Category: Business Organizations

A Glut of “Opportunistic” Margin Calls: Are Creditors Moving Too Quickly to Seize Assets?

What can companies expect from their funding sources as COVID-19 does damage to the economy? In at least some instances, perhaps, opportunistic attempts by lenders to illegally take control of business assets. A real estate investment trust (REIT) in New York alleges in a new lawsuit that it has already fallen victim to that type of misconduct.

AG Mortgage Investment Trust Inc. (AG) filed suit against the Royal Bank of Canada (RBC) on March 25 for allegedly taking advantage of the pandemic to unlawfully seize the trust’s assets and sell them at below-market prices. AG says RBC is just one of many banks that are now trying to trigger margin calls on entities like AG. It alleges that RBC is doing so by applying “opportunistic and unfounded” markdowns on mortgage-based assets. A margin call then occurs, according to AG, with RBC contending that the value of a margin account — an investment account with assets bought with borrowed money — has fallen, requiring the borrower either to make up the difference with more collateral or have the asset seized. RBC, the suit further alleges, is being unreasonable in its valuations. Having seized assets based on what AG calls an “entirely subjective and self-serving calculation” of true market value, RBC then auctioned off $11 million worth of AG’s commercial mortgage-backed securities.

Two days before filing the suit, AG had warned in a statement that it might not be able to satisfy the glut of margin calls it now faces from lending banks like RBC, as coronavirus crisis fears and fallout cripple the mortgage-based asset market. In its complaint, AG asserts that rampant, unwarranted margin calls have brought the nation’s mortgage-based REITs “to the brink of collapse.” AG notes, however, that unlike RBC, most banks have thus far agreed to hold back on taking action against those trusts’ assets — for the time being, at least.
“Recognizing the aberrant state of the markets, most banks have stopped short of taking precipitous steps that could push the mREIT industry into the abyss. This action is brought to stop one outlier bank—Royal Bank of Canada—that has not stopped short but is instead hitting the accelerator to unlawfully seize and unload a large portfolio of Plaintiffs’ assets at fire-sale prices into the seized markets which will have a cascading effect in the market for mortgage-based assets, and potentially the entire U.S. economy. These consequences are likely to undermine the emergent efforts currently being undertaken by federal and state agencies to provide breathing room and help stabilize the economy.”

Hours after filing its suit, AG sought a temporary restraining order to halt the auction. The auction had already begun that day by the time the judge had a chance to review AG’s request. RBC must soon respond to AG’s complaint, and, as the case progresses, will have to defend itself against AG’s claims for damages. If AG’s perception of a glut of unjustified margin calls is shared by other business entities, we should expect many similar suits to follow.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP

For more COVID-19 related business news, see the National Law Review Coronavirus News section.

COVID-19: Paycheck Protection Program: Is this the solution you have been waiting for?

The $2.2 trillion coronavirus stimulus bill enacted by Congress on March 27 provides immediate cash assistance to small businesses that keep their employees or recall employees they have furloughed or laid off due to financial hardships related to COVID-19.  The money is available through a Small Business Administration (SBA) loan program that allows businesses to keep the loan proceeds as a grant for eligible expenses, including payroll, for the period between February 15 and June 30, 2020.

This program, called the Paycheck Protection Program (PPP), is a powerful tool for businesses with fewer than 500 employees to get immediate assistance with meeting operating expenses, with the prospect of not having to repay some or all of the loan.  It’s also available for nonprofits.

Here are the highlights of the program:

Maximum Loan Amount

  • The PPP raises the maximum amount for an SBA loan by 2.5x the average total monthly payroll cost, or up to $10 million.  The interest rate may not exceed 4%.

Qualified Costs

  • Payroll costs

  • Continuation of health care benefits

  • Employee compensation (for those making less than $100,000)

  • Mortgage interest obligations

  • Rent on any lease in force prior to February 15, 2020

  • Utilities

  • Interest on debt incurred before the covered period

Businesses Eligible to Obtain These Loans

  • Businesses with fewer than 500 employees.

  • Small businesses as defined by the Small Business Administration (SBA) Size Standards at 13 C.F.R. 121.201.

  • 501(c)(3) nonprofits, 501(c)(19) veteran’s organization, and Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees.

  • Hotels, motels, restaurants, and franchises with fewer than 500 employees at each physical location without regard to affiliation under 13 C.F.R. 121.103.

  • Businesses that receive financial assistance from Small Business Investment Act Companies licensed under the Small Business Investment Act of 1958 without regard to affiliation under 13 C.F.R. 121.10.

  • Sole proprietors and independent contractors.

Loan Forgiveness

All or a portion of the loan may be forgivable, and debt service payments may be deferred for up to one year.  The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Application Process

Current lenders through the Small Business Administration 7(a) are authorized to make determinations on borrower eligibility and creditworthiness without going through the SBA.  These lenders can be found here. For eligibility purposes, lenders will not be determining eligibility based on repayment ability, but rather whether the business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.

Timeline

The SBA is required to issue implementing regulations within 15 days, and the U.S. Department of Treasury will be approving new lenders.

©2020 Pierce Atwood LLP. All rights reserved.

COVID-19 Insurance Impacts

In the throes of the COVID-19 pandemic, businesses have been significantly impacted and, whenever possible, should turn to their insurance carriers for coverage to mitigate the fallout from this virus.  As an initial step, policyholders should consider the insurance coverages listed below that may be triggered by COVID-19 losses or claims:

  • Business Interruption Coverage
  • General Liability Coverage
  • Workers Compensation Coverage
  • Directors and Officers Coverage

Policyholders should keep in mind that each situation is unique, based on the policy language, factual circumstances and applicable state law. As a starting point, policyholders should examine their policy language carefully to determine whether coverage may exist for COVID-19 related losses or claims.

