Publications Archives

New York partner Mark Schonfeld, of counsel Gregory Merz and associate Chris Hamilton are the authors of “How Biz Development Cos. Can Mitigate Regulatory Risks,” [PDF] published by Law360 on May 11, 2020.

Munich associate Johanna Hauser is the co-author of “Die virtuelle Hauptversammlung” [PDF] published in the issue 13/2020 of the German publication NZG (New Journal for Corporate Law), together with Cornelius Simons (Cornell). The article focuses on current questions in connection with the convocation and holding of virtual general meetings under the rules of the new legislation due to the COVID-19 pandemic.

To address the pandemic, the Government announced several sweeping regulations and ushered through the Coronavirus Act 2020. These actions have a broad impact on law, public policy and daily life, impacting areas including health, social welfare, commerce, trade, competition, employment and the free movement of people.

In this webinar we will cover:

Current plans to ease the lockdown restrictions
An introduction to the data protection aspects of contact tracing apps
The UK Government’s Future Fund initiative, which aims to provide liquidity and investment to high-growth companies

We want to hear from you about the impacts the current measures and conditions are having on your business and the legal issues you are facing. We therefore welcome suggested topics, as well as questions in advance of each webinar, to ensure that we can address issues relevant to your business.

PANELISTS:

Charlie Falconer QC: An English qualified barrister and Gibson Dunn partner. Former UK Lord Chancellor and first Secretary of State for Justice, he spent 25 years as a commercial barrister, and became a QC in 1991.

Matt Aleksic: An associate in the Litigation and International Arbitration practice groups of Gibson Dunn. Experience in a wide range of disputes, including commercial litigation, international arbitration and investigations.

Sarika Rabheru: An Associate in Gibson Dunn’s Employment team. Specializes in employment.

Ciarán Deeny: An associate in Gibson Dunn’s Mergers & Acquisitions and Private Equity teams. A broad range of corporate transactional experience, with a primary focus on private equity and private M&A in Europe, the Middle East and North Africa.

Overview

On May 7, 2020, the European Commission (the “Commission”) announced an action plan of measures designed to pursue what will likely constitute a fundamental reshaping of how rules relating to anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) are implemented, overseen and enforced in the EU (the “Action Plan”). The Action Plan was published alongside further clarification regarding the identification of high-risk third countries that have strategic deficiencies in their national AML and CTF regimes.

This alert focuses on the rationale and key components of the Action Plan.

Background

In July 2019, the Commission published a “package” of AML communications, in which a number of weaknesses were identified in relation to the EU’s AML and CTF framework (the “Anti-Money Laundering Package”). In a report published amongst the suite of documents, the Commission pointed to a number of deficiencies evident from recent money laundering scandals in the banking sector. In particular, a key issue flagged in relation to the cases analysed in the report was that of cross-border payments and transfers, which present a challenge where there is insufficient harmonisation of national supervisory frameworks, standards and capabilities across the EU.

This fragmentation results from several historic factors, including the EU’s use of Directives relating to money laundering rather than directly applicable Regulations (leaving decisions on implementation to Member States) and a measure of divergence inherent in the Member States’ various approaches to the regulation of businesses generally, and sectors of key AML risk in particular, such as the financial and gambling sectors. There has been long-standing criticism of the EU’s lack of co-ordinated action on AML, including from the European Banking Federation (the “EBF”), which has called the EU’s framework “ineffective” and in need of “critical review”.[1]

Following the Anti-Money Laundering Package, the Commission was invited by the European Parliament and Council to investigate what steps could be taken to achieve “a more harmonised set of rules, better supervision, including at EU level, as well as improved coordination among Financial Intelligence Units”. The Action Plan is the Commission’s response to this challenge and is intended to be the first step on the path to creating a comprehensive framework to combat money laundering and terrorist financing across Europe.

The Action Plan

The Action Plan is structured on the basis of six “pillars”. The holistic aim of these is to (i) improve the overall fight against money laundering; and (ii) strengthen the EU’s global role in this sphere. Once implemented, it is hoped that this will result in greater harmonization of rules across the EU, with better supervision and improved co-ordination between the competent authorities of the various Member States. The Action Plan is described as aiming to “shut down any remaining loopholes and remove any weak links in the EU’s rules”.[2]

The Action Plan sets out the Commission’s intended actions over the next 12 months, including the proposal of a new harmonized set of rules in Q1 2021 (there are no changes to EU law at this point). A new EU level supervisory body will be proposed at around the same time.

The six pillars are discussed below.

Effective application of the rules

The Commission has stated that it will, of course, continue to closely monitor the implementation of EU rules by Member States to ensure that the national rules are in line with the highest possible standards. In parallel, the Action Plan encourages the European Banking Authority (the “EBA”)[3] to make full use of its recently heightened role to tackle money laundering and terrorist financing.

The EBA separately announced on May 7, 2020, in response to the publication of the Action Plan, that it stands ready to support the Commission’s considerations through the consultation (on which, please see “The Action Plan consultation” below), whilst using its powers to lead, coordinate and monitor the EU financial sector’s fight against money laundering and terrorist financing.

Single EU rulebook

As noted above, there is a degree of variation in the ways in which Member States currently apply the EU AML and CTF rules. Key areas of divergence identified include the list of entities subject to national rules, customer due diligence requirements, internal controls and reporting obligations.

The Commission announced that a more harmonized set of rules will be proposed in Q1 2021. A Q&A, published with the Action Plan, does not express a definitive view on whether the Action Plan will lead to a new Regulation – the Commission instead indicates that this will be “subject to a thorough analysis to ensure that [it] reaches as high a level of harmonization as possible”.

EU-level supervision

Oversight of AML and CTF regimes is currently conducted at a national level, which leads to significant differences in the way that the rules are supervised. Therefore, in Q1 2021, the Commission will formally propose to establish a supervisor at the EU level.

The Q&A provides that the role and scope of this EU-level supervision – as well as the supervisory body that should be tasked with carrying out this role – will be proposed following a thorough assessment of all options. This will also include consideration of feedback received in the open public consultation launched in connection with the Action Plan.

Whilst criminal enforcement of AML offences introduced in response to EU legislation has historically been undertaken at a Member State level (where competence to do so lies), the Commission has said that it is also critical to build capacity at EU level to investigate and prosecute financial crime. It noted that Europol has stepped up its efforts in order to tackle economic and financial crime with the new European Economic and Financial Crimes Centre, which should become operational in the course of 2020. Amongst other things, this will concentrate all financial intelligence and economic crime capabilities in a single entity within Europol.

Co-ordination and support mechanism for Member States’ Financial Intelligence Units

The Commission was keen to point out that Financial Intelligence Units in Member States play a critical role in identifying transactions and activities that could be linked to criminal activities.

However, it noted in the Q&A that several Financial Intelligence Units have not complied with their obligation to exchange information with other Financial Intelligence Units. Additionally, some Financial Intelligence Units have not managed to engage in a meaningful dialogue by giving quality feedback to private entities, as required by AML legislation. The Action Plan lays the groundwork for the creation of an EU support and coordination mechanism for these Units. The Commission will formally propose to establish this mechanism to help further coordinate and support the work of these units in Q1 2021.

Enforcing EU-level criminal law provisions and information exchange

The Commission notes that judicial and police co-operation, on the basis of EU instruments and institutional arrangements, is essential to ensure the proper exchange of information. It also points to the role that the private sector can play in combating money laundering and terrorist financing, indicating that it will issue guidance on the role of public-private partnerships to clarify and enhance information sharing.

The EU’s global role

The EU plays an important role on the world stage in shaping international standards in the fight against money laundering and terrorist financing and is actively involved in the Financial Action Task Force (“FATF”). The Commission is determined to step up its efforts so that the EU acts as a “single global actor in this area”. In particular, the Commission has stated that the EU will adjust its approach to third countries with strategic deficiencies in their AML and CTF regimes that pose significant threats to the “single market”. It specifically points to the new methodology issued alongside the Action Plan as giving the EU the right tools to do so.

New methodology to identify high-risk third countries

At the same time as it published the Action Plan, the Commission published a new methodology to identify high-risk third countries that have strategic deficiencies in their national AML and CTF regimes, which pose significant threats to the EU’s financial system.

The goal is to provide more clarity and transparency in the process of identifying these third countries. The key new elements concern: (i) the interaction between the EU and FATF listing process; (ii) enhanced engagement with third countries; and (iii) reinforced consultation of Member States experts.

Updated list of high risk countries

The Commission has a legal obligation to identify high-risk third countries with strategic deficiencies in their AML and CTF regimes. The Commission revised its list on May 7, 2020. It states that the new list is now “better aligned” with the lists published by the FATF.

Countries added to the list are: the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe.

Countries which have been de-listed are: Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia.

The Commission amended the list by means of a Delegated Regulation, which will now be submitted to the European Parliament and Council for approval within one month (with a possible one-month extension). The Regulation listing third countries – and therefore applying new protective measures – applies as of October 1, 2020. This is to ensure that all stakeholders have time to prepare appropriately. The de-listing of countries, however, will enter into effect 20 days after publication of the Delegated Regulation in the Official Journal.

The UK position

The transition period for the UK’s departure from the EU is currently set to end on December 31, 2020. There is a great deal of uncertainty surrounding what, if any, agreement will be made between the remaining EU Member States and the UK.

A key question is whether the UK will choose to separately implement any changes brought about under the Action Plan, given that these will occur after the end of the Brexit transition period. Any arrangements reached with the remaining EU Member States will likely require the UK to maintain a degree of “equivalence” (broadly, retaining legal and regulatory frameworks substantially similar to those of the EU); in relation to AML and CTF, this is likely to align with the interests of British industry, and in particular its financial sector.

The Action Plan consultation

The consultation on the Action Plan is open for comment until July 29, 2020. This is run via the Commission’s online portal. A number of key topics that may be of interest include (i) what regulatory provisions need to be harmonised (for example, whether record keeping should be covered); (ii) which body should exercise the EU supervisory powers (for example, the EBA or a new EU centralised agency); and (iii) what powers this EU supervisor should have. It is expected that the financial sector, and other sectors that stand to be significantly impacted, will participate actively in this consultation.

Looking ahead

The Action Plan is clearly ambitious and speaks to an obvious need. The initial industry-level response has been very positive – the EBF, for example, indicated that it is “greatly encouraged”.[4] As discussed above, there has been considerable discussion for some time about the significant issues posed by the varying implementation, supervision and enforcement of AML and CTF frameworks across the Member States of the EU. Key to the effectiveness of any new harmonized regime overseen at EU level will be the extent to which the EU supervisory body will be endowed with enforcement and investigative powers, including the power to commence or instruct competent authorities at national level to commence investigations, and the degree to which it will be able to foster information sharing and policy alignment across Member States, and with third countries.

To date, Member States have maintained control over the creation of offences and criminal enforcement in relation to EU AML legislation. As a result, the law in this area has historically been something of a “patchwork quilt” across the EU, with each Member State adopting its own approach to implementation, through the filter of the peculiarities of its own criminal law, using the domestic criminal and regulatory authorities already in place. This presents a significant hurdle to efforts to secure EU-level harmonization of the law, supervision and enforcement in the field of AML/CTF. As such, if the Action Plan is to fulfil its ambitions, it will require innovation, creativity and flexibility from both the Commission and Member States. However, the prize for such efforts would be significantly enhanced coherence and efficiency in AML regulation across Europe, to the advantage of both European society and European business.

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[1] “Lifting the spell of dirty money – EBF blueprint for an effective EU framework to fight money laundering”, EBF, March 2020

[2] European Commission press release, “Commission steps up fight against money laundering and terrorist financing”, May 7, 2020

[3] From January 1, 2020, the EBA has had a clear legal duty to contribute to preventing the use of the financial system for the purposes of money laundering and terrorist financing and to lead, coordinate and monitor the AML/CFT efforts of all EU financial services providers and competent authorities.

[4] Press release: “EBF supports new EU plans to fight money laundering”, European Banking Federation, May 7, 2020

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s White Collar Defence and Investigations or Financial Institutions practice groups, or the following authors:

Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Michelle M. Kirschner – London (+44 (0)20 7071 4212, [email protected])
Gregory A. Campbell – London (+44 (0)20 7071 4236, [email protected])
Sacha Harber-Kelly – London (+44 (0)20 7071 4205, [email protected])
Penny Madden QC – London (+44 (0)20 7071 4226, [email protected])
Allan Neil – London (+44 (0)20 7071 4296, [email protected])
Philip Rocher – London (+44 (0)20 7071 4202, [email protected])
Martin Coombes – London (+44 (0)20 7071 4258, [email protected])
Chris Hickey – London (+44 (0)20 7071 4265, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Finn Zeidler – Frankfurt (+49 69 247 411-530, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.

GLOBAL OVERVIEW

COVID-19: UK Financial Conduct Authority Expectations on Financial Crime and Information Security

The UK Financial Conduct Authority (“FCA”) has issued statements to financial services firms outlining its expectations on: (i) financial crime systems and controls; and (ii) information security, during the COVID-19 pandemic. These are further examples of the FCA requiring firms to take steps to prevent and/or limit harm to consumers and the market more generally in this challenging period. This client alert summaries these two statements and the steps that financial services firms should be taking to ensure continued compliance with their regulatory obligations.
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Nasdaq Provides Temporary Exemption from Certain Shareholder Approval Requirements in Response to COVID-19

On May 4, 2020, the SEC announced (available here) that it has immediately approved proposed rule changes by The Nasdaq Stock Market LLC (“Nasdaq”) that provide listed companies with a temporary exception from certain shareholder approval requirements under the Nasdaq Rules (the “Rules”) through and including June 30, 2020 (available here).
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SEC Releases COVID-19 FAQs to Provide Guidance on Disclosure Requirements and Form S-3

The SEC Division of Corporation Finance staff (the “Staff”) has released a list of FAQs on COVID-19 for registrants (available here) that provides guidance on required disclosures under the SEC’s COVID-19 Order and the application of such order to Form S-3 filings. The FAQs and responses provided by the Staff as of May 5, 2020 are summarized below—please follow the link above to read the full text of the FAQs.
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Dubai partners Hardeep Plahe and Fraser Dawson, of counsel Hanna Chalhoub and associate Thomas Barker are the authors of “The impact of Covid-19 on Mena M&A,” [PDF] published by Asian-mena Counsel, Volume 17 Issue 5, in May 2020.

This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion and below $100 billion (as of the last date of trading in 2019) during the second half of 2019. Announced shareholder activist activity declined relative to the second half of 2018. The number of public activist actions (24 vs. 40), activist investors taking actions (17 vs. 29) and companies targeted by such actions (23 vs. 34) each decreased substantially. The slowdown was in contrast to the first half of 2019, during which period shareholder activism activity was robust. On a full-year basis, however, 2019 represented a slowdown in activism versus 2018, as reflected in the number of public activist actions (75 vs. 98), activist investors taking actions (49 vs. 65) and companies targeted by such actions (64 vs. 82).

Despite the overall decline in shareholder activism activity, certain trends continued unabated. During the period spanning July 1, 2019 to December 31, 2019, two of the 23 companies targeted by activists—Instructure, Inc. and Occidental Petroleum Corporation—were the subject of multiple campaigns. The activism campaign launched by activist Carl Icahn against Occidental Petroleum Corporation was supported by activist Krupa Global Investments. In addition, certain activists launched multiple campaigns during the second half of 2019: Carl Icahn, Elliott Management, Land & Buildings, Sachem Head Capital Management and Starboard Value. These five activists represented 42% of the total public activist actions that began during the second half of 2019.

