or board with representatives from all major business lines and central functions (including HR, procurement, IT, finance, treasury, regulatory, communication/investor relations and legal) and covering all countries and regions material for the business. Assign responsibility for:

1. Assessing, monitoring and managing the development and impact of COVID-19, including compliance with the requirements and guidance issued by government bodies and local authorities.
2. Contingency and response planning, including business continuity, work force management and industry-side and business area-specific risk mitigation and orchestration of activation and implementation.
3. Communications, including internal and external communication of safety measures and response plans with employees, customers, suppliers, lenders, regulators/government bodies and other key stakeholders in the business.

II. Employment/Workforce Considerations – Protect your Employees

1. Check, monitor and comply with WHO guidelines and the requirements and guidance issued by government bodies and local authorities in connection with the health and safety of employees, including the Centers for Disease Control and Prevention in the United States (CDC).
2. Check, monitor and comply with notification obligations required by government bodies (including local entities) and make all appropriate containment, isolation or quarantine arrangements.
3. Review and be aware of the obligations and rights of the company under employment agreements and collective bargaining agreements, and under employment legislation, including applicable privacy rights and obligations.
4. Introduce new policies to prevent the spread of COVID-19 (and consider updating works council and collective bargaining agreements where appropriate) and communicate clearly with employees:
   a) Provide employees with the necessary equipment and technology to work remotely where appropriate (e.g., laptops).
   b) Instruct (to the extent permissible under applicable laws in your country) and/or ask employees to take their work equipment and technology home at the end of every working day.
   c) Consider introducing temporary flexible working policies.
   d) Consider having fever thermometers on hand for voluntary self-checks of employees or to offer/conduct health and fever checks for employees, to the extent permitted by applicable law.
   e) Consider instructing (to the extent permissible under applicable laws in your country) and/or asking employees to stay at home and not to come to the office/ workplace even if they show only mild cold symptoms.
   f) Consider whether employees should be instructed (to the extent permissible under applicable laws in your country) and/or allow employees to stay at home and not to come to the office/ workplace if family or household members have been diagnosed with COVID-19 or are otherwise in self-isolation.
   g) Limit or prohibit business travel, particularly to high-risk areas, and discourage face-to-face meetings. Instead, introduce ‘virtual’ meeting solutions such as videoconferences. Consider self-quarantine measures for employees returning from non-business travel.
   h) Require employees to notify the company of possible exposure to COVID-19 (including following travel to high-risk areas), subject to privacy laws.
   i) Provide training, equipment and support to prevent the spread of COVID-19.
5. Put in place arrangements to perform business-critical functions, if a material part of staff is absent (e.g., relocation of staff from high-risk areas).
6. Consider back-up arrangements and alternates for key personnel/functions.
7. To the extent available in your country, consider applying for short-time work compensation (e.g., so called Kurzarbeitgeld in Germany) and/or compensation from public authorities in the event of quarantine measures being imposed on employees.
8. Ensure strategies, policies, measures and communications (i) are proportionate to the health and safety objective, (ii) sustainable over time and (iii) comply with anti-discrimination and privacy laws.

III. Regulatory Matters

1. Prepare, coordinate and communicate with relevant authorities at the appropriate time to address (potential) containment, (temporary) shutdown of operations and/or sites, quarantine or changes to the business operations, if any. If need be, inform authorities regarding lead times for reduction of critical operational activities and levels.
2. Put in place arrangements to avoid or mitigate shutdowns, relocate to and/or perform operations or critical functions in low-risk areas, in case a material part of operations is located in (potential) high-risk areas and/or subject to containment restrictions, (temporary) shut-downs or quarantine (e.g., relocation of operations from high-risk areas).
3. Update emergency and business continuity plans to have documentation available when coordinating and discussing containment, shutdown of operations and/or sites and quarantine with relevant authorities.
4. Review whether any containment, (temporary) shutdown or change to the business operations triggers an obligation to notify the regulatory authorities. Identify competent authorities and check back with responsible personnel on your side.
5. Consider delayed responses and approvals from regulatory authorities from staff shortages as a result of remote working, travel restrictions, etc., and implications for pending measures.
6. Regularly check (extended) travel restrictions issued by national or federal authorities.
7. Regularly check extended customs clearance and/or expert control restrictions.
8. Regularly check for industry- and sector-specific developments and regulatory updates—in particular, in the healthcare and life sciences industries.