Property Policies-Business Interruption Coverage

Business interruption coverage in general

Some policyholders might benefit from claims under business interruption coverage in their Property Policy in the wake of COVID-19, even though this kind of coverage is generally triggered where there is physical loss or damage. Courts vary on whether contamination rendering a building uninhabitable or unusable constitutes physical damage. Given that COVID-19 rendered buildings uninhabitable and unusable, the issue that may arise is whether COVID-19 contamination constitutes physical damage. We are aware of at least one case where a policyholder is suing its insurance carrier for business interruption coverage arguing that COVID-19 constitutes physical damage because the virus contaminates surfaces.

Policy exclusions must also be taken into consideration when determining coverage. After epidemics such as SARS, MERS, Zika, and Ebola, many insurance companies wrote in exclusions for infectious diseases. However, state legislatures might intervene and forbid these types of exclusions as a matter of public policy. For example, recently the New Jersey state legislature introduced a bill that would require insurance companies to cover business interruption losses as a result of COVID-19 despite the presence of these types of exclusions.

Given the level of uncertainty resulting from the pandemic, and the significant adverse financial impacts many businesses are facing as a result, the New York State Department of Financial Services (NYSDFS) issued a letter instructing insurance companies to provide policyholders and NYSDFS with an explanation of benefits letter to provide clarity around business interruption coverage under the policies at issue.

Contingent business interruption coverage

Some policyholders might benefit from contingent business interruption coverage in their Property policy, which is triggered when someone in your supply chain cannot perform due to a covered loss which in turn interrupts your business. In the case of the COVID-19 pandemic, businesses have certainly been impacted as a result of supply chain interruptions of third parties. Whether contingent business interruption coverage is available depends on policy language.

Off-premises business interruption coverage

This type of coverage is triggered where a service, such as electricity, water, sewage, communications, or gas, is disrupted leading to business interruption. We may see these essential services heavily challenged by COVID-19 impacts on the workforce and there may be adverse effects that have not yet reached businesses, but may be coming soon.

“Civil Authority” coverage

Some Property policies include “civil authority” coverage which covers losses as a result of a government or civil authority restricting access to the policyholder’s premises. Policies differ as to the terms of coverage including duration of coverage, whether the premises has to be damaged by a covered cause, and whether coverage extends broadly, such as when the civil authority restricts, hinders, impairs access, or narrowly, such as when the civil authority “prohibits” or “denies” access. Generally, civil authority coverage applies when there is a direct link between the civil authority’s order and the policyholder’s loss. For policy holders in localities where the state or local government has ordered a shutdown or curtailment of businesses to curb the spread of COVID-19 policyholders might recover under civil authority coverage.

General Liability Coverage

Businesses with general liability policies might be covered against third-party claims arising out of COVID-19. General liability policies typically cover third-party claims for “bodily injury” and “property damage” under “Coverage A,” and personal injuries, such as false imprisonment, under “Coverage B.” “Property Damage” is typically defined to include both physical injury to tangible property and loss of use of tangible property that is not physically injured.

Under Coverage A, businesses may be at risk for claims alleging that the business did not take proper precautions to mitigate the spread of COVID-19, thus resulting in bodily injuries. Princess Cruise Lines recently was sued by two of its passengers after the ship was quarantined because of a COVID-19 outbreak, alleging that the company did not take proper precautions to prevent the spread of the virus despite knowing that some passengers were infected. The occurrence giving rise to the claim must be “accidental” and there may ultimately be an inquiry whether companies knew and ignored risks, or whether the circumstances amount to an accident. Coverage claims will also have to address any potentially applicable exclusions to coverage under general liability policies.

In terms of liability under Coverage B, companies may be sued for false imprisonment as a result of improper or unwarranted quarantines.

Workers Compensation Coverage

Businesses that face claims from their employees who contracted COVID-19 in the course of employment should turn to workers compensation policies for coverage. Generally, workers compensation provides coverage for employees who were injured by accident or contracted a disease in the course of their employment. Many state statutes carve out coverage exceptions for “ordinary diseases of life,” meaning diseases that can be contracted by the general public. Whether insurers cover workers compensation claims for employees who contract COVID-19 through the course of employment is yet to be determined.

Directors and Officers Coverage

Businesses are also at risk of shareholder and securities suits, particularly in the context of disclosing the impacts of COVID-19 on business. The U.S. Securities and Exchange Commission (SEC) has been active in monitoring the impact of COVID-19 on publicly-traded companies, investors, and the market. On March 4, 2020, the SEC issued a press release, through which the SEC Chairman encouraged companies to provide investors with as much information as possible regarding COVID-19 impacts, plans, and risks. A class action lawsuit has already been filed against Norwegian Cruise Line alleging deceptive practices by the company in hiding the impacts of COVID-19 on the business, and subsequent stock losses.

If you have paid your premiums, you are entitled to all of the benefits your policies provide. In these challenging times, be sure to check all of your insurance policies for potential coverage.

© 2020 Van Ness Feldman LLP

Economic Relief for Businesses Impacted by Coronavirus (COVID-19)

In response to the Coronavirus (COVID-19) outbreak, the federal government and many states have developed paths towards economic relief for small businesses. Below is a summary of such programs at the federal level and in New York, Connecticut, and New Jersey.

I. Federal – U.S. Small Business Administration (the “SBA”)

In response to the Coronavirus (COVID-19) outbreak, the SBA has made Economic Injury Disaster Loans (“EID Loans”) available for qualifying businesses that have suffered economic injury as a result of the epidemic.  Below is a summary of the SBA’s eligibility requirements, application procedures, and general loan terms for the EID Loans.

SBA EID Loan Eligibility

In order to be eligible for an EID Loan a business must first be located in a geographic area that is a declared disaster area recognized by the SBA.  Recognized Declared Disaster Areas are listed on the SBA’s website. As of March 17, 2020, the following areas are approved for disaster loan assistance due to the Coronavirus (COVID-19): California, Connecticut, Idaho,  Maine, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, and Washington. The entire State of Connecticut was declared a federal state of disaster due to the Coronavirus outbreak effective as of January 31, 2020. Many other states are currently in the process of submitting requests to the SBA for an economic injury disaster declaration as a result of the virus and should be eligible for EID loans in the coming days and weeks.

