The requirement to stay at home is giving many of us the opportunity to undertake (or no excuse to ignore) the household and DIY tasks at home that have long been at the bottom of the to-do list. Similarly, directors, management teams and employees are adapting to the new normal of operating under lockdown and having taken steps to protect and stabilise their businesses. With social distancing restrictions extended in the United Kingdom until at least 7 May 2020, businesses may wish to use this time to do some corporate and business housekeeping.
Once businesses have focused on the challenges that the Coronavirus (COVID-19) pandemic presents, taken advantage of available government schemes and (where applicable) adapted products, services, facilities and distribution channels in response, they should refocus on their legal and business fundamentals. For example, now may be the perfect time to tidy up corporate structures, update compliance policies, reinvigorate Brexit contingency plans, and plan for upcoming legal and regulatory changes.
This could also be a prime opportunity to innovate. The lockdown poses a risk that businesses could stagnate, distracted by the disruption to operations and the imposition of remote working. However, this period may actually give some teams within your business the opportunity to revisit strategies, adapt business plans for the ever-changing market conditions and consumer needs, pipeline plan for potential M&A opportunities, develop new marketing campaigns and be ready to hit the ground running as and when restrictions are eased.
This article considers key fundamentals that businesses should ensure are not forgotten in the midst of the COVID-19 crisis, and also explores some of the ways that businesses can use the lockdown period to focus on new initiatives.
Keep detailed board minutes – Directors cannot avoid the fact that decisions taken now could be scrutinised later with hindsight bias. However, they are considerably less likely to be challenged if full and accurate board minutes have been taken to help demonstrate how key issues were debated and considered, and the basis on which decisions were ultimately made.
Keep up with filings – The Financial Reporting Council, Financial Conduct Authority and Prudential Regulation Authority released joint guidance for companies and auditors to address the challenges that remote working may raise in this context. While deadlines for publication of annual accounts have been relaxed for both listed and unlisted companies, trying to make progress while in lockdown may allow teams to focus on driving the operational side of the business once lockdown measures are eased.
Reorganisations and group simplifications – It is not unusual for dormant companies, redundant SPVs or holding companies to sit in group structures “for a rainy day”, or for there to be companies within the group that cause a dividend block. Now may be the time to tidy up the group structure and take away the headaches of audits and filings for dormant entities and redundant holding entities, and free up the group structure from a dividend perspective. If you have recently acquired businesses, it may be worth digging out due diligence reports to see whether there were any such issues that were flagged but which have not yet been addressed. Be aware that such reorganisations could require lender consent under your finance arrangements.
Key dates for SPA claims – While regulators may be granting companies more flexibility in terms of filing dates, sellers are not going to be so generous in terms of dates for submitting purchase price adjustment, warranty, indemnity and tax deed claims. Be mindful of expiring limitation periods, and spend time assessing the potential claims and gathering information to support such claims.
Focus on integration – In almost every model supporting an acquisition case, there will be a line item for synergies. While there may not currently be appetite for new acquisitions, time can be spent focusing on recent acquisitions to ensure that those synergy targets are achieved.
Pipeline planning – While executing M&A in the current market may present challenges, M&A and corporate finance teams can use the time to undertake detailed desktop due diligence on potential targets. Planning the order in which a series of transactions may be carried out could help to avoid competition issues down the line. In addition, in the current market, now may be the time to test management’s and the investment committee’s appetite to look at distressed opportunities and to spend time getting a greater understanding of the nuances of distressed or insolvency-driven sale processes.
Prepare for future sales – An efficient sale process can help to ensure a seller obtains the best price. Now may be the time to dedicate internal resources to compiling a data room, preparing and verifying teasers and information memoranda, and producing vendor due diligence reports to develop a smooth process if there is an M&A bounce. Ensuring that intellectual property portfolios are in order and the databases are in good compliance with data protection and other laws is valuable preparation. It may be worth considering a refresh of ABC/AML and other compliance policies and manuals and looking to address any lingering defined benefit pension scheme issues.
