Managing the Commercial Impact of the Coronavirus: Implications for the Technology Industry
“Caution is appropriate. Preparedness is appropriate. Panic is not.” (~ U.S. Surgeon General Dr. Jerome Adams, commenting on the coronavirus outbreak)
The coronavirus (also known as COVID-19) has now been documented in more than 100 countries and territories. As the coronavirus outbreak continues to wreak havoc on markets and industries in the U.S. and around the world, businesses are now confronting significant and unique challenges. Successful navigation of these challenges will require thoughtful and comprehensive planning.
At the epicenter of the coronavirus is the important worldwide manufacturing hub of Wuhan, China. The recent spread to other major manufacturing hubs further impacts the global economy and supply chains in ways not seen since the SARS outbreak in 2003.
As the coronavirus outbreak continues to develop, now is the time for the Technology Industry to consider response actions to help mitigate their risk and prepare for how they will deal with the fallout from the coronavirus. An effective plan should include establishing an interdisciplinary crisis response team to identify, assess, and manage the risk presented. The team should include personnel from purchasing, operations, quality, finance, human resources, and legal.
In recent days, technology companies have closed stores and offices, restricted executives and workers from traveling to affected areas and warned about the potential effects on their supply chains. Manufacturers in China and Southeast Asia are key suppliers to various technology companies across the globe. For example, Chinese companies manufacture many of the solar panels, batteries, silicon components, and raw materials used in renewable technology company products. A number of those manufacturers have been impacted by the coronavirus and have delivered to customers notices of potential force majeure events as a result of the coronavirus.
Technology companies should take the following steps to identify the impact of the coronavirus and mitigate risk:
Communicate with Critical Suppliers. Companies should assess the potential impact of any delays or disruptions to delivery of mission critical materials and parts. Companies should reach out to those suppliers to determine what level of inventories they are carrying and what actions they are taking to ensure the least amount of disruption to deliveries of parts and/or components. This is especially true for companies with critical suppliers in the nations that have been hardest hit by the pandemic, especially China. Further, companies should seriously consider redeploying resources in order to build additional banks of parts and/or onboard alternative suppliers to mitigate the impact caused by delays in deliveries from critical suppliers.
Review Contracts to Determine What “Force Majeure” Rights and Requirements May Apply. Force majeure refers to a legal doctrine where a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract. Although most force majeure provisions are unlikely to list disease, epidemics, or quarantine, many include general provisions covering such things as natural disasters, “acts of God,” acts of government, or “other circumstances beyond the parties’ control.” The coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak). Parties should carefully review the force majeure provisions in their contracts to determine whether they apply.
Consider the Location and Government Decrees. In China, the Ministry of Finance has issued a clarification that the coronavirus is a force majeure event and should be considered a case of natural calamity. Similarly, the National Solar Energy Federation of India recently issued a request to the Ministry of New and Renewable Energy that the coronavirus be declared a force majeure event. However, in addition to checking the applicable regulations regarding force majeure and any decrees by government ministries, manufacturers still will need to demonstrate that they are unable to perform as a result of the force majeure event.
Review Contracts to Determine What “Material Adverse Change” Rights and Requirements May Apply.1 A typical Material Adverse Change (“MAC”) clause is a way in which both sides of a transaction can allocate risk between signing and closing, and can be utilized in certain areas of an agreement (e.g., in the representations and warranties section specifying the lack of an MAC occurring since a particular date). MAC clauses usually define a MAC as “any event, circumstance, development, condition, or change that, either individually or in the aggregate, has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations, or other aspects of the business of the target and its subsidiaries, taken as a whole.” Whether a company can rely on the MAC clause in any specific contract will be contingent upon (i) how the provision is authored, (ii) how the provisions will be interpreted under the contract’s governing law, and (iii) the actual impact on the company at issue. Given that the full impact of the coronavirus outbreak remains unclear, it is likely still too early to assess whether a MAC provision has been triggered. Therefore, companies should evaluate the continuing effect of the coronavirus outbreak on the business at issue in the agreement.