The SBA further requires that a business qualify as a small business to be eligible for an EID Loan. The definition of a “small business” varies by industry but generally is based on the number of employees a business has or the amount of revenue a business generates annually. The SBA has an interactive website to help companies determine whether or not they qualify as a “small business” under the SBA’s regulations. Generally, a full-service restaurant qualifies as a “small business” so long as it has less than $8,000,000 in annual revenue. Private and nonprofit organizations may also qualify for EID Loans.

Finally, a business must demonstrate that it has suffered “substantial economic injury” as a direct result of the disaster, in this case the Coronavirus outbreak, in order to qualify for an EID Loan. For the SBA’s purposes a “substantial economic injury” generally means a decrease in income from operations or working capital with the result that the business is unable to meet its obligations and pay ordinary and necessary operating expenses in the normal course of business.

Ultimately, an applicant’s eligibility for an EID Loan will be determined by the SBA based on the applicant’s type of business, available financial resources, and its demonstration of substantial economic injury.

EID Loan Application Process

An EID Loan, and all other SBA disaster assistance loans, can be applied for by an (1) online application or (2) by a paper form, using SBA Form 5. The SBA has suggested that online applications will be processed more quickly than applications submitted on a physical form.

In addition to the EID Loan application form, an applicant must submit the following documentation to the SBA –

  1. Tax Information Authorization (IRS Form 4506T), completed and signed by each principal owning 20% or more of applicant business, general partner, general manager or owner who has 50% ownership interest in affiliate business. (Affiliates include, but are not limited to business parents, subsidiaries, and/or other businesses with common ownership or management with applicant business.)
  2. Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business; if unavailable a written explanation must be submitted in lieu
  3. Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant and each principal, general partner or managing member.
  4. Schedule of Liabilities listing all fixed debts (SBA Form 2202)

Following the submission of a complete loan application, the SBA will conduct a credit check of the applicant and verify the business’ financial information. The SBA may request additional financial information including tax returns for principals, general partners and managing members of the business, as well as a current profit-and-loss statements, and balance sheets for the business. The SBA’s stated goal is to review an application and decide on a business’ eligibility for the EID loan program within 2-3 weeks. Given the anticipated high volume of applications to this program as a result of the Coronavirus, it is likely that the application and review process will take longer. Once an application is fully accepted and approved, the applicant will need to sign the applicable EID Loan documents and return them to the SBA. The applicant can expect to receive a disbursement of the EID Loan funds within one week from the SBA’s receipt of the fully executed loan documents.

The EID loan amount awarded by the SBA will be based off an applicant’s actual economic injury and the business’ financial needs, as determined by the SBA. The SBA will factor in the availability of other potential sources of financial contribution and business interruption insurance when determining an EID loan amount to be awarded to a small business.

EID Loan Use and General Terms

The funds from an EID loan may be used by the small business to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The terms of an EID Loan shall be determined by the SBA on a case-by-case basis, based upon each applicant’s needs and ability to repay. Generally, the maximum amount of an EID loan for the Coronavirus disaster is $2 million with an interest rate of 3.75% for small businesses or 2.75% for non-profits. The maximum repayment term of an EID loan is 30 years. There are no pre-payment penalties imposed by the SBA on an EID loan.

Alternatives to EID Loans

Small businesses that do not qualify for EID loans or have alternative needs may still be eligible for financial assistance from one of the SBA’s alternative loan programs.

The SBA has an 7(a) Loan Guarantee Program involves loans for small businesses in an amount up to $5,000,000 made by private lenders that are guaranteed by the SBA (“SBA 7(a) Loan”). An SBA 7(a) Loan is made directly by a private lender, who also handles the application and loan process, but is subject to the SBA’s terms and guidelines. To encourage private lenders to make these loans, the SBA guarantees a certain percentage of the SBA 7(a) Loan amount.  Small businesses looking for an acceptable lender for a SBA 7(a) Loan can use the SBA’s lender matching tool or contact their local SBA office for recommendations. The local Connecticut SBA office can be reached at 860-240-4700. The general timeline for the approval of an SBA 7(a) Loan application is 5 to 10 business days.

In order for a business to qualify for a SBA 7(a) Loan, it must qualify as a “small business” under the SBA’s regulations, operate for profit, be engaged in, or propose to do business in, the U.S., have reasonable owner equity and resources to invest in business, and be for a sound business purposes. The acceptable use of the 7(a) Loan funds is generally less restrictive than that of the EID loans and permissible uses include use for working capital, expansion or renovations, new construction, the purchase of land or buildings, the purchase of equipment or fixtures, lease-hold improvements, the refinancing of existing debt for compelling reasons,  seasonal line of credit, inventory, or starting a business. The proceeds from an SBA 7(a) Loan may not be used for the reimbursement of an owner for previous personal investments toward the business, the repayment of any delinquent withholding taxes, or anything not deemed a “sound business purpose” as determined by the SBA. Interest rates for SBA 7(a) Loans are determined by the private lender and generally based off the prime rate or LIBOR rate at the time of the loan but are subject to interest rate caps set by the SBA.

For businesses that need loan funds in a shorter period of time, the SBA offers a SBAExpress loan program which provides term loans and line of credits in amounts up to $350,000. The approval process for an SBAExpress loan is generally completed within 36 hours of receipt of an application.  A SBAExpress loan must also be obtained through a private lender and may be used for the same general purposes as an SBA 7(a) Loan.

II. New Federal Legislation

Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act

On March 18, the United States Senate approved a relief package to provide sick leave, unemployment benefits, free coronavirus testing, and food and medical aid to people impacted by the pandemic. The legislation was passed by the House on March 14, and was signed by President Trump on the evening of March 18. The legislation contains provisions that require immediate review and action for employers with fewer than 500 employees.

Both the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act will take effect 15 days after enactment, i.e. April 2, 2020. These provisions expire on December 31, 2020.

Covered employers (i.e., private employers with fewer than 500 employees) will be provided payroll tax credits to cover the wages and health care contributions paid to employees under the sick leave and family medical leave programs, up to the specified caps.