Amendments to contracts – If you are renegotiating contracts as a result of COVID-19-related issues, it may be worth considering whether any Brexit-related changes should be made at the same time. Such changes include (i) ensuring that definitions referring to EU derived statute are amended to refer to UK law; (ii) checking to see if any Change Control, Material Adverse Change clauses or Force Majeure clauses will be triggered by Brexit; (iii) where the contracts refer to European Trade Marks or European Registered Community Designs, these will lose protection in the UK and so details of the automatically generated corresponding new UK marks and designs should be added; (iv) reviewing the tax provisions to take account of changes to VAT, the Interest and Royalties Directive and any provisions allowing for the recovery of withholding tax on royalty payments; (v) analysing whether any suppliers or subcontractors are affected by Brexit; and (vi) for international contracts, consider whether alternative dispute resolution should be adopted whilst there is no automatic recognition of English judgements in the EU.
Brexit contingency planning – When faced with the challenges and disruption caused by the COVID-19 pandemic, many businesses may have put Brexit-related planning on hold. Now that many businesses are adapting to the new normal, it may be worth reinvigorating this process. There will likely be many learnings that can be taken from the implementation of COVID-19 contingency measures.
Maintain regular contact with lenders – Maintaining regular contact with your finance providers is particularly important in times of economic uncertainty. Banks will take comfort from a regular dialogue and will be more likely to support businesses where they trust the management team is being open with them.
Review existing facilities and explore options – Any requests for new money on deals may be challenging at the moment, but consider the reallocation of existing tranches of cash under facility agreements. Can you agree with your lender to re-purpose an existing capex line? Are there any reserves that can be released or discussions that can be had with lenders to agree that those reserves can be used for a specific purpose? It is worth reviewing your existing facilities to see what might be possible. Whatever you might want to do, bear in mind that even if a positive response can be obtained from a lender, it is likely to take quite some time to get the necessary credit committee approvals from your existing lender, even if the request makes perfect sense. We are all facing similar challenges with the usual day-to-day working, and lenders are no exception.
Prepare for potential equity fundraisings – For listed companies, the Pre-Emption Group’s relaxation of its guidance on non-pre-emptive offers may make it worth exploring whether existing shareholders would be willing to support the business by injecting equity through a cashbox placing. Alternatively, if it looks like a larger fundraising may be required, now may be the time to start discussions with your financial advisers and kick off the process for producing an initial draft of a prospectus. Private companies may also want to engage with their advisers in relation to exploring private placements with existing and new shareholders.
Patent strategy – The much-anticipated Unitary Patent is now very unlikely to cover the United Kingdom as the UK Government is not willing to accept the supremacy of a European court. As a result, businesses’ UK patents strategy will need to be adapted to ensure new patents are obtained as part of any European or global patent strategy. Any infringement claims should also treat the United Kingdom as an additional jurisdiction.
Licence and agreement review (trade marks) – From the end of the Brexit transition period, EU Trade Marks and UK Registered Community Designs will no longer include the United Kingdom, which may cause unintended effects in licences and agreements. Holders of EU Trade Marks or UK Registered Community Designs will be automatically granted additional trademarks or designs from the UK Intellectual Property Office. However, businesses may want to use this time to (i) review existing licences and agreements to ensure they still work for the business (e.g., is the geographical scope accurate post-Brexit, and do indemnities for third-party IP infringement still cover the right territories?), and (ii) ensure that these new intellectual property rights are reflected in all future agreements. The rules relating to the international exhaustion of trade marks when products are first put into the market will also change. Consequently, a business that sells products in both the United Kingdom and the European Union should consider the effect this change could have on its distribution strategy and pricing.
Review template contracts of employment and engagement – Over time, precedent contracts become out of date and can lose integrity as a result of ad hoc amendment. Conducting a wholesale contract review is a job that businesses often place on the “to do” list but rarely have time to complete. This is a particularly good time to take on this task, in light of recent changes to the legal requirement that employers provide employees with a written statement of employment particulars (sometimes called a section 1 statement) and the extension of that requirement to workers.