By the Numbers – H2 2019 Public Activism Trends

Additional statistical analyses may be found in the complete Activism Update linked below.

The rationales for activist campaigns during the second half of 2019 remained consistent with those in the first half of 2019. Over both periods, M&A, board composition and business strategy represented the most frequent rationales animating shareholder activism campaigns. These three rationales collectively reflected approximately 75% of activism campaigns during each time period (noting that many campaigns have multiple rationales), with other rationales (governance, management changes, return of capital and change of control) representing the minority. M&A (which includes advocacy for or against spin-offs, acquisitions and sales) and board composition were each a motivator for activist activity in the case of 63% of campaigns (as compared to 55% and 67%, respectively, in the first half of 2019). M&A and board composition were followed by business strategy (54% of campaigns, as compared to 51% in the first half of 2019). On the other hand, advocacy for changes in governance (29% of campaigns in the second half of 2019), managerial changes (17% of campaigns), return of capital (8% of campaigns) and attempts to take corporate control (4% of campaigns) represented less frequently cited rationales for activist campaigns. Proxy solicitation occurred in 29% of the campaigns, representing a significant increase relative to the first half of 2019, in which 15% of campaigns featured activists filing proxy materials. (Note that the above-referenced percentages total over 100%, as certain activist campaigns had multiple rationales.)

The diminution in shareholder activism activity brought with it a decline in publicly filed settlement agreements. Only five such settlements were filed during the review period, which is the lowest number observed for a half-year-period since 2014. Those settlement agreements that were filed had many of the same features noted in prior reviews, however, including voting agreements and standstill periods as well as non-disparagement covenants and minimum and/or maximum share ownership covenants. Expense reimbursement provisions were included in approximately half of those agreements reviewed, which is consistent with historical trends. We delve further into the data and the details in the latter half of this Client Alert.

Though not covered in this Client Alert, we note that early indications suggest that the COVID-19 pandemic has caused a decline in shareholder activism activity during the first half of 2020. However, some activists may see opportunities in market dislocation to increase pressure on certain targets and/or to increase their positions in certain companies opportunistically. These trends may be borne out in both the types of targets on which activists focus as well as in the rationales for the campaigns that activists launch. We will analyze these trends in detail during our next shareholder activism update.

We hope you find Gibson Dunn’s 2019 Year-End Activism Update informative. If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team.

Gibson Dunn 2018 Year-end Activism Update - Click here for complete update

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office:

Barbara L. Becker (+1 212.351.4062, [email protected])
Dennis J. Friedman (+1 212.351.3900, [email protected])
Richard J. Birns (+1 212.351.4032, [email protected])
Eduardo Gallardo (+1 212.351.3847, [email protected])
Saee Muzumdar (+1 212.351.3966, [email protected])
Daniel Alterbaum (+1 212.351.4084, [email protected])
Jessica L. Bondy (+1 212.351.3802, [email protected])

Please also feel free to contact any of the following practice group leaders and members:

Mergers and Acquisitions Group:
Jeffrey A. Chapman – Dallas (+1 214.698.3120, [email protected])
Stephen I. Glover – Washington, D.C. (+1 202.955.8593, [email protected])
Jonathan K. Layne – Los Angeles (+1 310.552.8641, [email protected])

Securities Regulation and Corporate Governance Group:
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
James J. Moloney – Orange County, CA (+1 949.451.4343, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The UK Financial Conduct Authority (“FCA”) has issued statements to financial services firms outlining its expectations on: (i) financial crime systems and controls; and (ii) information security, during the COVID-19 pandemic. These are further examples of the FCA requiring firms to take steps to prevent and/or limit harm to consumers and the market more generally in this challenging period. This client alert summaries these two statements and the steps that financial services firms should be taking to ensure continued compliance with their regulatory obligations.

Financial crime systems and controls

In its statement to firms, the FCA noted that criminals are already taking advantage of the COVID-19 pandemic to conduct fraud and exploitation scams through a variety of methods (including cyber-enabled fraud). The FCA flagged the importance of firms remaining vigilant to new types of fraud and amending their control environment where necessary to respond to new threats (including ensuring the timely reporting of suspicious activity reports).

Risk appetite

Firms should not address any current operational issues faced during the COVID-19 crisis by changing their risk appetite. For example, firms should not change or switch-off current transaction monitoring triggers/thresholds or sanctions screening systems, for the sole purpose of reducing the number of alerts generated to address operational issues.

Flexibility relating to ongoing customer due diligence reviews

The FCA does, however, acknowledge that firms may need to prioritise or reasonably delay some activities, whilst still operating within the anti-money laundering legislative framework. For example, this may involve, in some cases, delaying ongoing customer due diligence (“CDD”) reviews. This is subject to two important caveats:

when there are delays, the firm has accepted these on a “risk basis” (such as delaying CDD reviews of customers posing a lower risk); and
a clear plan is in place to return to the “business as usual” review process as soon as possible.

The FCA specifically flags that challenges of detecting terrorist financing still exist and firms must not, therefore, weaken their controls to detect such high-risk activity.

Decisions to amend controls to take account of the current circumstances should be clearly risk-assessed, documented and go through the appropriate governance process.

Client identity verification

Firms are still expected to comply with their obligations under money laundering legislation relating to client identity verification. They are reminded, in light of current travel restrictions, that such legislation, together with the Joint Money Laundering Steering Group guidance, allows for client identity verification to be carried out remotely. They also give indications of certain safeguards and additional checks which can help with verification. For example, firms can ask clients to submit digital photos or videos for comparison with other forms of identification gathered as part of the onboarding process

The FCA is, however, keen to point out that this does not constitute flexibility of the requirements – this is something already provided for under the anti-money laundering legislative framework and associated guidance.

Information security

Linked to the FCA’s concerns prompting the above statement on financial crime, the FCA has also issued a statement with respect to firms’ information security.

Changes to the “threat landscape”

The unprecedented circumstances caused by coronavirus have required firms to change their ways of working at some speed and have changed the threat landscape faced by many financial services firms. As more people are working from home, online systems are becoming increasingly mission-critical and cyber criminals are taking advantage of the situation for their own gain.

Managing the increased risk

Firms are expected to prioritise information security and ensure that adequate controls are in place to manage cyber threats and respond to major incidents. This may include implementing enhanced monitoring to protect end points, information and firm critical processes (including, but not limited to, video conferencing software).

Firms should “proactively manage the increased risks”. Amongst other things, they should be:

vigilant to the potential increase in security breaches or cyber-attacks;
ensuring that they continue to have appropriate governance and oversight arrangements in place; and
ensuring that necessary regulatory notifications are made.

Ongoing areas of regulatory focus

Information security and financial crime are two areas on which the FCA has focused for some time prior to the COVID-19 pandemic. For example, there is an ongoing FCA consultation on operational resilience (published in December 2019), under which cyber security is a key theme.

Further, there are no indications of the FCA’s interests in these area waning. For example, the FCA Business Plan 2020/2021 provides that the FCA will start to implement changes to how it reduces financial crime. These include making greater use of data to identify firms or areas that are potentially vulnerable. It warns that it will continue to take enforcement action where it uncovers serious misconduct, particularly where there is a high risk of money laundering.

________________________

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team, or the following authors:

Authors: Michelle Kirschner, Martin Coombes and Chris Hickey

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In the current distressed environment of the oil and gas industry, there has been a great deal of discussion about, consideration of, and even implementation planning for, significantly reducing or even “shutting in” production. Join the Chair of Gibson Dunn’s Oil & Gas Practice Group, Michael P. Darden, as he discusses how and why this reduction or shut-in of production may occur and the consequences thereof, and provides a comprehensive examination of potential pitfalls and suggested courses of action.

View Slides (PDF)

PANELISTS:

Michael P. Darden is Partner-in-Charge of the Houston office of Gibson, Dunn & Crutcher, chair of the firm’s Oil & Gas practice group, and a member of the firm’s Energy and Infrastructure and Mergers and Acquisitions practice groups. Before joining Gibson Dunn, Mr. Darden served as the global chair of the oil and gas transactions practice and co-chair of the global oil and gas industry team at Latham & Watkins as well as the firmwide chair of the global oil and gas practice at Baker Botts. Mr. Darden is Board Certified in Oil and Gas Law by the Texas Board of Legal Specialization.

MCLE INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Victoria Chan (Attorney Training Manager) at [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

GLOBAL OVERVIEW

COVID-19 Oversight and Investigations: Navigating Legal and Communications Challenges Webcast (May 8, 2020)

This unique webcast offers the combined insights of Gibson Dunn, world-class crisis communications firm Brunswick, and Ashley Callen, Deputy Staff Director of the House Oversight and Reform Committee. They will discuss the onslaught of COVID-19 related oversight and investigations, including how to manage and address the interplay of legal, reputational and communications challenges.
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Corporate/M&A in Times of the Corona Crisis – Specific Consequences of the Pandemic for the German Transaction Business

After almost two months of social and economic lockdown and with Germany only very recently taking its first tentative steps on the road towards the “new normal” and re-opening the economy, this second instalment of our German corporate client update on “Corporate/ M&A in Times of the Corona Crisis” takes stock and provides an overview of the early reactions in the German M&A market, likely future trends and key battles to be fought in the German transactional arena as the business community slowly gets to grip with the Corona pandemic: In the first sub-section, we focus on the increasing importance that distressed M&A transactions and, in particular, the framework and specific rules provided by German insolvency or restructuring laws (like e.g. the insolvency contestation rules and the insolvency administrator’s right to potentially reject continued performance under business acquisition agreements) are likely to assume as certain enterprises and industry sectors will struggle to overcome the expected economic challenges. This is complemented in a second sub-section by an analysis of the likely impact of COVID-19 on the interpretation of existing and drafting of future business acquisitions agreements, common clauses such as MAE clauses, other contractual or statutory remedies, as well as more commercial issues related to evaluation matters and the determination and adjustment of the purchase price. The overview is completed in a third sub-section by a brief summary of the early reactions and discernible trends in the German market for W&I insurances.
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Developments in the Sports Betting Landscape in the United States During the COVID-19 Pandemic

The world of sports betting, like many other industries, has been impacted by the COVID-19 pandemic in significant ways. One major disrupting force has been the widespread cancellation of live sporting events. On March 11, 2020, in light of the spread of COVID-19, the National Basketball Association halted play “until further notice”, and Formula 1 and the PGA Tour followed suit the next day. By the end of March, play in Major League Baseball, the Premier League, the Champions League, the National Hockey League, the 2020 Tokyo Olympics and March Madness had been suspended, postponed or cancelled. Without live sports, participants in the sports betting market have less to wager on. Likewise, the operations of brick-and-mortar casinos and sportsbook operators have been upended by the pandemic. Virtually all casinos in the United States have faced closures for some period of time as a result of the pandemic, whether pursuant to state or municipal “stay at home” orders or other limitations on the operation of businesses deemed “non-essential”, voluntary suspensions of tribal gaming operations, or other voluntary closures.
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Investor Communications by Private Equity and Real Estate Fund Managers in Light of COVID-19

As COVID-19 continues to spread throughout the globe, the ultimate effect on businesses and financial markets remains uncertain. At the same time, certain risks and disruptions to operations and performance have materialized, and investment advisers should consider their disclosure obligations and determine appropriate steps in communicating evolving circumstances to investors. This alert offers practical guidance for the managers of private equity and real estate funds weighing such considerations.
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New York Moratorium on Residential and Commercial Evictions Extended Through August 20, 2020

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In this second part of our German corporate law Client Updates on corporate law issues and the M&A business in Germany in times of the Corona crisis, we provide an overview of various tendencies and trends that will influence the German transaction business beyond and partially irrespective of the specific legislative steps taken in response to the pandemic.[1] Such consequences arise, on the one hand, for company acquisitions which have not yet been completed in full and which were signed before the current economic and social restrictions came into effect and will, therefore, by their very nature not contain any provisions specifically designed to deal with the pandemic and, on the other hand, for future transactions in which the parties, at least, have an opportunity to address such pandemic-related or general economic distortions in their transaction documents.

Section 1 (M&A in Times of Financial Distress) gives a general overview of selected provisions of German insolvency law which will be of increasing importance for business acquisitions in cases where either the seller or the target company operates under financial distress or close to insolvency. Particular emphasis is put on (i) the application of rules that give the insolvency administrator an election right to either reject or continue to perform partly unfulfilled mutual contracts to company acquisition agreements in insolvency cases and (ii) the rules on insolvency contestation (Insolvenzanfechtung).

Section 2 (COVID-19 and M&A Transactions in Germany) then deals with selected topics in which COVID-19 and the economic distortions resulting from the pandemic will have an impact on the conduct of the parties and the interpretation of existing as well as the recommended structure and design of future transaction documents, both now and going forward, and beyond the above cases of urgent financial distress.

Finally, Section 3 (W&I Insurance in Times of COVID-19) deals with the specialist domain of W&I insurance as a popular structuring tool of M&A practice, because this is an area where an early market reaction by insurers to the crisis is already discernible and potential parties to a W&I insurance contract should be aware of these gradual shifts in market expectations and practices.

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TABLE OF CONTENTS

1 M&A in Times of Financial Distress

2 COVID-19 and M&A Transactions in Germany

3 W&I Insurance in Times of COVID-19

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1. M&A in Times of Financial Distress

The cross-sectoral economic effects of the Corona crisis are likely to lead to an increased number of transactions in the medium term where the seller or the target companies, but in certain cases also the purchaser, are operating under distress or the threat of impending insolvency. This trend should apply irrespective of the German Act on the Temporary Suspension of the Insolvency Filing Obligation and Liabililty Limitation of Corporate Body in cases of Insolvency caused by the COVID-19 Pandemic (“Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht und zur Begrenzung der Organhaftung bei einer durch die COVID-19-Pandemie bedingten Insolvenz“ – COVInsAG) that recently entered into force.[2]

This kind of crisis scenario makes the initial planning and structuring of M&A transactions, as well as the later implementation thereof, particularly challenging for the parties: Both sides are forced to make an informed risk assessment on a potential insolvency of their contract partner and/or the target involved and then settle on a structure that best prevents or mitigates such risk. The possible privileges accorded by the COVInsAG, if applicable, will be of particular interest to the parties. If the seller is in distress, the purchaser should, for instance, evaluate up front whether it might be preferable in terms of legal certainty to acquire the target in the framework of a “pre-packaged deal” in subsequent insolvency proceedings. To the extent, however, that either the seller and/or its main creditors do not consent to this approach, the purchaser is only left with the choice of either not proceeding with the desired transaction or trying to mitigate the risks of a later seller insolvency to the largest extent possible.

If German insolvency law is applicable to one of the contract parties, either due to the fact that the “center of main interest” (COMI), which is used to determine the applicable insolvency law, is in Germany or because there would be an option of opening German secondary insolvency proceedings (Sekundärinsolvenzverfahren) on the basis of the target’s German operations, the contracting parties are, in particular, faced with two main risks triggered by a later insolvency: On the one hand, the insolvency administrator (or in case of debtor-in-possession proceedings, the insolvent contract party itself) could choose to reject the continued performance of the enterprise sale and transfer agreement (“Acquisition Agreement“) if this mutual agreement at the time of the opening of insolvency proceedings has not yet been completely fulfilled by at least one of the two contract parties. On the other hand, the insolvency administrator might under certain circumstances decide to contest either the Acquisition Agreement itself and/or individual completion acts or actions thereunder.