III. New York

New York State is currently assessing options to mitigate hardships to NYS businesses. As of March 19, 2020, the following orders and programs have been established in New York State in response to the COVID-19 outbreak:

Work From Home

On March 18, Governor Cuomo announced he will issue an executive order directing non-essential businesses to implement work-from-home policies effective Friday, March 20, to help reduce density as a social responsibility to protect their workforce. He also announced that businesses that rely on in-office personnel must decrease their in-office workforce by 50%. Exceptions will be made for essential service industries, including shipping, warehousing, grocery and food production, pharmacies, healthcare providers, utilities, media, banks and related financial institutions and other businesses that are essential to the supply chain.

Paid Sick Leave

On March 18, Governor Cuomo signed legislation to provide the following:

  • Employers with 10 or fewer employees and a net income less than $1 million will provide job protection for the duration of the quarantine order and guarantee their workers access to Paid Family Leave and disability benefits (short-term disability) for the period of quarantine including wage replacement for their salaries up to $150,000.
  • Employers with 11-99 employees and employers with 10 or fewer employees and a net income greater than $1 million will provide at least 5 days of paid sick leave, job protection for the duration of the quarantine order, and guarantee their workers access to Paid Family Leave and disability benefits (short-term disability) for the period of quarantine including wage replacement for their salaries up to $150,000.
  • Employers with 100 or more employees, as well as all public employers (regardless of number of employees), will provide at least 14 days of paid sick leave and guarantee job protection for the duration of the quarantine order.

Shared Work Program

The New York State Department of Labor (NYSDOL) Shared Work Program allows businesses to manage business cycles and seasonal adjustments while retaining trained staff and avoiding layoffs. Employees can receive partial Unemployment Insurance benefits while working reduced hours. Full-time, part-time and seasonal employees are eligible.

IV. Connecticut

Connecticut has provided a number of resources, in addition to the SBA, for Connecticut businesses including the following:

DECD’s COVID-19 Business Emergency Response Unit

The Connecticut Department of Economic and Community Development has created a COVID-19 Business Emergency Response Unit dedicated to assisting businesses navigate resources and develop new resources. A dedicated phone line is has been set up at 860-500-2333 to provide assistance to Connecticut’s small businesses for this purpose.

Unemployment Assistance

Workers directly impacted by the coronavirus pandemic no longer must be actively searching for work to qualify for unemployment assistance. And employers who are furloughing workers can use the Department of Labor’s shared work program, which allows businesses to reduce working hours and have those wages supplemented with unemployment insurance. Further information can be found here.

Tax Filing Extensions

The Department of Revenue Services has extended deadlines for filing and payments associated with certain state business tax returns. Effective immediately, the filing deadlines for certain annual tax returns due on or after March 15, 2020, and before June 1, 2020, are extended by at least 30 days. In addition, the payments associated with these returns are also extended to the corresponding due date in June.

The impacted returns and the associated filing dates and payment deadlines are set forth below:

  • 2019 Form CT-1065/CT-1120 SI Connecticut Pass-Though Entity Tax Return: Filing date extended to April 15, 2020; payment deadline extended to June 15, 2020
  • 2019 Form CT-990T Connecticut Unrelated Business Income Tax Return: Filing date extended to June 15, 2020; payment deadline extended to June 15, 2020
  • 2019 Form CT-1120 and CT-1120CU Connecticut Corporation Business Return: Filing date extended to June 15, 2020; payment deadline extended to June 15, 2020

Business Interruption Insurance

A business interruption insurance policy should list or describe the types of events it covers. Events that are not described in the policy are typically not covered. It is important to review the policy exclusions, coverage limits, and applicable deductibles with your agent, broker or insurer. The Connecticut Insurance Department has an FAQ that provides more information.

V. New Jersey

New Jersey has not yet released any official assistance programs for businesses impacted by COVID-19. Several State agencies are currently engaging with local business leaders, local financial institutions, and business advocacy groups to better understand what supports would be most impactful to ensure business and employment continuity. While businesses await direction, the New Jersey Economic Development Authority (NJEDA) has a portfolio of loan, financing, and technical assistance programs available to support small and medium-sized businesses.

© 1998-2020 Wiggin and Dana LLP

Can the Government Really Shut Down My Business and Make Me Stay Home? Questions Answered Relating to Declarations of Emergency Due to Coronavirus

As companies face shutdowns and citizens are encouraged to stay home due to the coronavirus (COVID-19), businesses and people may be asking questions, such as can the government really do that? Those who followed China’s response to the outbreak—which involved using martial law to keep millions of citizens in their home—would have seen references in those stories western democracies being unable to use such extreme measures. Yet, it may now seem to some that our own democratic leaders are doing just that (and should be). Can they?

The short answer is yes, they can.

But fear not, because you are not likely to see tanks rolling down the streets enforcing martial law. There remain strong protections for citizens, even in times like these, preventing arbitrary government action. Unlike the famous Dunder Mifflin manager Michael Scott “declaring” bankruptcy in a building parking lot, when Governor Murphy declared a state of emergency in New Jersey he did not simply open the window of his office, shout “this is an emergency!” and then start issuing a list of edicts. His authority, and that of any executive, is restricted by the laws authorizing such a declaration.

A brief review from civics class:

To prevent abuse, the power to make laws, enforce laws, and interpret laws are separated into three branches, i.e., the legislative, executive, and judicial branches. That means the governor cannot simply do what he wants (like a king or dictator), even if he feels those actions are best for the people. He must do only those things which comply with the laws enacted by the legislature (as interpreted by judges). So upon declaring a state of emergency, Governor Murphy—and any other executive declaring an emergency—issued a series of executive orders invoking specific New Jersey legislative enactments. Those statutes pre-authorized the executive branch (which the Governor heads) to take certain, specific actions when the state is facing an emergency.