Monitor Customer Demands. Companies should monitor customers to ensure that they will comply with their contractual obligations, including timely payment for parts supplied to the customer. In anticipation of disruptions, technology companies should formulate a plan for managing communications with counterparties, bearing in mind that strategic considerations may be involved when deciding whether to take certain steps. For those customers with a greater risk of nonpayment, companies should analyze contractual payment terms. Generally, however, companies should assess whether the circumstances and applicable law permit any party to assert any basis for avoiding or pausing performance under their contracts and analyze the potential consequences of a breach and/or default.
Review Allocations. Technology manufacturers should review allocation requirements and obligations to multiple, competing customers for potentially scarce materials as manufacturing operations ramp back up.
Reporting Requirements. Public companies should review and make accurate required disclosures, in the event that business operations are impacted such that a reporting requirement is triggered. All companies who are parties to credit agreements and other financing arrangements should review existing MAC clauses (as discussed above), and potential impacts on the borrower’s financial covenant compliance, in order to determine whether any proactive conversations with lenders may be warranted.
Insurance. Companies should review insurance policies to determine possible coverage in the event of a business disruption, and comply with all applicable notice requirements. Companies may also review the possibility of obtaining business interruption insurance. Regardless, businesses should evaluate their coverage to determine whether they may be covered for losses due to business interruptions attributable to coronavirus. However, many insurers have precluded viral outbreaks from being included in their standard business interruption policies. It is crucial, therefore, for companies to evaluate the terms of their specific policies in order to determine whether interruptions from coronavirus would be covered. During the course of their evaluation, companies should assess what their policies’ insurer notice requirements are and ensure that they will strictly comply with those provisions in the event coverage is sought.
Workplace Concerns. Section 5(a)(1) of the Occupational Safety and Health Act imposes a duty on companies to provide a workplace free from recognized hazards that are causing or are likely to cause death or serious physical harm – certain states also impose similar common law duties on companies, including regarding the spread of infectious diseases. Companies may adopt policies permitting ill employees to work from home or sending employees home if they disclose that they have coronavirus symptoms. Before disciplining or terminating an employee who misses work out of fear of contracting the virus, companies should consult legal counsel - some courts have found that the public policy exception to at-will employment provides a cause of action to employees terminated for missing work under conditions that pose a risk of communicable infection. Further, companies should ensure they are complying with applicable state and local sick leave laws, and be prepared to notify eligible employees of their rights under the Family Medical Leave Act.
Business Travel. Companies whose business involves travel to nations with Level 3 travel health notices (e.g. China, Iran, Italy and South Korea) should implement guidelines around travel to and from those nations. Additionally, companies should postpone nonessential business travel to such nations and consider whether there is a need for other international travel. Companies should respect employees’ unwillingness to travel rather than demanding they do so, in order to minimize the risk of future liability. If employees have traveled to either China, Iran, Italy, or South Korea within the previous several weeks, companies should require employees work from home for a period of 14 days from the day they left those nations per CDC guidelines.2 Companies should ensure that all policies and travel restrictions are applied universally to avoid the appearance of scrutinizing employees of a certain nationality, ethnicity, or race. Additionally, when implementing remote-work rules, companies should consider documenting the uniqueness of the situation to avoid future assertions that their remote-work decisions have not been applied consistently.
Cybersecurity. As governments require or recommend office and school closures to prevent or slow the spread of the coronavirus, many companies may decide to implement or expand employee work-from-home programs. These programs allow for business continuity, but they also pose increased cybersecurity risks by creating several additional avenues for unauthorized access to company systems and information. Therefore, companies should review their current cybersecurity controls and whether they must be enhanced prior to initiating or significantly expanding remote working technology. For example, best practices require implementation of two-factor authentication for accessing company networks and webmail and encryption on laptops and mobile devices. Companies should ensure adequate physical security and access controls for information technology assets during preparations for extended office closures.
Companies also should warn their employees that malicious actors will increase the use of targeted phishing attacks. These might include emails that purport to include medical updates or are “important notices” for those working remotely.
Additionally, policies that govern the acceptable use of company systems and devices as well as the transfer and storage of company information are essential. Employees working remotely are more likely to forward company information to personal email accounts or to store information on unprotected laptops or other mobile devices. Therefore, training or reminders about such policies is critical.
Finally, companies should be mindful of applicable privacy laws when collecting information about employees or clients they might not have previously collected, such as health information and travel itineraries.
In summary, it is important for the Technology Industry to take additional steps now in order to mitigate their risk of suffering negative impacts from the coronavirus. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.