Under both scenarios, the solvent counterparty (typically, the purchaser) could be faced with significant disadvantages including a near-total loss of its own performance actions already rendered (payment of purchase price) while, at the same time, either not receiving title and ownership in the target or facing a restitution and unraveling of an already occurred transfer of ownership.

1.1 Rejection Risk of Mutually Unfulfilled Contracts and Potential Safeguards

If insolvency proceedings are opened over the estate of a contract party (seller) at a time when the Acquisition Agreement has not yet been fully performed by, at least, one of its parties, the insolvency administrator is entitled to choose whether or not to continue to perform under the agreement (§§ 103 et seq. of the Insolvency Code (Insolvenzordnung – InsO). If the insolvency administrator elects non-performance and contract rejection, the mutual obligation not yet fully performed or satisfied become unenforceable. The counterclaims of the solvent contract party due to such non-performance become regular insolvency claims that must be filed to the insolvency table and which in the normal run of events are, thus, almost completely worthless in economic terms.

In the time period between the signing of the Acquisition Agreement and the closing there is significant potential for delays based on the customary closing conditions such as merger clearances(s) and other regulatory clearances, further required corporate steps such as board approvals and/or share transfer restrictions, necessary waivers of pre-emption rights, the change of the fiscal year or the termination of existing enterprise agreements (Unternehmensverträgen). Furthermore, there are many cases where the seller and the purchaser have agreed on ancillary agreements like transition services or license agreements between the seller and the target, the details of which are finally negotiated in the time window between the signing and the closing of the Acquisition Agreement. Such agreements are often a key component of the overall transaction but are also themselves subject to the risk of contract rejection by the insolvency administrator.

If the closing under the Acquisition Agreement has already taken place, i.e. the in rem transfer of title has occurred or, at least, the purchase price component owed at closing has already been paid, purchasers often feel they are on safe ground. However, since the assessment of the question whether a contract is indeed fully performed and obligations have been completely satisfied does not only take into account the performance of the mutual primary obligations (Hauptleistungspflicht) of the parties, but also any currently open ancillary obligations (Nebenpflicht), it will, in practice, be very difficult in most relevant acquisitions to argue successfully that all relevant contract obligations of one party are already fully performed. This is even more so in pending, not yet fully performed transactions concluded in times prior to the Corona pandemic where the parties would in most cases not have had reason to dig deeper into potential insolvency-related issues.

There are a number of customary clauses that may end up acting as regular barriers against a successful argument of full performance of the Acquisition Agreement even if the closing has already taken place, including purchase price adjustment clauses, earn-out agreements or purchase price retention amounts aimed at securing possible breaches of representations and warranties. As far as asset deals are concerned, but sometimes also in share deals, where certain target entities are not all owned by one central holding company, certain individual transfer acts under applicable foreign laws are often deferred at the closing date, be it because local share certificates may yet have to be handed over under mandatory local laws or because the necessary registration of an asset or share transfer in a local jurisdictions has not yet been duly made with the competent authorities. To the extent mandatory third party consent to certain transfer steps is necessary (for example, for contract assumptions or transfers), the seller is also unable to argue that the complete fulfillment of all aspects of the agreement has already occurred. There, in addition, are typical other purchaser rights such as potential claims due to breaches of representations and warranties and/or indemnities or non-compete undertakings with time limitations of often several years, as well as obligations to release or replace seller securities granted by the seller for the benefit of the targets, which the insolvency administrator is likely to use as auxiliary considerations to support his argument that the Acquisition Agreement as such has not yet been completely satisfied by at least one of the parties.

In order to avoid or mitigate these risks, the following potential safeguards (which, of course, cannot be addressed comprehensively in this context) should be considered when negotiating future transaction documents with parties in distress:

The purchaser is particularly well-advised to document in scenarios where the seller has (urgent) liquidity needs or where the transaction could be viewed as a “fire-sale” that the purchase price negotiated and ultimately agreed on is a fair market price. Because the insolvency administrator will otherwise (be forced to) reject the continued performance of a mutually not yet fully fulfilled mutual contract if such contract is shown to be unduly disadvantageous. A competitive auction procedure or a fairness opinion may further militate against such decision by the insolvency administrator. The insolvency administrator may, furthermore, consider such contract rejection in asset deal scenarios based on the argument of individual creditors being unduly disadvantaged if the purchaser only assumes selective liabilities of the seller, because in a later insolvency it can be argued that such selective debt assumption unduly benefits creditors whose claims end up fully paid by the assuming purchaser to the detriment of the remaining creditors of the insolvent seller who will only receive the far-lower insolvency quota on their claims which the purchaser chose not to assume.
To agree on specific insolvency-based contractual termination rights in favor of the purchaser in the time period between the signing and closing of the Acquisition Agreement in order to address a possible seller insolvency are very likely to be viewed as an impermissible circumvention of the insolvency administrator’s contract rejection right. A contractual termination right of the purchaser based on a mere deterioration of the seller’s financial position may, however, be feasible.
To reduce the time window between signing and closing as much as possible could be a tool to minimize or mitigate the risk of a (further) deterioration in the financial position of a party in distress. To the extent legally possible and depending on the individual bargaining power in each specific case, the purchaser could also try to negotiate weather or that certain legal steps and circumstances that usually become closing conditions or closing actions can already be implemented prior to the signing of the Acquisition Agreement.
The complete fulfillment of the contract by the purchaser can probably only be argued beyond material doubt if the purchaser pays a final one-off purchase price at closing without any additional purchase price adjustments or earn-out provisions being agreed on. As a tendency, a sale agreement with a locked-box mechanism would, therefore, appear to be the preferred choice in such crisis scenarios. From an insolvency-law perspective, it should also be considered to forfeit any attempts to negotiate purchase price retention amounts as a means of securing potential claims under representations and warranties or indemnities (even if such retention amounts are paid to an escrow account), because such structures also mean that the seller has not yet received the purchase price in full. An alternative worth exploring would be a directly enforceable bank guarantee (selbstschuldnerische Bankbürgschaft) or to take out W&I insurance to secure such claims of the purchaser.
With a view to avoiding multiple transfer acts at closing, a share deal will often be the preferred option to an asset deal. If the parties nevertheless opt for an asset deal, the corresponding transfer acts at closing should be prepared meticulously and in detail and should all be taken on or about the closing date. In the context of movable assets, the purchaser may acquire a strongly protected position already via a retention of title (Eigentumsvorbehalt) and regarding real estate may protect itself against contract rejection by way of a recorded priority notice (Vormerkung), see §§ 106, 107 InsO. As far as acquiring rights (shares, IP, receivables) is concerned, no such expectant or inchoate rights worthy of protection (schutzfähige Anwartschaftsrechte) are granted in the context of the insolvency administrator’s election right to perform or reject contracts.
In certain cases, the provisions in the Insolvency Code on already made partial performance (§ 105 InsO) may also help the purchaser as such partial performance do not have to be restituted as a rule. For instance, if individual transfer measures regarding certain – usually non-essential – assets in a transaction remain pending, such partial performance may be argued to exist. It would follow that the insolvency administrator usually could not reclaim or unravel the already transferred parts of the business solely based on his choice not to perform the outstanding contract as a whole. As far as business sales are concerned, such separate deal parts are, however, only assumed to exist if there is a separate partial business unit (Teilbetrieb) and the outstanding transfer act or implementation measure does not concern the “inseparable core business”.
In cases where the conclusion of ancillary transition services agreements, license, lease or supply agreements with the insolvent seller is provided for in connection with the closing of the Acquisition Agreement, the purchaser should be aware that each of these agreements may, in turn, be subject to selective contract rejections rights of the insolvency administrator.
The solvent party is able to achieve legal certainty on the continued fate of the mutually unfulfilled agreement by formally requesting the insolvency administrator to exercise the corresponding election right.

At the end of the day, a comfortable safeguard against the risk of potential rejection of further contract performance by the insolvency administrator will only be realistic for the purchaser if the Acquisition Agreement contains a fixed purchase price based on a locked-box transaction which is settled in full at closing. Indemnities or claims for breaches of representations and warranties could, in addition, be secured by a directly enforceable bank guarantee (selbstschuldnerische Bankbürgschaft) or W&I insurance taken out by the purchaser.

1.2 Contestation Risk and Precautionary Steps

A further possible challenge to the existence and implementation of a business acquisition lies in the risk of a later insolvency contestation (Insolvenzanfechtung). If the relevant prerequisites are met, the insolvency administrator may contest the Acquisition Agreement itself and/or individual performance acts related thereto (§§ 129 et seq. InsO). Under certain circumstances and if the contestation succeeds in the seller’s insolvency, the purchaser may have to re-transfer the performance received by him (i.e. the ownership of company assets or shares) back to the insolvent estate, while his corresponding repayment claim regarding the purchase price paid will normally only be a regular unsecured insolvency claim and, thus, be largely worthless in economic terms due to the low insolvency quota.

The contestation rights of the insolvency administrator are manifold. Under certain circumstances, however, the COVInsAG, which recently entered into force, may privilege the Acquisition Agreement and/or measures taken to implement it for a transitional period. In addition, certain general, precautionary measures are well-advised which will, at least, mitigate the risk of subsequent insolvency contestation.

1.2.1 Contestation of the Acquisition Agreement Itself

In the first instance, the new provisions of the COVInsAG which will be in force until 30 September 2020[3] aim at suspending the obligation to file for insolvency in spite of existing illiquidity caused by COVID-19 and privilege the conduct of the corporate bodies in such scenarios. From a contestation perspective, in particular, loan agreements which provide new liquidity are privileged and exempted from later contestation for a limited period of time. However, the new law stops short of expressly declaring all agreements contestation-proof which were concluded during the period where the obligation to file for insolvency was suspended and which serve restructuring purposes. As far as the contestability of the Acquisition Agreement itself is concerned, the existing contestation rules are, therefore, likely to apply.
When structuring and drafting the Acquisition Agreement, it is, thus, of particular importance to prevent a potential later contestation of the Acquisition Agreement based on an argument that creditors are directly disadvantaged (§ 132 InsO). This contestation option exists if the disadvantage for creditors is directly caused by the Acquisition Agreement itself, the seller was illiquid at the time of the signing of the Acquisition Agreement and the purchaser knew of these circumstances, provided that the conclusion of the Acquisition Agreement occurred in a period three months prior to the filing for insolvency or after such filing. The argument that the purchase price was set below the threshold of the fair market value can be refuted by reference to a competitive auction process. Alternatively, a fairness opinion by an independent expert can be obtained. If the purchaser does, however, assume selected but not all of the seller’s liabilities in an asset deal, a disadvantage for creditors in a later insolvency may already be seen in the fact that only the creditors of the assumed liabilities were fully satisfied by the purchaser, whereas the remaining creditors of the seller were left to settle for the much lower quota.

Any imputed knowledge of illiquidity can, in practice, be refuted by a positive confirmation of solvency in an analysis of the insolvency status prepared by an expert according to standard IDW S 11 (Analyse der Insolvenzreife nach IDW S 11). In certain cases, it may also be opportune to fix a closing date that is more than three months after the signing of the Acquisition Agreement. However, such approach runs contrary to the above suggested aim of quickly achieving full performance of the agreement in order to preempt the insolvency administrator’ election right to either reject or continue to perform under a contract which is partly still unfulfilled by both parties.

The contestation of the Acquisition Agreement due to disadvantaging creditors with intent (§ 133 InsO) in cases of impending illiquidity (drohende Zahlungsunfähigkeit) of the seller and seller’s intention to disadvantage his creditors requires the purchaser to know of such circumstances. The purchaser can protect himself against such allegation by submitting an expert analysis of the insolvency status, which also covers impending illiquidity, as well as a restructuring expert opinion under standard IDW S 6, which concludes that the seller’s restructuring efforts have a serious expectation of being successful.

1.2.2 Contestation of Closing Actions / Performance Measures

The newly enacted COVInsAG (§ 2 para. 1 no. 4) generally declares performance acts which are congruent in terms of time and substance to be exempt from contestation for a transitional period until 30 September 2020[4], unless the restructuring and refinancing efforts of the seller were unsuitable to remedy the crisis and the buyer knew about this. According to the wording, the privileged exemption applies without restrictions to all performance acts, i.e. a restriction to performance acts related to credit agreements is not provided for in the new law. Having said that, the official legal justification of the new law (Gesetzesbegründung) reasons that the new provision is intended to protect the performance of existing contracts with suppliers or under recurring long-term obligations against insolvency contestation rights, as the relevant counterparties would otherwise be forced to terminate the business or contractual relationship, which, in turn, would frustrate restructuring efforts. Even though there is not yet any indication for a prevailing opinion on the scope of this protection clause against contestation under the COVInsAG, there are good reasons to argue that it also covers performance actions under an Acquisition Agreement. The purchaser would, thus, be protected if he is able submit an expert opinion on the restructuring of the company which considers a successful restructuring to be likely when taking into account the transaction proceeds.
If the privileged exemption under COVInsAG is held not to apply, the seller would again need to evidence that the seller was not illiquid at the closing date by submitting an expert analysis of the insolvency status to avoid a contestation risk under the header of contestation of congruent performance actions (§ 130 InsO – Kongruenzanfechtung von Erfüllungshandlungen).
When attempting to avoid a contestation under the header of intentionally disadvantaging creditors through performance acts that are congruent from a temporal and substantive perspective (§ 133 para. 3 InsO – Anfechtung wegen vorsätzlicher Benachteiligung durch inhaltlich und zeitlich kongruente Erfüllungshandlungen), the solvent party may refute the allegation that actual illiquidity existed at the time the closing actions were taken by submitting an expert analysis on the insolvency status according to standard IDW S 11. The counterparty’s imputed knowledge of a debtor’s possible intent to disadvantage creditors presumed by law is likely rebutted as well, although this has not yet been confirmed by rulings of the highest court(s). An update as of closing of the expert restructuring opinion pursuant to standard IDW S 6 already obtained at signing should eliminate any remaining grounds for the insolvency administrator to justify a contestation based on intent.
Furthermore, if the purchaser succeeds in structuring the performance of the agreement as a so-called “cash deal” (§ 142 InsO – Bargeschäft), the contestation rights of the insolvency administrator to challenge performance actions are excluded per se, with the exception of disadvantaging creditors with intent (§ 133 para. 3 InsO). In order to qualify a transaction as a cash deal, the parties must exchange performances of equivalent worth directly, i.e. in close temporal proximity. Since the exchanged performance must be objectively of equivalent value, absolute deal certainty can ultimately only be obtained by way of a valuation expert opinion. However, a competitive auction process or, if applicable, a fairness opinion might also provide meaningful indications in this regard.

The necessary temporal link permits staggered closing actions or implementation steps only to a very limited extent, even though strictly simultaneous performance (Zug-um-Zug) is not mandatory but recommended. Purchase price retention amounts to secure potential claims for breaches of representations and warranties, purchase price adjustment clauses and, especially, earn-out provisions should be avoided. If the purchaser wants to agree on and implement a “cash deal” within the meaning of insolvency law, he should, as a precaution, also consider not to include a conditional assignment of share title already in the Acquisition Agreement.

Finally, specific issues arise if the seller also concludes further ancillary agreements either with the purchaser or the target at the closing, such as lease or tenure agreements (Miet- oder Pachtverträge), license agreements, supply agreements, transitional services agreements or the like, which, in turn, are subject to separate contestation rights.
Unlike in the case of the insolvency administrator’s election right to either reject or continue to perform under pending contracts, the insolvency administrator cannot be forced into a timely decision on his potential contestation right. This causes considerable uncertainty for the purchaser (whilst giving the insolvency administrator strong leverage in negotiations) since the contestation right is only limited by the regular three year time limitation period under German law.