Most declarations of emergency in recent memory pertain to snowstorms or hurricanes. In those instances, the State invoked more familiar provisions of the statutes governing declarations of emergency, including freeing up money earmarked for emergency use; calling on the national guard to help with the effects of the storm; and allowing the police to redirect traffic. But the Governor’s statutory powers during an emergency are broad, flexible, and include the ability to “make such orders. . . as may be necessary adequately to meet the various problems presented by any emergency,” including “[t]he designation of vehicles and persons permitted to move during. . . emergency,” “[t]he conduct of the civilian population during the threat of and imminence of danger or any emergency,” and “[o]n any matter that may be necessary to protect the health, safety and welfare of the people. . . .”  N.J. S.A. App. A:9-45.  Violations of these orders are considered a disorderly person offense and may be punished by up to 6 months imprisonment, a $1,000 fine, or both.

In response to coronavirus questions:

Governor Murphy also invoked a provision of New Jersey law not implicated by other types of natural disaster called the “Emergency Health Powers Act,” which provided additional authorization for control over medical facilities, the distributions of medical resources, and authority to “identify areas that are or may be dangerous to the public health” and cause “movement of persons within that area to be restricted, if such action is reasonable and necessary to respond to the public health emergency.” N.J.S.A. § 26:13-9. The same law allows the State to “[r]equire the vaccination of persons as protection against infectious disease;” and although the vaccine cannot be “administered without obtaining the informed consent of the person to be vaccinated,” the state may require quarantine for “persons who are unable or unwilling to undergo vaccination. . . .” N.J.S.A. § 26:13-14. And the same law states that no public entity or its agents are “liable for an injury caused by any act or omission in connection with a public health emergency, or preparatory activities. . . .” N.J.S.A. § 26:13-19

So, can the government shut down your business and make you stay home?

Yes. And they can vaccinate you, quarantine you, and are immune from suit for doing any of those things.

There are, however, other avenues and considerations of which businesses and employees should be aware during these times. Many contracts contain force majeure clauses, which businesses should analyze to determine if they apply to coronavirus-related shutdowns, especially those mandated by the Governor’s recent executive order. Others may consider whether they have insurance coverage for a business interruption caused by the government-mandated shutdown. Employees and employers alike should keep abreast of the changing legal landscape surrounding paid sick leave.

©2020 Norris McLaughlin P.A., All Rights Reserved

Coronavirus and Commerce: Possible Insurance Implications

The coronavirus pandemic and its consequences are spreading throughout the world at an alarming rate.  Governments at all levels and the private sector are scrambling desperately to mitigate these consequences even as new closures, stricter quarantines, and fresh fears develop on an hourly basis.

While some industries are more directly impacted than others (e.g., airlines and hospitality), the economic losses associated with coronavirus cut across sectors and are reverberating throughout the economy.  As companies look to mitigate coronavirus-related losses, they should carefully review their insurance policies to determine whether they provide coverage for losses associated with the disease.  While coverage will ultimately turn on the specific terms of the relevant insurance policies and the precise nature of the losses, a number of insurance lines may provide relief.

First-Party Property Insurance – Business Interruption Insurance

Business interruption insurance is a common component of commercial property insurance policies.  In general, business interruption insurance covers loss of income that a business suffers after an interruption of their business operations.  Often, business interruption coverage is triggered as a result of “direct physical loss of or damage to” insured property as a result of an otherwise covered peril.  Depending on the specifics of the claim, a dispute may ensue as to whether “physical loss” occurred as a result of the coronavirus.  The term “physical loss” has been the subject of litigation in many jurisdictions and the outcome of such disputes is not uniform.  Property that becomes unusable or uninhabitable as a result of the coronavirus may be sufficient to satisfy the requirement of “physical loss.”

Some property insurance policies also include contingent business interruption coverage.  Contingent business interruption insurance provides insurance for lost earnings resulting from a third-party supplier or distributor shutdown directly impacting the policyholder’s operations.  Typically, contingent business interruption insurance requires that the type of damage sustained by the third party be a covered type of loss for the policyholder.  Contingent business interruption insurance is often marketed to businesses such as hotels, restaurants, or food vendors that derive business from nearby properties that draw large crowds (e.g., sports stadiums).  Given cancellation of sporting events and conferences, this coverage could potentially be significant.

Specialized Insurance Policies

There are many types of insurance that provide specialized coverages.  For example, trade disruption insurance is political risk insurance that covers loss of gross earnings and extra expenses resulting from delay or failure of materials to arrive due to actions or inactions of a foreign government.  As the coronavirus and the response thereto continue to evolve, potential governmental restrictions on travel and trade will continue to be fluid.  This is just one example of more specialized insurance that could come into play.  Companies should be sure to evaluate all potentially applicable policies (or sublimits within policies) that may respond to coronavirus-related losses.

Commercial General Liability Policies

Commercial general liability insurance typically provides coverage for “all sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which th[e] insurance applies.”  This is coverage for third-party claims against the company.  Although causation may be difficult for plaintiffs to prove based on the specific facts, an important aspect of commercial general liability insurance is that it provides defense for third-party claims and the insurer’s duty to defend is broader than the insurer’s duty to indemnify.

Given the nature of coronavirus, it is not difficult to envision scenarios in which individuals assert claims against companies alleging that they were exposed to coronavirus as a result of negligent behavior by company employees.  Companies should turn to their commercial general liability insurer for both defense and, if ultimately necessary, indemnity of such claims.

Conclusion

The coronavirus pandemic is an evolving threat with catastrophic human and economic consequences.  While the first priority of companies should be the safety of their employees and customers, they should also look to mitigate the economic impact of the disease, including utilizing insurance tools as applicable.  While coverage will ultimately depend on the specific facts associated with the loss and the relevant policy language, companies would be well served to review all of their potentially applicable coverages, including but not limited to those discussed above.

© 2020 Gilbert LLP

Business Owners Take Note as Enterprise Completes Its Mission: Supreme Court Holds No Common Law Partnership Was Formed with ETP

Logic is the beginning of wisdom, not the end.