Review internal policies – This is another task that is important but time consuming. Policies should be reviewed regularly to ensure continuing compliance with laws and best practice. For example, over the past few years, our understanding of how holiday and holiday pay should operate has changed. Employers have had to react quickly to the changes. Now is the time to consider how holiday will be addressed and accommodated on an ongoing basis. It is important to review the policies as a whole, to identify any areas of inconsistency between them, and to ensure that it is clear which policies (or sections thereof) are intended to have contractual effect and which do not.
Homeworking – The current crisis may change how we work going forward. Now is the time to consider how your business could adapt. Could long-term homeworking be accommodated? If so, what are the pros and cons? If employees wanted to work from home, is your homeworking policy fit for purpose? What equipment would employees need? Employees may raise the issue of changing the way that they work as soon as lockdown is eased (as some may not want to rush back onto crowded public transport). Therefore, it would be useful to have done this thinking beforehand.
Return to Work – At some point, lockdown will be eased and employees will be able to return to the workplace. However, some social distancing recommendations may remain in place, and employees may generally have a heightened sensitivity to working in close confines with others. Consider in advance how your workplace might be able to accommodate these issues and demonstrate to employees that you are alive to their concerns. For example, are there changes that could be made to the work environment, or to the pattern of working? Do any kitchen facilities meet high hygiene standards?
Data Protection and Privacy
Record keeping and accountability – As we near the two-year anniversary of the General Data Protection Regulation’s (GDPR) entry into force, now is a good time to take stock of compliance efforts to date. A key part of the GDPR is record keeping and this includes insuring that data protection impact assessments (DPIAs) have been and continue to be undertaken for all high-risk processing activities. Many of the Data Protection Authorities are now permitting a lower standard of data protection compliance and a regime of lesser enforcement. The open questions are first, what lower standard of compliance should be adopted and second, what should be done after the pandemic when this relaxation by the regulators is reversed? A DPIA is a great tool for helping to determine and to document the lower standard of compliance that is adopted. Secondly, its inherent record keeping allows a company to effectively track the areas of relaxed compliance so that they can be addressed post pandemic. However, as a note of caution, although the regulators are adopting a lower standard, a court may not adopt a similar approach in any privacy law suit against the company. DPIA’s will again provide a helpful evidential trial to show that due consideration was given to the companies responsibilities and data subject’s rights.
Update data protection notices and policies – Data protection notices and policies should be reviewed regularly to ensure continuing compliance with laws and evolving regulatory guidance. Since the entry into force of the GDPR and the regulator’s response to the Covid-19 pandemic, a substantial amount of regulatory guidance has been released both at the EU level and at the Member State level. With the changes to the way of doing work, particularly with the adoption of remote working – many data protection notices and polices should now be updated.
International data transfer strategy (EU-UK data flows) – After the end of the Brexit transition period, on 31 December 2020, in the absence of an EU Commission adequacy decision, businesses must ensure that all EU-UK data flows continue to comply with applicable data protection requirements after the end of the transition period. A strategy will be needed, in both the short and long term, to manage these international data flows. Consider whether standard contractual clauses offer sufficient coverage in the long term or whether binding corporate rules would offer the most robust long-term solution. Now is a good time to get ahead of this issue.
IT and Cybersecurity
Increase in social engineering, ransomware and other exploits – The incidence of the Covid-19 pandemic has brought with it an expected flood of increased hacking activity. With employees moving to remote working, there are now many more ways in which hackers can gain access to company systems. These range from an increase in phishing emails on Covid-19 related topics, fake approaches by the firm’s IT “help desk”, third party “support” to help fix home internet or router problems or technical exploits arising from insecure home WiFi or routers. Consider whether the IT security policy suite appropriately covers remote working. Typically, it may be necessary to update remote working policies and “bring your own device” policies, and to make adjustments to any breach response policy. Consider also if any heightened IT system monitoring will be enabled for employees working from home. All of these issues will have considerable data protection and employment considerations, as well as IT policy considerations.