In summary, reducing the risk of possible subsequent contestation requires some effort on the part of the purchaser. In addition to a fairness opinion and an expert analysis of the insolvency status, a restructuring expert opinion in accordance with standard IDW S 6 may also be well-advised, but the purchaser will have to rely on the cooperation of the seller in this regard. The respective mutual performance actions should, in an ideal case, be agreed upon and implemented as a cash deal with a simultaneous exchange of performance actions. At least on a literal reading of the wording, the purchaser could also rely on COVInsAG to make performance actions taken during the transitional period contestation-proof if a positive expert restructuring opinion exists.

2. COVID-19 and M&A-Transactions in Germany

2.1. Acquisition Agreements in the Pre-Closing Phase

Whereas the start of 2020 was still characterized by lively M&A activities, the German market was taken by surprise in March by the speed and massive impact of the COVID-19 pandemic. For the majority of investors and companies, measures to stabilize sales and liquidity were and are still the focus of attention.

In this situation, a share purchase agreement (the “Acquisition Agreement“) already signed but not yet closed may represent a welcome influx of liquidity for the seller, while the same agreement may now be viewed as a drain on liquidity by the buyer which might no longer be welcome. Various contractual and legal provisions may play a role in this dilemma, which are outlined below and may also serve as guidelines for negotiations of Acquisition Agreements in the near future.

2.1.1 Provisions in the Acquisition Agreement

a) Termination Clauses

The respective Acquisition Agreement usually provides for a termination provision which, in principle, allows both parties to terminate the agreement if the transaction has not been completed (closing) by a certain long stop date. Also, further provisions, which frequently are agreed and allow unilateral termination before the long stop date has occurred, usually require that the closing has become impossible due to the definitive frustration of a closing condition. Not least because deal certainty is regularly a priority for both parties to an Acquisition Agreement, it seems fair to expect that a general right of termination or a termination due to the effects of COVID-19 can only in rare cases be based on the agreed upon regular termination provisions. However, even if the conditions for terminating the Acquisition Agreement are met, the actual exercise of this right will require careful review of whether such termination would, in turn, result in an obligation to pay any pre-agreed contractual penalties, break-up fees or damages to the counterparty.

b) Specific Closing Conditions: Merger Clearance and Material Adverse Change

(i) Merger Clearance

If a contractual termination right in the Acquisition Agreement is tied to the failure of closing occurring within a certain agreed-upon timeframe, the necessary analysis must consider, first and foremost, the specific closing conditions agreed in each individual case. One of the key closing conditions in this context regularly is obtaining merger clearance by the specifically named anti-trust authorities. The impact of the COVID-19 pandemic on the work of these anti-trust authorities varies greatly from jurisdiction to jurisdiction.[5] In the case of M&A transactions that have been signed but have not yet closed, the contract parties would, thus, be well-advised to examine in each case whether the originally envisaged time frame is (still) sufficient, whether and which complications and delays are possible and what measures could or even must be taken to further ongoing proceedings. Where appropriate, it is recommended to enter into timely discussions on the potential adjustment of the long stop date.

If no amicable agreement can be reached in this respect, further questions under contract law could arise: This is so because, irrespective of any statutory obligations to adjust or modify the contract (see below on § 313 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), there may be contractual provisions in the Acquisition Agreement which could conceivably result in an obligation of a contracting party to agree to an adjustment of the contract. In practice, there are some cases, for instance, where a general mutual obligation to cooperate and facilitate the closing is included in the Acquisition Agreement or the severability clause provides for an obligation to agree on a fair commercial solution if unforeseen or unforeseeable contractual gaps or omissions later become apparent. Whether such provisions indeed lead to a contractual adjustment obligation of a contracting party can only be assessed on the basis of the individual provision in the relevant Acquisition Agreements.

(ii) Material Adverse Change

Another contractual provision in the Acquisition Agreement, which may lead to either a contract adjustment, potential compensation payments or even to the termination of the Acquisition Agreement, depending on the substance of the clause in question, are so-called Material Adverse Effect (MAE) or Material Adverse Change (MAC) clauses. Essentially, these are clauses which – if agreed as a closing condition or as a right of rescission – provide for a closing reservation to address the occurrence of unforeseen, material adverse developments of the target company’s business (so-called Business or Target MAC) between signing and closing, or, less frequently, with regard to the industry in which the target company operates (so-called Market MAC), which have a value-diminishing long-term impact on the target company. If such an adverse development occurs or exists, the purchaser does not have to close or complete the transaction.

Under the seller-friendly M&A market conditions prevalent in recent years, the inclusion of such clauses has become more rare. However, if the Acquisition Agreement contains a MAC clause, the issue of its interpretation will likely come more into focus now. Whether the COVID-19 pandemic and its consequences actually constitute a material adverse change event must be carefully determined on the basis of the specifically agreed clause and the details and spheres of knowledge of the parties at the time of entering into the Acquisition Agreement. Even if the MAC clause does not contain any specific wording regarding the inclusion or exclusion of epidemics or pandemics, this is only the starting point for such an analysis.

In a second step, the agreed upon exclusions then need to be assessed: In particular, it may be required to clarify whether the frequently used exclusion of general or industry-specific negative market developments is applicable here, and then again whether there might be a counter-exception in case the target company is disproportionately affected by these developments.

A further issue that needs reviewing in the specific MAC clause is the exact reference point in time for, and probability threshold of, the MAC event occurring. There will also be cases where – depending on the industry – certain adverse effects are (partly) becoming apparent already now, but have not yet (fully) materialized. In such scenarios, the outcome will depend on whether the wording of the clause only covers disadvantages that have already occurred or also – already foreseeable – future consequences.

It is also crucial by which criteria the materiality of an event is to be measured. In some cases, the parties agree on specific thresholds (e.g., a reduction of EBITDA by x%). If such materiality criterion is not defined in greater detail, this must be assessed by interpreting the agreement with specific focus on the target company.

Finally, even if a MAC event has occurred, the contractual consequences provided for in the agreement must be clarified. Withdrawal from the Acquisition Agreement or a refusal to close the deal may only be the ultima ratio. It would also be conceivable to negotiate in good faith on the adaptation of the Acquisition Agreement to the changed commercial circumstances.

2.1.2 Statutory Provisions on the refusal to Perform or the Adaptation of the Agreement

The issue whether the parties to an Acquisition Agreement may also rely on the statutory provisions in view of the COVID-19 pandemic is likely to be a matter of increasing activity for (arbitration) tribunals in the near future: In particular, the legal instruments in the event of a disruption to the basis of the transaction (Störung der Geschäftsgrundlage) pursuant to § 313 BGB are likely to be at the forefront. These rules allow the adaptation of the contract or, in case of impossibility or unreasonableness of such adaptation, the rescission of the contract, if the parties’ mutual conceptions on which the agreement was based have changed to such an extent that one party cannot reasonably be expected to adhere to the unchanged contract. With the COVID-19 pandemic, the various restrictive governmental measures to combat the spread of the virus, but also, in turn, specific governmental stabilization and support measures and, in many cases, the grave effects thereof on the business of the target company, its profitability and the assumptions in the business plan, may be seen, at a first glance, as such momentous changes arising from the COVID-19 pandemic without either of the parties having been in a position to foresee such impact or be held responsible for the consequences. However, even if the manifold economic effects resulting from the outbreak of the pandemic seem to be a textbook example of a disruption of the contractual performance obligations, the legal significance of such disruption must be analyzed in a differentiated manner and on the basis of the specific contractual agreements.

In the Acquisition Agreement, the parties often agree on specific comprehensive exclusions of the statutory provisions, which may in certain cases also include the – generally negotiable – provision in § 313 BGB. However, even if such an exclusion is not expressly provided for, it may, for example, follow from a past effective date, on which the (economic) transfer of risk is deemed to occur, that any risks which materialize after such date have to be borne by the purchaser. The conclusion may be similar in the case of a MAC clause contained in the Acquisition Agreement. As specific expression of the intentions of the parties, such concrete agreements must, in principle, be given priority and can, as a specifically agreed contractual distribution of risk, override or exclude the application of § 313 BGB even for unforeseen circumstances. All of this does not per se exclude a possible adjustment of the contract due to disruption of the basis of the transaction, as any contractual provision (including an exclusion) could also have been affected by the parties’ underlying fundamental misconceptions. In any case, however, the hurdles to be overcome would then be significantly higher and require a comprehensive evaluation of the wording and spirit of the Acquisition Agreement.

If these initial hurdles can be overcome, the second step is to examine whether there has been, taking into account the circumstances of the individual case, such a momentous change in the parties’ underlying conceptions of the agreement that adherence to the contract would be unreasonable. Here, similar considerations will then play a role as discussed above when assessing the application and interpretation of MAC clauses (see above under Section 2.1.1, lit. b), (ii)), i.e. what did the parties know at the time of signing the Acquisition Agreement, do the contractual provisions as agreed entail a certain distribution of risk between the parties, how significant are the changes for the subject matter of the contract and how significant would the consequences of an application of § 313 BGB be for the parties.

To make matters worse, there is another major factor of uncertainty: It is currently completely unclear how COVID-19 and its consequences will pan out (internationally) in purely factual terms. The length of the restrictions in the individual countries, possible further waves of outbreaks, economic catch-up effects, government support and economic stimulus programs and the concrete effects on the respective target companies – these and many other aspects will only reveal themselves fully in the future. In any case, the individual allocation of risk between the parties of future Acquisition Agreements is likely to play a greater role again in the respective contract negotiations going forward – also with a view to possible further COVID-19 “waves”.

2.2 Purchase Price Mechanics and Evaluation Matters

When predicting the development of the M&A market in the near and medium term future, COVID-19 and the economic effects of the pandemic will be one of the central issues in determining the value of a company and, thus, also the purchase price. The discussions are likely to focus on the question whether the fair enterprise value can be justified on the basis of normalized EBITDA, taking into account or excluding the effects of the COVID-19 pandemic, among other things. However, this is also likely to play a major role in the case of already concluded Acquisition Agreements with earn-out or staggered payment regulations or in connection with management incentive schemes or bonus arrangements. In these cases, EBITDA is also regularly used as a benchmark and specific rules are agreed on to determine it.

With regard to the two main approaches for determining the purchase price, the following considerations are fundamental: If the parties have agreed on a so-called fixed purchase price (locked-box approach), this should basically be exactly that, a definitive purchase price which is typically not subject to any later adjustment. The purchase price is determined by reference to an economic reference date and the risk of changes in value transfers to the purchaser on such date. In principle, there is no mechanism for some kind of value clarification regarding the underlying valuation assumptions. Instead, the purchaser is protected against changes in value after the reference date until the closing date by means of positive and negative covenants and guarantees (ring-fencing), which are essentially related to the conduct of the business in the ordinary course.

As far as variable purchase prices are concerned, there are ultimately many different approaches to agreeing such a variable purchase price. In the first instance, the reference values agreed on by the parties for determining the purchase price and the influence of the COVID-19 pandemic on these values must be taken into account. Under the so-called closing accounts method, which is often used in this regard, the parties generally agree on a fixed enterprise value, which is typically not subject to adjustments. Only the reconciliation bridge to the equity value is based on a subsequent adjustment of cash, debt and (normalized) working capital positions in the so-called closing accounts prepared by reference to the agreed economic effective date. It follows that COVID-19 effects are therefore only recorded under this method to the extent that they affect the aforementioned reference values. The extent to which changes are then to be reflected depends on the principles laid down for the preparation of the closing date accounts (including the degree to which any value-enhancing facts are taken into account), it being understood that the parties regulate the granularity of these principles to varying degrees. A particularly thorough and careful assessment of the provisions in the Acquisition Agreement is required in this regard, which should not only include the necessary legal analysis but also cover the commercial and economic evaluation and accounting methods to be applied.

The questions raised in this context are also likely to feature prominently when interpreting agreed clauses on purchase price components payable only in the future, as in the case of earn-outs or other staggered payment arrangements, if these are related to key company benchmark figures (and not, for example, to the realization of future minimum exit sale proceeds). Here, too, the payment of the additional purchase price components is linked to certain economic reference values, the determination of which is governed by the individual agreement regarding the applicable (accounting) provisions. The parties would, therefore, be well-advised also with regard to already existing earn-out regimes to monitor the likely effects of the COVID-19 pandemic on the company’s key benchmark figures at this early stage and consider their evaluation impact and suitable accounting treatment as well as their potential scope for manoeuver under the specific, individually agreed upon provisions.

3. W&I Insurance in Times of COVID-19

Among the consequences of the COVID-19 pandemic have been certain new trends and challenges in the private equity and M&A arena, including W&I insurances. Even though there are no current indications that W&I insurances will generally become unavailable in transactions, COVID-19 certainly has an influence on the insurer’s risk assessments and the details of the insurance policies that are on offer.

3.1 Potential Impact of COVID-19 on the Future Scope of W&I Insurance

At the moment, there is no market trend that insurers are generally re-considering the scope of the guarantees and representations and warranties that can be insured. Having said that, to insure certain, previously customary and coverable representations and warranties in new policies not concluded prior to the occurrence of the COVID-19 pandemic will now and in future be subject to a more detailed insurance assessment (see below under lit. b) regarding the consequences for the underwriting process). This, in particular, concerns guarantees which are related to a contractually defined reference or balance sheet date and the absence of material disadvantageous deteriorations regarding the target entities or their business operations since then, as well as guarantees that refer to an adequate level of insurance coverage of the sold business operations – it being understood, for instance, that, depending on the business model, the question whether and under which circumstances a particular business interruption insurance policy provides “adequate” insurance coverage may well have been affected and modified by the COVID-19 pandemic. A further focus is likely to be on guarantees regarding compliance with all (material) laws and regulations, in particular on health and safety, and on customer and supplier relationships. With a view to the scope of damages covered, several insurers currently exclude any and all damages that are caused by and arise from the pandemic in their entirety. Other insurers are willing not to insist on such a blanket exclusion of damages and negotiate modified, specifically defined and tailored damage exclusions. This means that in these Corona times the selection of the W&I insurer and the ensuing negotiation of the actual W&I policy have gained added practical relevance and are more important than ever before, especially since the contractual provisions agreed on in the transaction documentation with the purchaser might in many cases allow recourse to the seller for certain uninsurable risks.

3.2 Impact on the Underwriting Process

It is nothing new that the insurers have always put special emphasis on the topics most critical for the insurance’s potential liability during the underwriting process. If the purchaser’s due diligence exercise on such specific risk topics is not sufficiently thorough from an insurer’s perspective, the policy will usually contain corresponding exclusions of insurance coverage. Furthermore, an exclusion from insurance coverage of all known problematic issues and risks, which had been identified in the course of the due diligence process by the purchaser or which arose and were identified in the time window between the signing and the closing of the transaction, was customary in the past already.