— Dr. Spock, Star Trek, Starfleet Officer

The long running legal saga between Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) finally concluded on January 31, 2020, when the Texas Supreme Court unanimously decided that no partnership had ever arisen between the parties. (Read) This dispute between two of the major players in the energy industry focused on the legal standard for determining when a partnership is formed. ETP argued that the test should be based on the parties’ conduct, while Enterprise maintained that the parties had agreed that specific conditions in their contracts had to be established before a partnership was created, and those conditions were never met.

As the Supreme Court’s opinion brings to a close eight years of hard-fought litigation between Enterprise and ETP, we will share our third, and hopefully last, blog post about the case and also review some important lessons for business owners gleaned from this legal conflict. ¹

Predictable Legal Result

The staggering $535 million jury verdict that ETP secured against Enterprise in 2014 had always rested on tenuous legal ground because it conflicted with the terms of the parties’ written agreements. At trial, ETP claimed that Enterprise had breached its fiduciary duty as a partner when it ditched ETP to enter into a new pipeline deal with a competitor, Enbridge. The result at trial rested on the jury’s finding that the parties’ conduct had created a partnership between them, which gave rise to a duty of loyalty that was owed by Enterprise. The jury’s verdict, however, disregarded the parties’ written agreements, which set forth specific conditions precedent to the formation of a partnership, including approval by both companies’ boards. Enterprise therefore argued that it had become subject to a “partnership by ambush.”

The Texas Supreme Court has long championed the sanctity of contract. In numerous previous cases, the Court expressed the view that sophisticated business parties who enter into contracts must honor their bargain. Therefore, the Court’s decision on behalf of Enterprise was not surprising to Court watchers. In addition, a decision in ETP’s favor upholding its common law partnership claim would have created significant uncertainty in the business community as to when a partnership, and related partnership duties, would arise between contracting parties.

In its decision, the Court cited common law strongly favoring the freedom of contract, and held that parties can adopt conditions precedent that must be met before a partnership will be formed. The Court also cited language from a case it had decided more than a decade ago, and noted that: the Legislature did not “intend to spring surprise or accidental partnerships” on parties. While the Court acknowledged that the conditions precedent the parties agreed to could have been waived or modified, it held that ETP was required to either obtain a jury finding that the conditions had been waived or prove waiver conclusively at trial, and ETP had done neither. ²

Business Lessons Learned

While Enterprise ultimately prevailed in defeating ETP’s partnership claims, the legal battle required an enormous amount of time, caused considerable distraction and required each of the parties to incur millions of dollars in legal expense. Thus, the Court’s holding in ETP v. Enterprise provides some key take-aways for business owners. If the practices reviewed below are followed when parties are considering entering into a new business relationship, they may help to avoid future litigation. At a minimum, these practices will make it more likely that a court or an arbitration panel would grant a summary judgment dismissing before trial claims alleging that the parties entered formed a new partnership based on their conduct.

  • Get it clearly in writing — This is the clear guidance from the Supreme Court. If a party does not want to be saddled with partnership duties, it should confirm in writing that: (i) no partnership has been formed, and (ii) no partnership will be formed unless specifically stated conditions are met, e.g., the requirement that a written partnership agreement must be signed and approved by the company’s board and/or managers.
  • Address waiver — All agreements can be waived or modified, but the parties can expressly agree there will be no waiver or amending of any conditions to forming a partnership unless the waiver or amendment is signed and in writing;
  • Disclaim all fiduciary duties — In addition to making it clear that no partnership exists without specific conditions being met, the parties can also state that they do not owe each other any fiduciary duties unless and until they sign off on a binding written agreement between them;
  • Consider use of arbitration — The parties may require that all disputes arising between them will be decided by sophisticated business lawyers in an arbitration proceeding, and they can require that the arbitration hearing be held promptly, within 60 or 90 days;
  • Impose damage caps — The parties can agree to limit recoverable damages in a variety of days in any future dispute that arise between them, which can include their agreement to eliminate all claims for consequential damages, for lost profits and for punitive damages; and
  • Award fees to prevailing party — The parties can also award reasonable legal fees to the prevailing party, which will require the losing party to pay all of the legal fees that are incurred in the litigation or arbitration.

Conclusion

One man cannot summon the future. But one man can change the present!

Alternate Mr. Spock, “Mirror, Mirror”

The Supreme Court’s decision in the Enterprise case confirms the critical importance of securing written agreements that document the parties’ business relationship. Business owners who sign letters of intent, or enter into other preliminary documents before formally starting a new business relationship need to take care to ensure they are not forming a partnership or joint venture unless specific conditions are met. The failure to incorporate these conditions in a signed agreement may result in adverse consequences for the business owner, including being saddled with claims that a partnership was formed and that, as a result, they are now burdened with burdensome fiduciary duties.

¹ This post has a Star Trek reference based on the USS Enterprise, the name of the flagship in the show. As Star Trek fans know, the series was written in 1964, and first debuted on television in 1966. Perhaps it is a coincidence, but the first United States nuclear-powered aircraft carrier, the USS Enterprise, entered into service just a few years before, in 1962.

² In issuing its decision, the Supreme Court upheld the opinion of the Dallas Court of Appeals, which had overturned the trial court’s judgment. The appellate court had determined that ETP had not shown that it met the conditions precedent set forth in the parties’ agreements and, further, there was no jury finding these conditions had ever been waived or modified by the parties.

 

© 2020 Winstead PC.

ARTICLE BY Ladd Hirsch of Winstead.
For more on common-law partnerships see the National Law Review Corporate & Business Organizations Law section.

Spurned by HP Board of Directors, Xerox Gets Hostile, and is Spurned Again

Case raises a unique antitrust question.

Copy equipment giant HP Inc. turned down the much smaller Xerox Holdings Corp.’s acquisition overtures twice in one week as the exchange of statements between corporate leadership grows increasingly hostile. From an anticompetition perspective, the case raises the interesting question of how the “failing firm” defense could come into play.

A deal would bring together the world’s second largest copier company, HP, a company whose leadership position was once so strong that its very brand name, derived from the word “xerographic” in 1938, became a verb used more often than the word “copy” itself. Xerox is also credited with innovations that brought us tools like the mouse and ethernet networks.