Cyber incidence response – This greater likelihood of breaches means that it is important to have an effective cyber incidence or breach response plan. These plans should be adapted to take into account remote working and remote detection. Third parties who will assist in the response, cyber investigators, PCI Forensic Investigators, lawyers, insurers, and PR companies should be identified and retained in a way so that they can get to work quickly. Timescales for data breach reporting to regulators and affected individuals should be understood, as this can now be as low as 2 hours for companies subject to the Payment Services Directive No. 2. Finally, with the greater likelihood of follow on class actions or other litigation, care should be taken that the correct rules are followed with regard to document preservation and legal and litigation privilege, so that certain reports can be protected from disclosure to third parties.
Third-party commercial contract review – Review IT supply and IT outsourcing agreements to ensure that these contain the mandatory language prescribed by Article 28 GDPR. Failure to include this language amounts to a breach of the GDPR and exposes businesses to unnecessary commercial risk. Brexit will also have an impact on IT agreements. In addition to the steps mentioned above, to mitigate risk companies should review indemnities providing protection for high-risk IT liabilities such as GDPR to ensure they are effective for both UK GDPR and EU GDPR risks.
Landlords – Landlords should review existing leases and consider whether any specific provisions protecting landlords/tenants should (or should not) be inserted in relation to future pandemics such as this one. Where tenants are not paying rent, landlords should assess whether they can secure such rental streams (e.g., by claiming on existing rent deposits), and should assess what points should be considered in this regard, such as potential top-up rights. Developer landlords dealing with ongoing projects may wish to review guidance on force majeure and other terms which potentially allow for construction contracts to be terminated, should the need arise, or alternatively in order to strengthen the developer’s position in advance of commercial discussions with such contractors.
Tenants – Tenants are advised to assess ongoing rent liabilities and other costs (e.g., by taking immediate action to reduce rent and other financial liabilities). The moratorium on forfeiture for non-payment of rent under the Coronavirus Act 2020 offers tenants some protections, but is a cash-flow aid only. Rent (plus interest) remains fully payable as of 30 June 2020. In addition, tenants may wish to look at their existing utility contracts, especially in buildings that are largely unoccupied due to COVID-19, to see whether services can be suspended or terminated.
Portfolio reviews – Real estate owners and investors could consider reviewing their portfolios in light of the COVID-19 crisis, for example by looking to invest in sectors which are likely to thrive in the “new world” post-COVID-19 (such as residential, multi-family, logistics) or alternatively picking up assets in more distressed sectors at suitably low prices. Some property owners could look to reposition their existing assets in line with the developing market—for example, retail space being redeveloped into warehousing or affordable housing units. Certainly it is a time for all property holding companies and real estate investors to revisit existing business strategies, look into repositioning defunct or under-performing assets, and reboot commercial and strategic thinking where necessary. In terms of reopening for business after the pandemic is over, owners and operators of assets in the more affected sectors (e.g., hotels) would be well advised to produce checklists going forward, for example on any regulatory requirements which need to be fulfilled in order to reopen.
The last few years have seen a series of major changes to the corporate tax regime in the United Kingdom and elsewhere, and many taxpayers may understandably have struggled to keep up. The United Kingdom introduced significant limitations on the deductibility of interest, a new tax charge on offshore intellectual property that is exploited in the United Kingdom, new restrictions on loss carry-forwards, and anti-hybrid rules. None of these were grandfathered, and all potentially could render formerly tax-efficient structures significantly less beneficial. Internationally, governments have moved to close down tax “treaty-shopping” opportunities and to ensure that intra-group transactions are underpinned by substance. Now may be a good time to review whether historic structures remain fit for purpose.
Following the COVID-19 outbreak, the UK Government postponed changes to the IR35 rules, which would require large and medium-sized businesses to assess whether contractors engaged through personal service companies should be regarded as employees for tax purposes (with consequent PAYE obligations). Even before the lockdown, there were significant concerns that business had not had sufficient preparation time to administer and comply with the new rules effectively. The delay until April 2021 will allow many underprepared businesses to undertake a proper review of their contractors and to ensure that they are fully compliant.