Currently, this conclusion is of particular and increased relevance for the potential impact and consequences of the COVID-19 crisis on the business operations of a company undergoing a sales process and the corresponding catalogue of guarantees contained in the sale and transfer agreement: It depends on the nature of the business sector and the industry of the sold business how strict the insurer’s parameters for this evaluation will be and whether they may differ to a significant degree – reflecting the fact that not all enterprises are affected by the current crisis in the same manner, relative to the nature and structure of their business, their geographic footprint, potential interdependencies in their production procedures and supply chain, the consequences of the pandemic for their customers, suppliers and staff, and, of course, the existence of any liquidity or balance sheet reserves and buffers. As far as (material) customer and supply agreements are concerned, it is especially pertinent whether such contracts – based on the respective applicable law – may be terminated or modified based on force majeure or an undue change of the underlying common commercial understanding of the parties (Änderung der Geschäftsgrundlage) or whether there may, at least, be a (temporary) defense of withholding or delaying performance (Leistungsverweigerungsrecht). Another point of special importance for the insurers is the question how the parties deal in the transaction documentation with the particular further transaction risks potentially triggered by the COVID-19 crisis in the time between signing and closing, e.g. by way of relevant closing conditions, specific termination rights prior to closing or the inclusion of a specially-tailored MAC clause. We are under the general impression that the insurers have a current market expectation that the parties should normally agree on express provisions in their sale and transfer agreements dealing with the potential COVID-19 risks: This means that the insured party should therefore examine and assess the impact and consequences of COVID-19 on the business operations of the target extra-thoroughly and with specific care to put themselves in a position where they can negotiate with the insurer on a solid factual basis on a successful, moderate exclusion of such risks rather than being hit with a blanket exclusion of all COVID-19-related risks.

3.3 Special Case: Occurrence of the Pandemic between Signing and Closing

The above considerations apply to those cases where the negotiation and conclusion of the insurance policy and its terms are completed subsequent to the occurrence of the COVID-19 pandemic. The second, also practically relevant scenario concerns cases where the signing of the transaction (and, thus, the insurance policy) predate COVID-19 but the closing only occurs thereafter. W&I insurances regularly provide for the disclosure of new facts and circumstances, which arose in the time period between signing and closing and which result in breaches of guarantees and representations and warranties, and then exclude them from insurance coverage, at least, for such guarantees which are repeated at closing (so-called bring-down). The details and scope of such additional disclosure is, in particular, stipulated in the insurance policy negotiated between the insurer and the insured party and is normally limited to facts and circumstances occurring between signing and closing which would result in a breach of a guarantee as of the closing date had they been left undisclosed. Irrespective of such underlying contractual agreement, however, certain insurers have already requested blanket disclosure of all abstract consequences of COVID-19 for the transaction and have asked for a description of the concrete measures the target has taken in order to mitigate the impact of the pandemic or the purchaser’s assessment of the changed business case of the target entities or have enquired whether the parties may have settled on modified transaction parameters to address the crisis. Normally, such questions are likely designed to allow an argument that the corresponding consequences and adaptations identified can then be excluded from coverage as a disclosed known risk. The parties should therefore take the utmost care to limit such disclosure in terms of its content and scope strictly to the contractually agreed degree and not make any further-reaching, sweeping written or oral generalizations on the target entities or the transaction vis-à-vis the insurer so that their W&I policy is not compromised unduly. However, the insured party must, in turn, also take care that it does not fall short in fulfilling its contractually agreed disclosure and information obligations, because a breach of such obligations could also result in a loss of insurance coverage.

3.4 Outlook

COVID-19 places new and difficult challenges and demands on both the insurers and the insured party when it comes to structuring M&A procedures and developing tailor-made, risk-appropriate W&I solutions. It nevertheless is to be expected that the W&I insurance will continue to remain a practical and valuable tool for the purchaser to ensure adequate coverage for damages caused by breaches of contractual guarantees or representations and warranties – irrespective of their bargaining power in the sales process and the solvency position of the seller. Taking into account the expected shift of the M&A markets towards an even more buyer-friendly market climate, potential purchasers will be well-advised to evaluate the suitable liability recourse structure for the time after closing (e.g. seller’s liability, W&I insurance or a mixture of both) with particular emphasis in each individual case on the potential exclusions of insurance coverage that can be expected under new W&I policies. There is, at least, some good news in the short term for the potential insured party, however, in that the current decrease in the number of M&A transactions during times of crisis could easily result in a trend towards lower insurance premiums in the immediate short term.

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[1] We have already covered various reactions by the German and European lawmakers and administration, which are particularly relevant to corporate law and the transaction business in Germany, in our Client Update of April 14, 2020, available in English and German at: https://www.gibsondunn.com/corporate-ma-in-times-of-the-corona-crisis-current-legal-developments-for-german-business/.

[2] In this context, also see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, under section II.2, as well as with further analysis in this regard https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

[3] The temporal application of these provisions may be extended by way of governmental regulation until 31 March 2021.

[4] Regarding the potential extension option, please see above footnote 3.

[5] Reference is again made to: https://www.gibsondunn.com/corporate-ma-in-times-of-the-corona-crisis-current-legal-developments-for-german-business/, see Section 4 (Anti-Trust and Merger Control in Times of COVID-19), available in German and in English.

The following Gibson Dunn lawyers assisted in preparing this client update: Lutz Englisch, Birgit Friedl, Marcus Geiss, Sonja Ruttmann and Dennis Seifarth.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, financing and restructuring, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime and litigation experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices:

General Corporate, Corporate Transactions and Capital Markets
Lutz Englisch (+49 89 189 33 150, [email protected])
Markus Nauheim (+49 89 189 33 122, [email protected])
Ferdinand Fromholzer (+49 89 189 33 121, [email protected])
Dirk Oberbracht (+49 69 247 411 510, [email protected])
Wilhelm Reinhardt (+49 69 247 411 520, [email protected])
Birgit Friedl (+49 89 189 33 180, [email protected])
Silke Beiter (+49 89 189 33 121, [email protected])
Annekatrin Pelster (+49 69 247 411 521, [email protected])
Marcus Geiss (+49 89 189 33 122, [email protected])
Sonja Ruttmann (+49 89 189 33 150, [email protected])
Dennis Seifarth (+49 89 189 33 150, [email protected])

Finance, Restructuring and Insolvency
Sebastian Schoon (+49 89 189 33 160, [email protected])
Birgit Friedl (+49 89 189 33 180, [email protected])
Alexander Klein (+49 69 247 411 518, [email protected])
Marcus Geiss (+49 89 189 33 122, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Interim and Proactive Disclosure to Existing Investors

In evaluating disclosure obligations to existing investors regarding the ongoing and potential impacts of COVID-19, investment advisers should distinguish between effects that relate to the following:

a fund’s financial performance (e.g. disruptions to a portfolio company’s business); and
an investment adviser’s ability to manage a fund (e.g. a diminished capacity to source, diligence or complete deals due to work-from-home or other limitations).

Fund’s Financial Performance: Contractual obligations in existing fund documents and side letters typically address the timing and form of reporting and/or notice obligations relating to changes in a fund’s financial performance. Interim disclosure regarding fund performance or risks to performance may also be appropriate if investors have ongoing or impending investment decisions in connection with a fund, such as for open-ended funds.

In providing normal course or interim fund performance disclosure, investment advisers should consider whether to include specific COVID-19 disclaimers to indicate that future performance remains uncertain and prior period results may have been obtained in an environment that differs materially from the current economic climate. Funds that are actively marketing to prospective investors and/or seeking additional commitments from existing investors must take into account additional disclosure considerations; please see our related alert “COVID-19: Fundraising Considerations for Private Investment Fund Sponsors” for additional information.

Investment Adviser Operations: Changes to an investment adviser’s own operational abilities and performance implicate a deeper set of fiduciary and regulatory considerations, even before running into typical contractual guardrails (e.g. key person and time commitment clauses applicable to senior personnel). Timely disclosure of any material disruptions to operations is important, but investment advisers would be well served to communicate the state of the firm and any risks to their own operations to investors proactively during the crisis.

Oral Versus Written Disclosure

Investment advisers may reasonably differ in their approach to communicating information to investors, subject to any contractual notice or reporting obligations. Phone conversations with investors can be appropriate (and are often preferred from an investor relations perspective), provided that messaging remains consistent, is supported by underlying facts and avoids selective disclosure (as further discussed below). Alternatively, written communications offer uniformity, precision in message and provide a documentary record for regulatory and compliance purposes.

Avoid Selective Disclosure

Investment advisers should take care to ensure that messaging remains consistent and complete across the investor base. Selective disclosure to certain limited partners risks not only running afoul of partnership agreement or side letter provisions, but also undermining the adequacy of disclosure made to other investors.

Consider Categorizing Investment Risk Levels

SEC Chairman Jay Clayton and William Hinman, Director of the Division of Corporate Finance, released a joint statement encouraging “companies strive to provide, and update and supplement, as much forward-looking information as is practicable” and noted “that we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.”[1] Although directed to public companies, this guidance offers insight into the SEC’s expectations around disclosure during the COVID-19 crisis, and the message appears intended to encourage forward-looking disclosure even in the face of uncertainty.

In light of this message, each investment adviser should consider categorizing the level of investment risk and volatility associated with COVID-19 across its portfolio and communicating its analysis to investors, in particular for funds with multi-sector investment strategies. Advisers should weigh the value of this enhanced disclosure against the risk attendant in forecasting performance, and any such disclosure should be appropriately qualified.

Responding to Investor Inquiries

Existing investors and prospective investors have begun to, and will continue to, make inquiries regarding the impact of COVID-19 on fund performance and operations. Preparing a script and drafting form responses (e.g. an FAQ) in anticipation of such inquiries is the surest route to achieve accuracy and conformity in communications. Consider also having a dedicated compliance member tasked with reviewing communications for COVID-19-related disclosure.

Keep Records of Communications and Supporting Materials

As noted in our March 26, 2020 alert “SEC Enforcement Focus on Fallout from COVID-19: Insights for Public Companies and Investment Advisers During a Crisis”, prior periods of market volatility have been typically followed or accompanied by heightened SEC investigative risk. Investment advisers should maintain contemporaneous records of communications with investors regarding the crisis and any supporting materials, with a view towards a post hoc assessment by the SEC of actions taken during this time. For oral communications, calendaring calls and maintaining an internal written summary of conversations may be appropriate.

LP or Limited Partner Advisory Committee Notices

A detailed review of fund documents and side letters should be undertaken to assess potential notice requirements. Adhering to such requirements is particularly important during this period of heightened scrutiny.

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[1] Public Statement, “The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, Public Statement” (April 8, 2020), available at, https://www.sec.gov/news/public-statement/statement-clayton-hinman

Gibson Dunn lawyers regularly counsel clients on the issues raised in this alert, and we are working with many of our clients on their response to COVID-19. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Investment Funds Practice Group, or the authors:

C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, [email protected])
Shukie Grossman – New York (+1 212-351-2369, [email protected])
Edward D. Sopher – New York (+1 212-351-3918, [email protected])
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, [email protected])
John Fadely – Hong Kong (+852 2214 3810, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Nicholas C. Duvall – Washington, D.C. (+1 202-887-3781, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Executive Order 202.8, which established the eviction moratorium, was signed by Governor Cuomo on March 20, 2020. Among other measures, the order placed a stay on all residential and commercial evictions. This provision of the order, which was set to expire next month, will be extended an additional 60 days through August 20.

In addition to extending the eviction moratorium, Governor Cuomo announced two additional measures to protect renters. First, the state is banning late payments or fees for missed rent payments during the eviction moratorium period. Second, the state will allow renters facing COVID-19-related hardships to use their security deposit in place of rent payments. During his May 7, 2020 daily press briefing, Governor Cuomo stated that renters will be required to repay the deposit “over a prolonged period of time.”

A press release announcing these measures was published on May 7, 2020. At this time, no new Executive Order has been issued.

___________________________

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors:

Mylan Denerstein – New York (+1 212.351.3850, [email protected])
Andrew A. Lance – New York (:+1 212.351.3871, [email protected])
Emily Black – New York (+1 212.351.6319, [email protected])
Stella Cernak – New York (+1 212.351.3898, [email protected])
Doran Satanove – New York (+1 212.351.4098, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On April 27, 2020, a divided Supreme Court held in Georgia v. Public.Resource.Org, Inc. that Copyright protection does not extend to the annotations contained in Georgia’s official annotated code. 590 U.S. ___, No. 18-1150, 2020 WL 1978707, at *3 (U.S. Apr. 27, 2020). The “government edicts” doctrine, the Court held, puts Georgia’s annotations outside the reach of copyright protection because they are created by an arm of the Georgia legislature acting in the course of its legislative duties. Id.

Background

The Official Code of Georgia Annotated (“OCGA”) includes the text of every Georgia statute currently in force. Public.Resource.Org, 2020 WL 1978707, at *3. At issue in this case is a set of annotations that appear beneath each statutory provision, which includes summaries of judicial decisions applying a given provision, pertinent opinions of the state attorney general, a list of related law review articles and similar reference materials, and information about the origins of the statutory text. Id.

A state entity established by the Georgia Legislature, called the Code Revision Commission, assembles the OCGA. Id. Pursuant to a work-for-hire agreement with the Commission, Matthew Bender & Co., Inc., a division of the LexisNexis Group, prepared the annotations in the current OCGA in the first instance. Id. at *4.

Public.Resource.Org is a nonprofit organization that aims to facilitate public access to government records and legal materials. Id. Without permission, Public.Resource.Org posted a digital version of the OCGA on various websites and distributed copies of the OCGA to a number of organizations and Georgia officials. Id.

The Commission sued Public.Resource.Org on behalf of the Georgia Legislature and the State of Georgia for infringement of its copyright in the annotations. Id. Georgia did not contend that its state laws were subject to copyright protection. Public.Resource.Org counterclaimed, seeking a declaratory judgment that the entire OCGA, including the annotations, fell in the public domain. Id.

The District Court sided with the Commission but the Eleventh Circuit reversed. In a 5-4 decision, with two dissenting opinions, the Supreme Court affirmed the Eleventh Circuit, albeit for reasons distinct from those relied on by the Court of Appeals. The Supreme Court held that the annotations in Georgia’s Official Code are ineligible for copyright protection.

The Government Edicts Doctrine

This case is the Supreme Court’s most detailed discussion of the so-called “government edicts” doctrine in more than a century. The government edicts doctrine is a judicially created exception to copyright protection that originated in a trio of cases decided in the 19th century: Wheaton v. Peters, 33 U.S. 591 (1834); Banks v. Manchester, 128 U.S. 244 (1888); and Callaghan v. Myers, 128 U.S. 617 (1888). These cases, addressing works reporting court decisions, held that there can be no copyright in the opinions of the judges or in “whatever work they perform in their capacity as judges,” Banks, 128 U.S. at 253, but that the reporter had a copyright interest in the explanatory materials that the reporter had created himself, Callaghan, 128 U.S. at 647.

Georgia urged the Court to read these precedents as limiting the government edicts doctrine to government edicts “having the force of law,” such as state statutes, but not to works lacking the force of law, such as the annotations in the Official Code of Georgia Annotated. See, e.g., Brief for Petitioner at (I), Georgia v. Public.Resource.Org, Inc., 590 U.S. ___ (2020) (No. 18-1150), 2019 WL 4075096, at *I. Public.Resource.Org offered an alternative approach, arguing that the Court’s precedents do not limit the government edicts doctrine to works that have binding legal effect; rather, the legal materials prepared by state court judges were not copyrightable—not because they had the force of law, but because they lacked an “author” for copyright purposes. Brief of Respondent at 27, Georgia v. Public.Resource.Org, Inc., 590 U.S. ___ (2020) (No. 18‑1150), 2019 WL 5188978, at *27.