IV. Commercial Agreements/Supply Chain Disruptions

1. Identify and mitigate any potential supply chain disruptions caused by containment zones, factory closures, travel restrictions or employee absences due to illness or quarantine.
2. Consider short-term changes to supply chain and logistics models to avoid disruption (e.g., qualify alternative source replacement suppliers or vendors and consider production alternatives).
3. Evaluate and consider impacts on vendors’ ability to deliver and customers’ ability to pay on time.
4. Review contractual arrangements to identify the company’s rights and obligations arising in respect of delays in production or failure to fulfill outstanding orders (e.g., events of default, cross-default, notice and termination requirements, and applicability of force majeure) and any related consequences of a breach, including dispute resolution provisions and potential applicability of the United Nations Convention on Contracts for the International Sale of Goods (CISG).
5. Review adequacy of force majeure terms of material contracts.
6. Introduce alternative communication channels with customers and suppliers in anticipation of and while travel restrictions remain in effect.
7. Consider short-term marketing and sales responses to demand shocks.

V. Corporate and Capital Markets

1. Coronavirus/COVID-19 and M&A:
   a) Consider impacts on transactions: Expect delay, including issues arising from enhanced due diligence, reduced availability of acquisition financing, and warranties and exclusions from indemnities (W&I) insurance, and a potential slowdown/ retraction of auction sale processes, especially in affected sectors.
   b) Conduct enhanced due diligence with a risk-based approach for sectors directly affected (e.g., retail, travel and leisure industry) or indirectly affected (e.g., operations, supply chains, customers in high-risk or containment areas).
   c) Review valuation questions and measures to bridge the gap in affected sectors (e.g., earn-out, deferred or staggered consideration, vendor loan, reinvestment rollover).
   d) Expect changes to customary risk allocation provisions in transaction agreements (e.g., market/business MAC, material adverse event (MAE), warranty bring-down, (extended) long-stop dates, break-up fees, reverse break-up fees, representations and warranties relating to COVID-19).
   e) Address uncertainty in leverage financing, in particular business and market MAC clauses in financing commitment letters and other provisions affecting certain fund requirements.
   f) For pending transactions, review termination rights and consequences in case of material adverse change; consider the impacts of a delayed regulatory approval process and implications for closing.
2. Coronavirus/COVID-19 – General Corporate and Capital Markets:
   a) Consider the need to postpone or to make alternative arrangements for board and shareholder meetings.
   b) Consider the need to postpone intended fundraising on capital markets until volatility subsides and identify alternative sources of funds.
   c) Assess the impact of lower or volatile market prices on transactions, including the valuation of consideration shares, the pricing of warrants and regulatory obligations linked to the value of transactions relative to market capitalization.
   d) Identify potential mark-to-market obligations, margin calls, etc., in respect of financial instruments and make plans for meeting them.
   e) Review potential effects on ongoing prospectus approval procedures with regulators; it may be necessary to rewrite or supplement, in particular, the risk factors included in the prospectus/offering memorandum.
   f) Identify whether European issuers may be obliged to publish ad hoc announcements pursuant to Article 17 (1) of the European Market Abuse Regulation due to the effects of the COVID-19. The US Securities and Exchange Commission has advised companies subject to US reporting obligations to provide investors with disclosures regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus and to ensure that coronavirus-related disclosures are disseminated broadly and updated to the extent that information becomes materially inaccurate. Similar obligations may exist under rules and regulations in other jurisdictions. For example, material operations located in containment zones and the disruption of the production or the supply chain because of the COVID-19 outbreak may oblige issuers of financial instruments to notify the public on an ad-hoc basis.
   g) Issuers typically release their annual reports at this time of the year (provided the business year is identical with the calendar year). COVID-19 poses a challenge in particular in regards to the risk report and the prognosis / forecast report and needs to be carefully worded in order not to expose the issuer to liability risks. The same applies to quarterly and half-yearly financial reports.
3. Identify and assess new investment opportunities arising in the crisis.