But Xerox, which has long since fallen from the top of the copier industry, was met with a flat-out rejection of its offer to get its mojo back by acquiring HP. Xerox offered HP $17.00 in cash and 0.137 Xerox shares for each HP share or $22 per share, or $27 billion overall. Skeptics wondered whether Xerox could execute such a deal, given it is “only” a $9.2 billion business, a third the size of HP. The skeptics were right. On Nov. 17 the HP Board of Directors informed Xerox that its offer was not in the best interests of shareholders as it “significantly undervalues” the HP business.

In its letter to Xerox Vice Chairman and CEO John Visentin, HP wrote that its board was concerned about the “potential impact of outsized debt levels on the combined company’s stock.” While saying it remained “ready to engage” with Xerox to better understand its business and its thinking around a merger, the HP board rejected the bid unanimously.

“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox. However,” the HP letter to Visentin continued, “… we have fundamental questions that need to be addressed in our diligence of Xerox. We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination. With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.”

Xerox had said it could generate $2.3 billion by selling its 25% share in the joint venture, Fuji Xerox Co., Ltd., to FUJIFILM Holdings Corp. In a Nov. 8, 2019, statement, Xerox also said it was selling to a Fuji Xerox affiliate Xerox’s 51% stake in Xerox International Partners, a joint original-equipment-manufacturer venture between Xerox and Fuji Xerox. The companies also agreed to end the $1 billion lawsuit FUJIFILM filed against Xerox after last year’s terminated merger. “Total after-tax proceeds to Xerox from the transactions, which included accrued but unpaid dividends through closing, are approximately $2.3 billion. Xerox expects to use the proceeds opportunistically to pursue accretive M&A in core and adjacent industries, return capital to shareholders and pay down its $554 million December 2019 debt maturity,” according to Xerox.

Xerox did not take HP’s rejection well.

“We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal ….” Xerox CEO Visentin responded, “claiming our offer ‘significantly undervalues’ HP. Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a ‘sell’ rating for HP’s stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17.” Visentin added that the offer was not, as HP said, “highly conditional” or “uncertain.” “There will be NO financing condition to the completion of our acquisition of HP,” the Xerox CEO said.

Xerox gave HP until today (Monday, Nov. 25) to accept the offer, otherwise it would take the case directly to HP’s shareholders. “The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction,” Visentin said.

But HP didn’t need the whole weekend. Yesterday, on Sunday, Nov. 24, it rejected Xerox again via a letter signed by HP Chairman and CEO Enrique Lores and HP Board Chair Chip Bergh. They repeated that Xerox is undervaluing the company, adding that Xerox did not address HP’s concerns about Xerox’s ability to raise the cash or handle such a substantial debt burden. Lores and Bergh didn’t seem to appreciate Visentin’s attitude, either.

“It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information,” the HP leaders wrote. “When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects. Accordingly, we must have due diligence to determine whether a Xerox combination has any merit.”

And yet, things had seemed to be going so well. In June, Xerox and HP announced they were expanding their relationship. Xerox was to begin sourcing certain products from HP, many of which used Xerox software, and supplying toner for HP for these and other products. These printers use laser printing technology HP acquired from Samsung in 2017. Xerox and HP also agreed to partner in the Device as a Service (DaaS) market. Xerox said it would sell HP PCs and peripherals to its commercial customers under a DaaS model, and HP would make Xerox cloud-based content management available to its commercial PC customers in the United States.

As the HP leaders said, the relationship started to sour at least as early as August.

HP questions Xerox’s resources and innovation.

HP offered additional specifics as to why it didn’t find the deal attractive:

  • Xerox has missed consensus revenue estimates in four of the last five quarters.
  • Xerox’s revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue. Xerox management projects revenue declines of 6% in fiscal 2019.
  • Given how much of the Xerox business is based on contractual revenue, HP is concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests Xerox’s revenues may decline even faster in future years. HP noted that the TCV of enterprise signings (including renewals) in 2018 was down 13.9% in constant currency and Xerox’s churn for 2018 was 18%, both data points which Xerox has stopped providing publicly since the end of 2018.
  • After a review of synergies based on public information and the “limited information” Xerox provided, HP said it does not agree with the value of potential synergies. “[I]t appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans,” HP wrote.
  • When Xerox exited the Fujifilm joint venture, Xerox essentially “mortgaged its future for a short-term cash infusion.” HP feels this has “left a sizeable strategic hole” in the Xerox portfolio.
  • HP also took a shot that has to sting the once-heralded leader of innovation. “[W]e have concerns as to the state of Xerox’s technology resources, research and development pipeline, future product programs, and supply continuity and capability.
  • HP said Xerox has not accessed the great potential of the Asia Pacific market.

The ‘failing firm’ defense

What’s intriguing from an antitrust perspective is how the parties might use the “failing firm” defense in a hostile takeover scenario. The failing firm defense argues that a merger that substantially lessens competition is less harmful to competition than one party’s failure and exit from the market. The defense requires a showing that the acquired company cannot meet its financial obligations, would not be able to successfully reorganize in bankruptcy, has been unsuccessful efforts to elicit other reasonable offers, and is succumbing to the only available purchaser.

We would expect to see that defense raised here given the high post-merger market share and years-long decline of both parties. But how will Xerox make the required showing without the cooperation of HP management? And, in this case the acquirer is arguably the greater “failure” risk of the two firms, making this use of a “failing firm” case a rarity, if not a first.

Copier industry landscape.

Xerox’s global annual revenue was at $20.64 billion in 2011, $19.54 billion in 2014, and $9.83 billion in 2018. It’s now a $9.2 billion company, with revenues generated from a combination of services and equipment. In 2016, Xerox services accounted for roughly a third of the company’s global revenue. From 2012 to 2014 services generated more revenue than technology. That flipped in 2015 when service revenue dropped to a third of prior years.