The Court opted for Public.Resource.Org’s “authorship” approach. According to Chief Justice Roberts, writing for the majority, the Court’s “government edicts precedents reveal a straightforward rule based on the identity of the author.” Public.Resource.Org, 2020 WL 1978707, at *5. “Because judges are vested with the authority to make and interpret the law, they cannot be the ‘author’ of the works they prepare ‘in the discharge of their judicial duties.’” Id. at *6 (citing Banks, 128 U.S. at 253). Similarly, legislators cannot be “authors” of the works they prepare in their capacity as legislators. Id. This rule, however, does not apply to “works created by government officials (or private parties) who lack the authority to make or interpret the law, such as court reporters.” Id. (citing Banks, 128 U.S. at 253; Callaghan, 128 U.S. at 647). This rule based on the identity of the author, the Court explained, “applies regardless of whether a given material carries the force of law,” id. at *5 (emphasis added): “appl[ying] both to binding works (such as opinions) and to non-binding works (such as headnotes and syllabi),” id. at *6.

Thus, the Court concluded, “copyright does not vest in works that are (1) created by judges and legislators (2) in the course of their judicial and legislative duties.” Id. at *6.

Justice Thomas, in dissent, joined by Justice Alito and by Justice Breyer, would have followed Georgia’s “force of law” approach. The trio of cases, Justice Thomas wrote, establishes that “statutes and regulations cannot be copyrighted, but accompanying notes lacking legal force can be.” Id. at *13.

Georgia’s Annotations Are Not Subject To Copyright Protection

For its purposes, the Court identified the technical “author” of the annotations as Georgia’s Code Revision Commission. The Commission was the technical author even though the work was prepared in the first instance by a private company (Lexis) because Lexis did the work pursuant to a work-for-hire agreement providing that the Commission would be the sole “author” of the annotations. Public.Resource.Org, 2020 WL 1978707, at *7. The parties did not dispute this point. Id.; see also id. at *15 n.3 (Thomas, J., dissenting).

Then, applying its two-part “authorship” framework, the Court held that Georgia’s annotations are not subject to copyright protection because (1) the technical author of the annotations, Georgia’s Code Revision Commission, qualifies as a legislator for the purposes of the analysis because it functions as an arm of the Georgia Legislature; and (2) the annotations were created in the discharge of the Legislature’s legislative duties. Id. at *7.

1. The Court first determined that, for the purpose of preparing and publishing the annotations, the Commission functions as an arm of the Georgia Legislature. Id. Citing a number of factors, the Court concluded that the Commission is an arm of the legislature because:

The Commission is created by the legislature, for the legislature;
The Commission consists largely of legislators;
The Commission receives funding and staff designated by law for the legislative branch; and
“Significantly,” the legislature approves the Commission’s annotations before they are “merged” with the statutory text and published in the official code alongside that text at the legislature’s direction. Id.

Justice Thomas maintained that this “test for ascertaining the true nature of these commissions raises far more questions than it answers.” Id. at *13. Although the majority lists a number of factors, Thomas noted, “it does not specify whether these factors are exhaustive or illustrative” nor does it “specify whether some factors weigh more heavily than others when deciding whether to deem an oversight body a legislative adjunct.” Id.

Interestingly, although sovereign immunity is not mentioned anywhere in the Justices’ opinions, the majority’s test for determining whether the Commission functions as an arm of the Georgia Legislature resembles the fact-intensive, multifactor inquiry the Court performs when deciding whether a state instrumentality may invoke the State’s immunity under the Eleventh Amendment. See, e.g., Hess v. Port Authority Trans–Hudson Corporation, 513 U.S. 30, 47–51 (1994); Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391, 401–02 (1979). In the arm-of-the-state context, the Court examines the relationship between the state and the entity in question and may look to the “nature of the entity created by state law” to determine whether it should “be treated as an arm of the State.” Regents of the Univ. of California v. Doe, 519 U.S. 425, 429–30 (1997) (citing Mt. Healthy City Bd. of Ed. v. Doyle, 429 U.S. 274, 280 (1977)); see also Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 311–12 (1990) (Brennan, J., concurring) (“immunity applies . . . where the entity being sued is so intricately intertwined with the State that it can best be understood as an ‘arm of the State’”). For example, in Auer v. Robbins, the Court considered whether the state (1) was responsible for the appointment of the board’s members, (2) was responsible for the board’s financial liabilities, or (3) directed or controlled the board in any other respect. 519 U.S. 452, 456 n.1 (1997).

2. The Court next concluded that the Commission created the annotations in the discharge of its legislative duties. Public.Resource.Org, 2020 WL 1978707, at *7. Although the legislature does not enact the annotations into law through bicameralism and presentment, the annotations provide commentary and resources that the legislature has deemed relevant to understanding its laws and fall within the work legislators perform in their capacity as legislators. Id.

Justice Ginsburg, with whom Justice Breyer also joined, disagreed. Justice Ginsburg would have held the annotations copyrightable because, in her view, the Commission did not create them in its legislative capacity for three reasons. Id. at *19. First, because the annotations comment on statutes already enacted, annotating begins only after lawmaking ends. Id. Second, the annotations do not state the legislature’s perception of what a law conveys; rather, they summarize the views of others on a given statute. Id. at *20. Third, the annotations serve as a reference to the public, not the legislature—they do not aid the legislature, for example, in determining whether to amend existing law. Id.

The Broader Implications Of The Majority And Dissenting Opinions

Given the infrequency with which the government edicts doctrine appears in copyright litigation, the Court’s decision may be most remarkable for the unusual lineups that it produced in the majority and dissenting opinions. Analyzing the reasons for those divisions may reveal clues about the individual Justices’ judicial philosophies.

In writing for the Court, Chief Justice Roberts expressed concern with creating the appearance of “first-class” and “economy-class” access to public laws, which could reflect his institutional responsibilities as Chief Justice of the United States (which include presiding over the Judicial Conference and chairing the Board of the Federal Judicial Center). The Chief Justice observed that the “animating principle” behind the common-law limit on copyright protection “is that no one can own the law.” Public.Resource.Org, 2020 WL 1978707, at *6. “Every citizen,” the Chief Justice continued, “is presumed to know the law, and it needs no argument to show that all should have free access to its contents.” Id. (citing Nash v. Lathrop, 142 Mass. 29, 35 (1886)) (internal quotation marks and alterations omitted). The Chief Justice asked readers to “[i]magine a Georgia citizen interested in learning his legal rights and duties.” Id. at *10. If he or she were limited to the “economy-class version of the Georgia Code,” he or she would have no idea that the Georgia Supreme Court has held important aspects of certain laws unconstitutional. Id. By comparison, the Chief Justice noted that “first-class readers with access to the annotations will be assured that these laws are, in crucial respects, unenforceable relics.” Id. He added that the decision follows a “clear path forward that avoids these concerns.” Id. at *11.

In contrast, Justice Thomas, joined by Justice Alito, expressed a discomfort with judicial policymaking and “meddling.” Id. at *18. For Justice Thomas, “[a]n unwillingness to examine the root of a precedent has led to the sprouting of many noxious weeds that distort the meaning of the Constitution and statutes alike.” Id. at *14. Only after disputing the majority’s extension of the Court’s 19th century precedents did Justice Thomas address the “text of the Copyright Act,” concluding that it “supports” the dissenters’ reading of the precedents.

The bright-line nature of the majority’s “straightforward” authorship rule may help to explain why Justices Gorsuch and Kavanaugh joined with Chief Justice Roberts in this holding. As the dissent warned, however, that the rule could be challenging to apply in practice. To determine whether a state body is part of a legislature and discharging its official duties, courts must survey state law to identify factors that either point toward or away such a conclusion. See id. at *7–8. As Justice Thomas noted in his dissent, the courts apparently have discretion to decide what factors are relevant. Id. at *13. The result may be a patchwork of copyright protection for states’ annotated codes, depending on the particulars of each state’s statutory scheme.

Conclusion

As result of the Court’s decision, state legislatures and publishers trying to enforce copyrights in legal annotations may face increasing scrutiny based on whether their publications were issued by a legislative body discharging an official function. As a result, we may see more state legislatures taking action to restructure the way they create their code annotations and rethink whom they enlist to create them. For example, more publishers may compile annotations independently of the legislature (as some states already do). This, as Justice Thomas predicts, could result in an increase in the cost of annotations and further exacerbate the divide between “first-class” and “economy-class” access to public laws that Chief Justice Roberts worked to avoid. Finally, if Congress is dissatisfied with the government edicts doctrine, Congress may respond to the Court’s invitation to change the meaning of “author.” Of course, predicting whether and on what schedule Congress may act is always difficult, and particularly so under current circumstances.

More broadly, the Court’s decision hints at philosophical disputes over the role of precedent and judicial policymaking, statutory construction, and even immunity and governmental function analysis. It will be interesting to see how the Justices use this decision in future cases implicating those issues.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the following authors:

Jessica A. Hudak – Orange County, CA (+1 949.451.3837, [email protected])
Lucas C. Townsend – Washington, D.C. (+1 202.887.3731, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202.887.3640,[email protected])

Please also feel free to contact the following practice leaders:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202.887.3667, [email protected])

Intellectual Property Group:
Wayne Barsky – Los Angeles (+1 310.552.8500, [email protected])
Josh Krevitt – New York (+1 212.351.4000, [email protected])
Mark Reiter – Dallas (+1 214.698.3100,[email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In spite of these disruptions to the industry, significant developments in the regulation and operation of sports betting have occurred in several states since the pandemic emerged. On May 1, 2020, online sports betting was launched in Colorado, with four online sportsbooks going live on the first day in a state that is anticipated to be a competitive market for sports betting operators. From the end of March 2020 to date, new legislation or regulations authorizing and governing sports betting have been enacted or adopted in each of Virginia, Tennessee and Washington. Likewise, in response to the widespread shutdown of live sports around the world, regulators in the established sports betting markets in New Jersey and Nevada have approved expanded offerings by online sports betting operators.

Overview of the Pre-COVID-19 Sports Betting Landscape in the United States

In 2018, the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act in Murphy v. National Collegiate Athletic Association, et al, 138 S.Ct. 1461 (2018), ending the federal ban on sports betting.[1] Following the Murphy decision, regulation of sports betting was placed in the hands of each state, which has caused a patchwork of state legislation and case law governing sports betting to emerge over the past two years. The federal Interstate Wire Act of 1961 further complicates this state-by-state legal landscape, as it prohibits the transmission of sports bets or wagers through interstate commerce. As a result, online and mobile sports betting operations (where legalized) currently require the bettor to be geographically located in the same state as the sportsbook operator accepting bets.

By the end of 2019, sports betting had gone live, in one form or another, in 16 states. State regulatory schemes governing sports betting have varied widely, with some states expressly authorizing online or mobile betting, and others limiting wagering to certain brick-and-mortar locations. Of the states where online or mobile sports betting has been legalized, many have limited the number of licenses available to operate online or mobile brands (so-called “skins”), including by linking skins to brick-and-mortar casinos, triggering a wave of joint ventures, strategic partnerships and market access agreements between such casinos and platform developers. Other emerging issues facing gaming operators include the use of official sports league data, integrity fees, player protections, and the costs imposed by evolving, and at times ambiguous, laws and regulations applicable to sports betting.

Colorado: Online Sports Betting Goes Live

In spite of the widespread shutdown of live sports in the United States and around the world, four online sportsbooks launched operations in Colorado on May 1, the first day on which operators were eligible to begin sports betting operations in the state. Two additional online sportsbook operators had received clearance to begin operations in Colorado on May 1, according to a statement from Dan Hartman, director of the Colorado Division of Gaming, although they did not launch on the first day of eligibility. Betting on a wide variety of esports competitions may be offered by operators in Colorado, so long as such competitions are sanctioned by a sports governing (or equivalent) body.

The first step towards legalizing sports betting in Colorado came in May 2019 through adoption of legislation authorizing a voter referendum to permit sports betting at Colorado’s 33 brick-and-mortar casinos, as well as statewide mobile and online betting. A narrow majority of Colorado voters in the November 2019 elections voted in favor of a proposition that authorized and regulated land-based and mobile sports betting (other than NCAA sports, which is being reviewed by state regulators).

The Colorado Limited Gaming Control Commission and the Colorado Division of Gaming worked quickly to meet their mandate to authorize operators to launch mobile betting platforms by May 1, despite the myriad challenges imposed by the COVID-19 pandemic. Aiding in the launch of mobile and online betting operations amid the pandemic were the rules governing participant registration, which permit players to register remotely, without an express requirement to enter a brick-and-mortar location to establish identity, which has been an impediment in other jurisdictions. Although land-based casinos in Colorado remain closed in light of the pandemic, sports betting at these brick-and-mortar locations will be legal and regulated when launched.

Colorado is widely anticipated to be a competitive market for mobile and online sports betting. State regulatory authorities have made 33 skins available, linked with the state’s 33 brick-and-mortar casinos. Of these 33 skins, industry tracking reports indicate that 17 have been accounted for (including the four platforms that launched operations on May 1), with numerous out-of-state sportsbook operators entering into joint ventures, strategic partnerships, and market access agreements with in-state casinos to date.

Virginia: Sports Betting Legalized in Sweeping Gaming Legislation

Virginia’s state legislature initially passed bills legalizing both casino gaming and online sports betting in March 2020. After Governor Ralph Northam proposed amendments to this legislation, which amendments were ultimately accepted by both houses of the state legislature, House Bill 896 (legalizing and regulating online sports betting) and Senate Bill 36 (authorizing up to five casino licenses, subject to local voter approval in November) became law on April 22, 2020. House Bill 896 authorizes up to 12 operators to obtain licenses to operate online-only betting on professional and collegiate sports (excluding proposition bets on collegiate sports and bets on Virginia college sports), with preferred consideration for each of the five operators that are ultimately selected to operate brick-and-mortar casinos in the state. Regulation of betting on virtual events and esports in Virginia remains to be decided.

Tennessee: Sports Betting Regulations Adopted

On April 15, 2020, a new set of regulations was adopted by the Tennessee Education Lottery Board, the state agency tasked with regulating sports wagering, which regulations will govern sports betting when it becomes operational in Tennessee, which is projected to occur by the end of 2020. The regulations provide for an open licensing system based on a European-style model, with an unlimited number of online and mobile wagering licenses available for operators. When operational, mobile and online platforms will be able to offer bets on professional, collegiate (other than proposition bets) and most Olympic sports. The regulations do not cover betting on virtual events or esports.

Washington: Sports Betting Legalized at Tribal Casinos

On March 26, 2020, Governor Jay Inslee signed into law House Bill 2638, authorizing and regulating sports betting exclusively on tribal lands in Washington. The law, which contained an “emergency clause” limiting voters’ ability to block it through a referendum, permits betting on all professional and college sports (other than college teams based in Washington), to the extent offered on tribal lands pursuant to gaming compacts with the state that include sports betting. There are currently 29 tribal casinos that are eligible to renegotiate their state gaming compacts in order to host retail sportsbook and on-site mobile sports betting under the new law.

New Jersey: New Bets Approved Amid Widespread Live Sports Shutdown

Amid the COVID-19-driven shutdown of live sporting events in North America, Western Europe, and Asia, New Jersey’s Division of Gaming Enforcement (“DGE”) expanded its official list of approved wagering events at the end of March 2020, allowing online sportsbooks in the state to offer betting, in some cases for a temporary initial period, on sporting events that have not historically drawn interest in the U.S. sports betting marketplace. Table tennis, Swedish handball, Nicaraguan and Algerian Soccer, and Turkish volleyball were among the approved new offerings. Regulations in New Jersey already permit betting on certain limited esports events (for instance, the DGE permitted betting on the 2019 League of Legends championship), and state legislators are considering a bill that would significantly expand esports betting, allowing betting on any esports event not involving high schools or a majority of contestants under the age of 18.