VI. Financing

1. Ensure sufficient liquidity is available to weather the storm (and implement proactive cash management measures).
2. Regularly analyze the impact of COVID-19 (in particular, interruption of normal business activities, supply chain disruption, decreased sales, and extended containment and travel restrictions) affecting cash flows and EBITDA (i.e., financial stress testing).
3. Consider updating/adjusting business plans and budgets to address changes in operations and potential defaults resulting from government actions, including containment zones.
4. Review and monitor obligations under existing financing arrangements to:
   a) Comply with ad-hoc obligations to notify the lender(s) about issues that could adversely affect the financial condition and/or operations of your business.
   b) Verify compliance with agreed general undertakings and representation and warranties.
   c) Verify compliance with agreed financial covenants (in particular, on the next testing dates) and assess (if needed) availability of additional funds from shareholders to equity cure potential breaches of financial covenants.
   d) Engage with lenders and other stakeholders to encourage proactive discussions with a view to (temporarily) waive and/or suspend events of default (including cross-defaults) and other applicable restrictive provisions.
5. Check if you are eligible for any subsidies or other financial support from national authorities with regard to financial losses incurred due to COVID-19 (e.g., short- time work compensation allowance schemes).

VII. Restructuring

1. Monitor insolvency filing obligations and fiduciary duties in the zone of insolvency, and avoid liabilities due to an illiquidity or an over-indebtedness. (With respect to over-indebtedness, please note: the over-indebtedness may kick in much earlier than the illiquidity under German insolvency law in case of a negative going concern prognosis for the current and next fiscal year!)
2. Review (potential) restructuring needs and explore measures to cope with these by way of a preventive and/or insolvent restructuring.
3. Review (potential) external financing needs, available financing (re-)sources (e.g., existing lenders, alternative lenders, factoring, sale and lease back) and anticipate their potential requirements (e.g., restructuring opinion for existing lenders).
4. Review intra-group financings and related risks for each group company as managers of cash flow-positive subsidiaries may have to refrain from feeding a cash pool on an unsecured basis.
5. Keep credit insurers informed in order to prevent them from cutting their support and to ensure early awareness of developments at that end.
6. Contact governmental authorities in order to apply for/obtain potential emergency support (i.e., subsidies, short-time allowance) in due course.
7. Prepare for a prolonged period of uncertainty as the risk of global recession heightens.

VIII. Insurance

1. Review insurance policies to assess potential recoveries for any business disruption.
2. Ensure notifications to insurers are made as required under existing policies.
3. Review and clarify needs for additional insurance coverage as the situation develops.

IX. Data Privacy

1. Identify potential data privacy/leakage risks due to loss of business-critical functions.
2. Update technical and organizational measures to ensure that personal data related to notification requirements (especially health data regarding employees or customers) is also covered and protected.
3. Do not collect more data than necessary, even in view of COVID-19. In particular, consider carefully whether you really need to know who exactly in the employee’s household is affected and whether they are ill or just self-isolating.
4. Check/review company policies regarding remote working and other work arrangements. Consider additional training for employees who do not normally work remotely.
5. Evaluate the use, transfer and storage of new data gathered from individuals (e.g., customers, suppliers and employees) in respect of enhanced risks, including diary management/travel plans, emergency contracts and health data.
6. Stress test robustness of IT systems and cybersecurity controls in anticipation of allowing/requiring employees to work from home.
7. Evaluate involvement of data privacy authorities.

X. Sector-Specific Considerations

1. Healthcare
   a) Review and update policies for healthcare workers in clinical and non-clinical settings to take into account national and local government advice for healthcare workers.
   b) Review and update emergency and disaster planning policies, particularly in the context of clinical settings.
   c) Review and update relevant policies, including infection control, decontamination, transfer and management of patients, and care of the deceased.
   d) Assess business impacts on health providers: review contracts (with payers, commissioners and supply chain) in respect of required notifications on force majeure and suspension of health services.
   e) Review and plan for changes in business demand, particularly in non-urgent face-to-face care (including options for remote care) and likely increases in demand for diagnostics, intensive care support and related services.
2. Life Sciences
   a) Review and manage supply chain issues and guidance in respect of demand and supply of medicines and devices.
   b) Review and comply with antitrust and related guidance on the pricing of in demand drugs and devices.
   c) Maintain ongoing review of regulatory guidance on acceleration of clinical trials and clinical trial support services.