HP’s net revenue from its printing business was at a high of $29.6 billion in 2008. It fell to $18.26 in 2016 and bounced up to $20.8 billion in 2018.

Worldwide, Canon is the market leader, with 24% of the market. HP is close behind with more than 21% of the market. Xerox has been in the low single digits for the past two years. After Canon and HP, market leaders are Brother (11%), Epson (10%), Kyocera (7%), NEC (5.6%), Ricoh (2.5%). Some 18.5% of the market is attributed to “other” companies.

Statistics provided by Statista based on data from IT Candor. Additional statistics from HP and Xerox.

© MoginRubin LLP

ARTICLE BY Dan Mogin and Jennifer M. Oliver of MoginRubin, edited by Tom Hagy.

Small and Mid-Sized Businesses Continue to Be Targeted by Cybercriminals

A recent Ponemon Institute study finds that small and mid-sized businesses continue to be targeted by cybercriminals, and are struggling to direct an appropriate amount of resources to combat the attacks.

The Ponemon study finds that 76 percent of the 592 companies surveyed had experienced a cyber-attack in the previous year, up from 70 percent last year. Phishing and social engineering attacks and scams were the most common form of attack reported by 57 percent of the companies,  while 44 percent of those surveyed said the attack came through a malicious website that a user accessed. I attended a meeting of Chief Information Security Officers this week and was shocked at one statistic that was discussed—that a large company filters 97 percent of the email that is directed at its employees every day. That means that only 3 percent of all email that is addressed to users in a company is legitimate business.

A recent Accenture report shows that 43 percent of all cyber-attacks are aimed at small businesses, but only 14 percent of them are prepared to respond. Business insurance company Hiscox estimates that the average cost of a cyber-attack for small companies is $200,000, and that 60 percent of those companies go out of business within six months of the attack.

These statistics confirm what we all know: cyber-attackers are targeting the lowest hanging fruit—small to mid-sized businesses, and municipalities and other governmental entities that are known to have limited resources to invest in cybersecurity defensive tools. Small and mid-sized businesses that cannot devote sufficient resources to protecting their systems and data may wish to consider other ways to limit risk, including prohibiting employees from accessing websites or emails for personal reasons during working hours. This may sound Draconian, but employees are putting companies at risk by surfing the web while at work and clicking on malicious emails that promise free merchandise. Stopping risky digital behavior is no different than prohibiting other forms of risky behavior in the working environment—we’ve just never thought of it this way before.

Up to this point, employers have allowed employees to access their personal phones, emails and websites during working hours. This has contributed to the crisis we now face, with companies often being attacked as a result of their employees’ behavior. No matter how much money is devoted to securing the perimeter, firewalls, spam filters or black listing, employees still cause a large majority of security incidents or breaches because they click on malicious websites or are duped into clicking on a malicious email. We have to figure out how employees can do their jobs while also protecting their employers.

Copyright © 2019 Robinson & Cole LLP. All rights reserved.

For more on cybersecurity, see the National Law Review Communications, Media & Internet law page.

Big Food and Plant-Based Protein: Potential MEATing of the Minds?

Capitalizing on an increasingly health and environmentally conscious era, plant-based meat substitute companies are positioning themselves as the future of protein. On May 2, 2019, Beyond Meat became the first plant-based product company to go public. Its stock skyrocketed to become the highest performing first-day public offering in nearly two decades. Impossible Foods is also performing well. While the company is in no rush to go public, they just secured $300 million in their latest funding round.

In light of these recent successes, the meat industry is grappling with how to address the new food phenomenon. With the long-term viability of the alternative meat market yet to be seen, traditional meat companies are taking both an offensive and defensive approach.

Many Big Food companies view cell-based meat as an opportunity rather than a liability. Taking the “if you can’t beat ’em, join ’em” approach, these companies are integrating plant-based protein investments into their own portfolio. For example, Tyson was an early investor in Beyond Meat. Tyson recently sold its 6.52% stake in the company, but Tyson is still fully committed to competing in the plant-based protein space. Tyson announced that it plans to launch an “alternative protein product” with market testing as early as this summer. The fact that Tyson is a household name synonymous with meat could impede its ability to build brand loyalty in the alternative meat space. That said, the producer’s well-established distribution networks and manufacturing facilities will enable them to hit the ground running—an advantage that start-up companies in the emerging market necessarily lack.

Simultaneously, however, the meat industry is taking active measures to hedge against what, on its face, appears to be an impending threat of market erosion.

The meat industry is also lobbying for laws banning any non-slaughterhouse-derived protein product from being labeled “meat.” Last year, Missouri was the first state to formally do so. Lawmakers in 17 states—including Arkansas, Kentucky, Mississippi, North Dakota, South Dakota, and Wyoming—have followed suit. Laws in Montana, Georgia, Nebraska, and Oklahoma are also on the horizon.

Legislators and meat industry lobbyists are touting these laws as necessary consumer protection measures. Not surprisingly, proponents of plant-based meat disagree and are fighting back against legislation they say is aimed to protect cattle and livestock producers’ bottom line. Tofurkey, the Good Food Institute, the American Civil Liberties Union of Missouri, and the Animal Legal Defense Fund are challenging the Missouri law on constitutional grounds. Jessica Almy, director of policy for the Good Food Institute believes that the appeal should put other states on notice “that there are significant constitutional problems with these laws” because labeling is a form of “commercial speech, which is protected as long as it’s truthful.” The constitutional issue has yet to be resolved.

If Big Food is on board as a champion of plant-based protein rather than an opponent, the future for the protein industry certainly looks bright. But, it appears—at least for the time being—that meat alternative companies will have their work cut out for them as they navigate a newly developing (and often times conflicting) patchwork of state laws designed to stifle their marketing efforts. These uncertainties will continue to trigger disputes about what producers (that often operate in multiple states) can say about their products without misleading consumers, and just how far states can go to regulate commercial speech.

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP
Article by Jennifer Junger and Lori Lustrin from Bilzin Sumberg.
For more on the meat substitute industry see the National Law Review Biotech, Food & Drug page.