Nevada: Esports Betting Approvals Increased in Light of Live Sports Shutdown

The Nevada Gaming Control Board (the “NGCB”) has significantly increased approvals for operators to offer esports betting since late March 2020, including approving betting on multiple League of Legends tournaments, the 2020 Overwatch League, and an eNASCAR series. Unlike for live sports, the NGCB requires event-specific approvals for betting on esports contests, and approval is contingent upon specific integrity criteria. Prior to March 2020, the NGCB had only approved betting on three major esports tournaments (in 2016 and 2017).

Until brick-and-mortar gaming operations in Nevada are reopened, however, the expanded esports offerings for online and mobile sports betting participants will benefit only those players whose accounts have previously been verified in accordance with state regulations. Although online and mobile sports betting participants may register their accounts remotely in Nevada, they must verify their identities in person at the sportsbook operator’s physical location before being eligible to place bets. As a result, unverified participants will not be able to participate in the expanded esports betting options in Nevada until such time as land-based casino operations resume.

The Road Ahead

Although the COVID-19 pandemic has resulted in the shutdown of many live sporting events around the world and almost all brick-and-mortar casino operations in the United States, state-level regulations governing sports betting have continued to expand and develop during the pendency of the crisis, and online operations have launched in a state that is expected to grow into a major market. These developments evidence confidence on the part of legislators, regulators and operators that the sports betting market in the United States will continue to grow at a significant pace when the crisis subsides. Although executives of major sportsbook operators have expressed skepticism that betting on more obscure sporting events, as we have seen in New Jersey, will continue in a post-COVID world, the momentum that has developed behind esports betting in certain markets during the pandemic may endure even after betting on the more traditional live sporting events returns.

____________________

[1] Gibson, Dunn & Crutcher LLP represented the State of New Jersey in this historic victory.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors in Gibson Dunn’s Betting and Gaming practice group.

Authors: Kevin Masuda, Sarah Graham and Maya Hoard

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Antitrust authorities in the U.S. and Europe have increasingly emphasized the importance of policing competition in innovation-driven health care markets, including pharmaceuticals, biologics, medical devices, and biotech. During and after the COVID-19 crisis, companies can expect greater demands on industry participants to collaborate, as governments and companies all work to develop innovative treatments and products. In addition, in recent years antitrust enforcers have been reviewing mergers and conduct throughout the industry through new analytical frameworks, and have issued new guidelines, which may have both short-term and long-term ramifications for business practices and transactions. We also can expect continued enforcement attention to perceived high drug costs. M&A transactions, litigation, and government enforcement are impacted and will continue to be impacted by these trends.

Drawing on their experiences in recent cases and their enforcement backgrounds, Gibson Dunn lawyers will discuss how to navigate these new and evolving approaches to antitrust enforcement and litigation.

The panel also will discuss how pharmaceutical, medical device, biologic and biotech companies can engage effectively with enforcers, while practically managing antitrust risk in this challenging environment.

View Slides (PDF)

PANELISTS:

Adam J. Di Vincenzo is a partner in the Washington, D.C. office of Gibson Dunn. Mr. Di Vincenzo’s practice encompasses a wide range of antitrust litigation and merger investigations. He has represented numerous clients before antitrust enforcement authorities in the United States (including the DOJ and FTC), European Union, and other jurisdictions in connection with mergers, acquisitions, joint ventures, conduct, and intellectual property issues. His recent matters include merger-related FTC investigations involving the pharmaceuticals, biotech, and medical device industries, including his representation of Spark Therapeutics in its $4.3 billion acquisition by Roche. He has been recognized as a leading antitrust and competition lawyer by Who’s Who Legal: Competition, Legal 500, Global Competition Review, and Law360.

Richard Parker is a partner in the Washington, D.C. office of Gibson Dunn and a member of the firm’s Antitrust and Competition Practice Group. Mr. Parker is a leading antitrust lawyer who has successfully represented clients before both enforcement agencies and the courts. As an experienced antitrust trial and regulatory lawyer, Mr. Parker has been involved in many major antitrust representations, including merger clearance cases, cartel matters, class actions, and government civil investigations. He has extensive experience representing clients in matters before the Federal Trade Commission (FTC) and the U.S. Department of Justice Antitrust Division. His experience in high-profile merger trials has earned him high honors, including being recognized by Chambers USA as a first-tier ranked “Leading Lawyer” in Antitrust, and included on Benchmark Litigation’s “Top 100 Trial Lawyers in America” list. From 1998 to 2001, Mr. Parker served as the Senior Deputy Director and then as Director of the Bureau of Competition of the U.S. Federal Trade Commission.

Eric J. Stock is a partner in the New York office of Gibson Dunn where his practice focuses on antitrust litigation and investigations, especially for clients in the pharmaceutical, health care, and financial services industries. He has particular experience advising pharmaceutical companies accused of monopolization or anticompetitive transactions, especially in matters that involve the intersection of the antitrust and intellectual property laws. Mr. Stock currently is defending several pharmaceutical companies in matters involving alleged “reverse payment” patent settlements, alleged “sham” citizen petitions or patent lawsuits, or the use of bundled discounts. In these matters, Mr. Stock frequently is responsible for coordinating the client’s response to these legal issues across multiple proceedings and jurisdictions, including state and/or federal investigations, class actions, and other customer or competitor lawsuits. From 2013-2016, Mr. Stock was the Chief of the Antitrust Bureau at the New York Attorney General’s Office.

Deirdre Taylor is a partner and English qualified solicitor in the London office of Gibson Dunn. Ms. Taylor’s practice encompasses the full range of antitrust issues, including cartel investigations, merger control, and abuse of dominance. Ms. Taylor has provided antitrust advice to clients across a number of industries, including telecommunications, aviation, financial services, oil and gas, engineering, retail, pharmaceutical, and manufacturing. Her recent merger experience in the pharmaceuticals, biotech, and medical device industries includes representation of Spark Therapeutics before the UK competition authority in relation to its acquisition by Roche. Ms. Taylor is assistant editor of “Faull & Nikpay: The EC Law of Competition,” one of the leading practitioner texts in the antitrust and competition law field.

MCLE INFORMATION:

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

GLOBAL OVERVIEW

Managing Regulatory and Legal Risk in UK Financial Services During the COVID-19 Pandemic – May 13, 2020 Webcast

Join a panel of Gibson Dunn London lawyers, led by partner Michelle Kirschner, in a discussion of ways for UK financial services business to manage legal and regulatory risks during the COVID-19 pandemic. The panel will cover discussions of expectations relating to communications with regulators; areas of likely focus from regulators; expectations regarding communication/engagement with clients; focus on senior management accountability; cultural considerations; and managing people and risks while working remotely and the return to the offices.
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COVID-19 United Kingdom Weekly Bulletin – May 6, 2020

This weekly bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in a variety of key areas, including Competition and Consumers; Corporate Governance (including accounts, disclosure and reporting obligations); Cybersecurity and Data Protection; Disputes; Employment; Energy; Finance; Financial Services Regulatory; Force Majeure; Government Support Schemes; Insolvency; International Trade Agreements (private and public); Lockdown and Public Law issues; M&A and Private Equity; Real Estate; and UK Tax.

This edition of Gibson Dunn’s Federal Circuit Update summarizes the three Supreme Court decisions in cases originating in the Federal Circuit decided in April and key filings for certiorari review. We address the court’s proposed amendment to the Federal Circuit Rules of Practice, announced last month, and observed changes in its Rule 36 disposition practice during the pandemic. And we discuss the Federal Circuit’s denial of the petitions for rehearing of Arthrex, Inc. v. Smith & Nephew, Inc., No. 18-2140, and other recent Federal Circuit decisions concerning assignor estoppel, § 101 in Rule 50 motions, prevailing parties, and the Patent Office’s § 101 Official Guidance.

Federal Circuit News

Supreme Court:

In April, the Supreme Court decided three cases originating in the Federal Circuit:

Thryv, Inc., fka Dex Media, Inc. v. Click-To-Call Techs., LP, No. 18-916: As we summarized in our alert, on April 20, 2020, the Supreme Court held 7-2 that the Patent Trial and Appeal Board’s decision whether a petition for inter partes review is time-barred is not judicially reviewable. On April 27, 2020, the Court also granted the petitions for writs of certiorari in Superior Communications, Inc. v. Voltstar Technologies, Inc., No. 18-1027, and Atlanta Gas Light Company v. Bennett Regulator Guards, Inc., No. 18-999. The Court vacated the judgments and remanded the cases for further consideration in light of Thryv.

Romag Fasteners Inc. v. Fossil Inc., No. 18-1233: On April 23, 2020, the Supreme Court unanimously held that under the Lanham Act, proof of willful trademark infringement is not a precondition to a mark holder’s recovery of the infringer’s profits. Read more in our alert.

Maine Community Health Options v. United States, No. 18-1028: As we summarized in our alert, on April 27, 2020, the Supreme Court held 8-1 that Congress failed to effectively repeal the government’s obligation to make more than $12 billion in payments to insurers under the Patient Protection and Affordable Care Act risk corridors program, and insurers may sue to recover the missed payments.

Currently, the only Federal Circuit case still pending at the Court is Google LLC v. Oracle America, Inc., No. 18-956. On April 13, 2020, the Court rescheduled argument for the October Term 2020; and on May 4, 2020, the Court ordered supplemental briefing on one of the two questions presented. Gibson Dunn partners Mark Perry and Blaine Evanson serve as counsel for Amicus Curiae Rimini Street, Inc. supporting reversal.

Noteworthy Petitions for a Writ of Certiorari:

The Supreme Court is currently considering certiorari in a number of potentially impactful cases.

Emerson Electric Co. v. SIPCO, LLC, No. 19-966: “Whether 35 U.S.C. 324(e) permits review on appeal of the Director’s threshold determination, as part of the decision to institute [Covered Business Method] review, that the challenged patent qualifies as a CBM patent.” On March 19, 2020, the Supreme Court invited a response from SIPCO.

Comcast Corp. v. International Trade Commission, No. 19-1173: (1) “Whether the Federal Circuit’s judgment should be vacated as moot and remanded with instructions to vacate the Commission’s orders, pursuant to United States v. Munsingwear, Inc., 340 U.S. 36 (1950)”; (2) “If the case is not moot, whether the Commission exceeded its authority under 19 U.S.C. § 1337(a)(1)(B), by holding that the set-top boxes are ‘articles that * * * infringe.’”; (3) “If the case is not moot, whether the Commission exceeded its authority under 19 U.S.C. § 1337(a)(1)(B) by finding that Comcast engaged in ‘importation’ of the allegedly infringing articles.”

Willowood, LLC v. Syngenta Crop Protection, LLC, No. 19-1147: (1) “Whether liability for patent infringement under 35 U.S.C. § 271(g) requires that all steps of a patented process must be practiced by, or at least attributable to, a single entity, a requirement that this Court previously recognized is a prerequisite for infringement under 35 U.S.C. § 271(a) and (b) in Limelight Networks, Inc. v. Akamai Technologies, Inc., 572 U.S. 915 (2014)”; (2) “Whether, by requiring EPA to grant expedited review and approval of labels for generic pesticides that are ‘identical or substantially similar’ to the previously approved labels for the same product, Congress intended to preclude claims of copyright infringement with respect to generic pesticide labels.”

Chrimar Systems, Inc. v. Ale USA Inc., No. 19-1124: “Whether the Federal Circuit may apply a finality standard for patent cases that conflicts with the standard applied by this Court and all other circuit courts in nonpatent cases”; (2) “Whether a final judgment of liability and damages that has been affirmed on appeal may be reversed based on the decision of an administrative agency, merely because an appeal having nothing to do with liability, damages or the proper calculation of the ongoing royalty rate is pending.”

Celgene Corp. v. Peter, No. 19-1074: “Whether retroactive application of inter partes review to patents issued before passage of the America Invents Act violates the Takings Clause of the Fifth Amendment.” The petitions pending in Collabo Innovations, Inc. v. Sony Corp., No. 19-601, and Arthrex, Inc. v. Smith & Nephew, Inc. (not that Arthrex), No. 19-1204, present variations on the theme. Gibson Dunn is co-counsel for Smith & Nephew.

Noteworthy Federal Circuit En Banc Petitions:

This month we highlight the Federal Circuit’s denial of rehearing en banc in Arthrex, Inc. v. Smith & Nephew, Inc., No. 18-2140. As we summarized in our November 2019 update and in our November 5, 2019 alert, a panel of the Federal Circuit (Moore, J., joined by Reyna and Chen, JJ.) held that Patent Trial & Appeal Board (PTAB) Administrative Patent Judges (APJs) were improperly appointed principal Officers under the Appointments Clause. To remedy this defect, the Court ruled that the statutory provision of for-cause removal for PTO officials is unconstitutional as applied to APJs, and vacated and remanded the PTAB’s Final Written Decision. The Court further held that, on remand, a new panel of APJs must be designated and a new hearing must be granted. The government and both parties to the underlying IPR petitioned for en banc review. Gibson Dunn partner Mark Perry served as co-counsel for Smith & Nephew.

On March 23, the Court voted 8-4 to deny rehearing en banc, with a concurring opinion from Judge Moore (the author of the panel opinion) and three different dissenting opinions. Judge Dyk’s dissent argued that the panel’s “draconian” remedy was inconsistent with Congressional intent, that the panel’s remedy does not require invalidation of pre-Athrex PTAB decisions, and that the panel’s holding that APJs are principal officers is “open to question.” Judges Newman and Wallach joined Judge Dyk’s dissent in full, and Judge Hughes joined the part relating to the panel’s remedy being inconsistent with Congressional intent. Judge Hughes’s dissent argued that APJs are inferior Officers and that severing removal protections is inconsistent with Congressional intent. Judge Wallach joined Judge Hughes’s dissent in full. Judge Wallach’s dissent further argued that APJs are inferior Officers.

The private parties in Arthrex and in several related cases have indicated their intent to petition the Supreme Court to review both aspects of the Federal Circuit’s decision—i.e., the distinction between principal and inferior Officers, and the appropriate remedy for any Appointments Clause violation. The Solicitor General is also considering whether to seek review on behalf of the United States, which intervened in these cases. On May 1, 2020, the PTAB Chief Judge issued a general order directed to the more than 100 PTAB cases where the final written decisions were vacated and remanded in view of Arthrex. The PTAB ordered all such cases be held “in administrative abeyance until the Supreme Court acts on a petition for certiorari or the time for filing such petitions expires.”

Other Federal Circuit News:

The COVID-19 pandemic has caused a number of scheduling and other changes at the Federal Circuit. For instance, the Federal Circuit submitted a number of cases on the briefs rather than holding oral argument for both the April and May court weeks, and held oral arguments over the phone in cases that received oral argument. This marked a significant change from the court’s normal practice, which typically involves oral argument for most patent appeals in which parties are represented by counsel.

The court’s change to resolving more cases on the briefs also has impacted the use of Rule 36 affirmances, which has drawn attention in recent years from some court watchers. The court’s informal policy regarding Rule 36 has been to use it only in cases that receive oral argument—nearly all cases submitted on the briefs receive a written opinion. Because the court submitted more cases on the briefs in April, the court’s use of Rule 36 affirmances dropped. The court issued only five Rule 36 affirmances for cases calendared in April, and all five cases had received oral argument (one other Rule 36 affirmance issued in April came from an earlier month and was issued concurrently with an opinion in a related case). By way of comparison, the court’s opinion page shows that the court issued 30 Rule 36 affirmances in March, 15 in February, and 19 in January. As the court continues to submit more cases on the briefs in May due to COVID-19, it will be interesting to see whether the court’s use of Rule 36 continues to decrease and how that affects the court’s practice of issuing opinions in the future.

The court continues to schedule telephonic arguments through June. Aside from not being able to see the judges or counsel, a number of attorneys who engaged in those remote arguments have stated that the court completed the process without any major technical difficulties. The clerk’s office held an orientation for those conducting arguments in advance of their scheduled date. And the Federal Circuit Bar Association is hosting a webcast, led by Gibson Dunn partner Lucas Townsend, on May 14, 2020, addressing “Perspectives on the Federal Circuit’s Modified Procedures During the COVID-19 Crisis.”

As of Monday, March 23, 2020, the clerk’s office reduced its availability to provide assistance by phone. It is available by email at either [email protected] (for questions about pending cases) or [email protected] (for all other questions).

The annual Federal Circuit Judicial Conference, scheduled for May 15, 2020, has been cancelled. The annual Federal Circuit Bench and Bar Conference, scheduled to occur this summer in Puerto Rico, has been changed to a virtual format that is tentatively scheduled to occur on June 17 or 18, 2020.

Federal Circuit Practice Update

On April 24, 2020, the Federal Circuit gave notice that it proposes to amend several Federal Circuit Rules of Practice and the Federal Circuit Attorney Discipline Rules. If adopted, the amendments would take effect on July 1, 2020. The deadline to submit Public comments—either by email to [email protected] or by mail—is May 27, 2020.

The proposed amendments are extensive, covering 47 amended or new rules. Many of the changes are stylistic, designed to minimize the differences between the Federal Circuit Rules and the Federal Rules of Appellate Procedures. These stylistic changes include, for example, changes to the format of enumerated lists, when numbers are spelled out, and how parties should refer to the opening brief (i.e., the “principal” brief).

One of the most substantive changes is the proposed addition of new Federal Circuit Rule 25.1, which, if adopted, would consolidate all privacy and confidentiality rules into a single rule. The rule would govern both logistical information (including who can view the confidential information and procedures for making it public), as well as substantive information (such as the definition of personally identifiable information and the status of protective orders on appeal). The new rule continues to restrict the parties to only marking up to 15 unique words or numbers as confidential in any one brief, petition, motion, response, or reply. The 15-word limit rule would not apply to appendices, exhibits, or similar attachments. The new rule would also govern the format of confidential filings. For example, the court has proposed requiring parties to provide an “adequate, general descriptor of the material . . . over the deletion or redaction” in filings that contain redacted information. Based on the language of the rule, it seems likely that this new requirement would apply to appendices as well as briefs and other filings, but some commentators have stated that this question remains unanswered.

There are other notable proposed changes. Federal Circuit Rule 21 would be amended to add a provision governing the treatment of amicus briefs filed in support of writ petitions, requiring that they be filed, along with a motion for leave to file, no later than four days after the petition is docketed. Rule 25 would be amended to no longer require the filing of courtesy paper copies of documents except in specifically enumerated circumstances. That rule would also be amended to prohibit serving confidential information through the court’s electronic filing system; instead, the party would be required to serve the confidential information via paper, absent agreement by the parties. Rule 28 would be amended to change the required contents of the opening brief, including modification to the jurisdictional statement and the contents of the addendum. Amended Rule 28 also requires parties filing briefs in related cases to “advise the court at the beginning of the brief section” if the briefs contain the duplicative content. The amendments to the Rule 28.1 practice notes concerning cross-appeals seek to limit argument on the appeal issues in the third and fourth briefs to the length permitted if there were no cross-appeal. Finally, Rule 34 would be amended to limit the number of counsel who may argue on behalf of each side and on behalf of each party.

Many of the other proposed amendments are ministerial and would not substantively impact an appeal to the Federal Circuit. The full notice and a summary of proposed amendments, a redlined copy of the proposed amendments, and a clean copy of the proposed amendments are available for public review on the court’s website.

Key Case Summaries (February 2020–April 2020)

Hologic, Inc. v. Minerva Surgical, Inc., Nos. 19-2054, 19-2081 (Fed. Cir. Apr. 22, 2020): Assignor estoppel bars an assignor from later challenging the validity of the assigned patent in district court, but not in an inter partes review (IPR).

The two asserted patents relate to procedures and devices in endometrial ablation. Inventor, Mr. Truckai, assigned his interest in the patents to Hologic. Mr. Truckai left NovaCept (now Hologic) and founded Minerva, the accused infringer in the case. Hologic moved for summary judgment before the district court arguing that the doctrine of assignor estoppel, which bars an assignor from later challenging the validity of an assigned patent, barred Minerva from challenging the validity of the two patents. The district court granted the motion and entered judgment that the patents were not invalid. The district court also granted summary judgment of infringement. In parallel, Minerva filed an IPR challenging one of the asserted patents and the Board rendered a decision concluding that the patent was invalid as obvious.

The Federal Circuit panel (Stoll, J., joined by Wallach and Clevenger, JJ.) affirmed-in-part, vacated-in-part, and remanded. Following Federal Circuit precedent, the panel held that the doctrine of assignor estoppel did not bar Minerva from relying on the Board’s decision that one of the patents was invalid, because the doctrine of assignor estoppel did not apply to IPRs. As a result, Hologic was not entitled to monetary or injunctive relief on that patent. As to the second patent, the panel concluded that the district court did not abuse its discretion in applying assignor estoppel. The panel agreed that Minerva was in privity with the original assignor (Mr. Truckai), and the fact that the patent issued from a continuation application Hologic filed after Mr. Truckai had left NoveCept and founded Minerva did not change the result. The panel reasoned that although Minerva was estopped from raising invalidity defenses, especially against claims resulting from a continuation application filed after the original assignor was no longer associated with the assignee, it was not estopped from successfully defending against infringement, where it could still introduce prior art as evidence to narrow the scope of the claims.

Judge Stoll also filed additional views to point out the odd situation that arose in this case where an assignor who could not challenge the invalidity of a patent in district court due to assignor estoppel could circumvent this prohibition by challenging the patent in an IPR. She suggested that it was time for the court to reconsider en banc whether the application of doctrine of assignor estoppel in district court should change or whether the court needed to revisit its interpretation of the AIA to prevent these “odd circumstances” from happening.

Ericsson Inc. v. TCL Communication Technology, No. 18-2003 (Fed. Cir. April 14, 2020): Failure to raise § 101 in Rule 50 motion did not waive issue where district court’s denial of summary judgment was effectively a grant of eligibility; claims directed to controlling access are abstract.

At the district court, TCL moved for summary judgment that the asserted claims were ineligible under § 101. The district court denied the motion and held that the claims were not directed to an abstract idea. A jury ultimately found that TCL infringed the asserted claims. TCL did not raise any § 101 arguments in its Rule 50 motions.

The Federal Circuit panel majority (Prost, C.J., joined by Chen, J.) vacated-in-part and reversed, determining that the asserted claims were ineligible under § 101. The majority reasoned that TCL did not waive the issue of eligibility because the district court’s summary judgment denial was not based on any factual issues that could have been presented at trial. Rather, the district court’s denial was based on its belief that the asserted claims were not directed to an abstract idea. Thus, the district court’s decision “effectively entered judgment of eligibility” and that was sufficient to preserve the issue for appeal. Alternatively, the majority reasoned that it could exercise its discretion to hear the issue because none of the goals underlying waiver would be served where the § 101 issue was fully briefed at the district court and on appeal. As to the substantive issue of eligibility, the majority found that the asserted claims, while “written in technical jargon,” were directed to the abstract idea of controlling access or limiting permission to resources. At step two, the majority determined that none of the alleged inventive concepts were recited in the claims.

Judge Newman dissented, arguing that TCL waived the issue of eligibility and that the claims were eligible under § 101.

O.F. Mossberg & Sons, Inc. v. Timney Triggers, LLC, No. 19-1134 (Fed. Cir. April 13, 2020): Prevailing party under § 285 requires a final court decision.

O.F. Mossberg sued Timney for patent infringement. Timney did not answer the lawsuit, and at Timney’s request, the district court stayed the lawsuit while Timney pursued post-grant proceedings at the Patent Office. Ultimately, the Patent Office invalidated the sole asserted patent. In response, O.F. Mossberg filed a notice of voluntary dismissal under Rule 41(a)(1)(A)(i). Timney sought attorney fees but the court denied the motion finding that Timney was not a “prevailing party” under § 285.

The Federal Circuit (Hughes, J., joined by Lourie and Reyna, JJ.) affirmed. The panel reasoned that while a party does not need to win on the merits to be a prevailing party, a party cannot “become a prevailing party without a final court decision.” Since O.F. Mossberg’s voluntary dismissal under Rule 41(a)(1)(A)(i) became effective upon filing, there was not a final court decision. The panel also found that the district court’s decision to allow a stay during the post-grant proceedings did not constitute a final court decision because it “did not change the legal relationship between the parties.”

Dragon Intellectual Property, LLC v. DISH Network LLC, No. 19-1283 (Fed. Cir. April 21, 2020): Prevailing party under § 285 does not require a final court decision awarding “actual relief on the merits.”

Dragon sued DISH Network and others for patent infringement. The lawsuits proceeded in two parallel tracks. As to DISH and Sirius XM, the district court stayed proceedings pending inter partes review. As to the other defendants, the district court proceeded with claim construction. After the district court’s claim construction ruling, all of the defendants, including DISH and Sirius XM, stipulated to noninfringement and the district court entered judgment in their favor. Shortly after, the PTAB determined that all of the asserted claims were unpatentable. DISH and Sirius XM moved for attorney’s fees in the district court under § 285. Before the district court ruled on the motion, Dragon appealed the district court’s noninfringement judgment and the PTAB’s decision. On appeal, the Federal Circuit affirmed the PTAB’s decision and dismissed the district court appeal as moot. On remand, the district court vacated the noninfringement judgment and dismissed the case as moot. The court denied the motion for attorney fees because DISH and Sirius XM were not awarded “actual relief on the merits.”

The Federal Circuit (Moore, J., joined by Lourie and Stoll, JJ.) vacated and remanded. According to the panel, a party can be a prevailing party even if the case is dismissed on procedural grounds. In this case, the panel reasoned that DISH and Sirius XM “successfully rebuffed” Dragon’s patent infringement lawsuit by invalidating the asserted claims before the PTAB. Although the district court vacated the final judgment, the panel determined that in this circumstance, the difference between dismissing a case for mootness and vacating a final judgment did not warrant a different outcome.

In re Christopher John Rudy, No. 19-2301, (Fed. Cir. Apr. 24, 2020): The Federal Circuit is not bound by Official Guidance from the PTO; method claims directed to selecting fish hooks based on water conditions are ineligible.

The patent at issue recited claims directed to methods of selecting colored or colorless quality fishing hooks based on observed water conditions. The Board concluded under the Alice framework and its 2019 Revised Guidance that the methods were directed to an abstract idea.

The Federal Circuit panel (Prost, C.J., joined by O’Malley and Taranto, JJ.) affirmed. As an initial matter, the panel held that the Office Guidance “does not carry the force of the law” and “is not binding in our patent eligibility analysis.” The panel then concluded that the claims at issue were directed to patent-ineligible subject matter.

Argentum Pharmaceuticals LLC v. Novartis Pharmaceuticals Corporation, No. 18-2273, (Fed. Cir. Apr. 23, 2020): Article III jurisdiction is not satisfied when a future ANDA would be filed by appellant’s partner without evidence relating to appellant’s involvement in the ANDA process. Gibson Dunn partners Jane Love and Robert Trenchard served as counsel for Appellee Novartis.

Argentum and multiple other parties joined an IPR filed by Apotex challenging the validity of a patent owned by Novartis. The Board held that the petitioners had failed to demonstrate unpatentability of the challenged claims, and the petitioners appealed. Each petitioner other than Argentum settled with Novartis, leaving Argentum as the only remaining appellant.

The Federal Circuit (Moore, J., joined by Lourie and Reyna, JJ.) dismissed the appeal because Argentum lacked Article III standing. The court rejected Argentum’s argument that it had shown a concrete injury-in-fact based on a real and imminent threat of litigation because a forthcoming ANDA would be filed by Argentum’s “manufacturing and marketing partner,” so Argentum’s partner would face the threat of litigation rather than Argentum. The court concluded that Argentum had failed to provide evidence that it would bear the risk of any infringement suit and had not proffered any other evidence of its involvement in the ANDA process beyond “generic statements.” The court also rejected Argentum’s other arguments because (1) Argentum had failed to demonstrate economic harm it would face based on the generic at issue as opposed to multiple other generics Argentum was developing with its partner and Argentum’s assertions of lost profits harm was “conclusory and speculative”; and (2) future estoppel under 35 U.S.C. § 315(e) is not a sufficient basis for standing.

Upcoming Oral Argument Calendar

For a list of upcoming arguments at the Federal Circuit, please click here.

In May, only about 38% of the court’s scheduled cases are set for telephonic argument, with the court set to decide its remaining cases on the briefs. This is up from April when the court heard argument in only 29% of its scheduled cases. The number of argued cases, however, is still dramatically lower than pre-pandemic numbers. For example, in November 2019, the court heard argument in 83% of its scheduled cases.

Cases of Interest:

The following cases scheduled for argument in May received at least one amicus brief:

Uniloc 2017 LLC v. Hulu, LLC, No. 19-1686 (Arg. May 6, 2020): Whether, in inter partes review, the Board may analyze and determine whether substitute claims submitted by a patent owner in a motion to amend comply with the subject-matter eligibility requirements of § 101.

Sellers v. Wilkie, No. 19-1769 (Arg. May 8, 2020) (Court of Appeals for Veterans Claims).

Hardy v. US, No. 19-1793 (Arg. May 8, 2020) (United States Court of Federal Claims).

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Jessica A. Hudak – Orange County (+1 949-451-3837, [email protected])

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

Intellectual Property Group:
Wayne Barsky – Los Angeles (+1 310-552-8500, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Mark Reiter – Dallas (+1 214-698-3100, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas:

1. Competition and Consumers
2. Corporate Governance (including accounts, disclosure and reporting obligations)
3. Cybersecurity and Data Protection
4. Disputes
5. Employment
6. Energy
7. Finance
8. Financial Services Regulatory
9. Force Majeure
10. Government Support Schemes
11. Insolvency
12. International Trade Agreements (private and public)
13. Lockdown and Public Law issues
14. M&A and Private Equity
15. Real Estate
16. UK Tax

Links to various English law alerts prepared by Gibson Dunn during this period are also included in the relevant sections.

As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the UK COVID-19 Taskforce (listed at the end of this bulletin), or one of the taskforce co-leads:

Charles Falconer – London (+44 (0)20 7071 4270, [email protected])
Anna Howell – London (+44 (0)20 7071 4241, [email protected])

1. COMPETITION AND CONSUMERS

Antitrust

Relaxation of rules in the dairy industry (UK)

On 1 May 2020 a fifth exclusion order was laid before Parliament, this time concerning the dairy industry. The order, which came into force on the following day, applies to agreements between two or more dairy produce suppliers or two or more logistic service providers. The order permits certain specified information sharing activities and certain specified co-ordination/sharing activities for the purpose of: (i) maximising the processing, transport and storage efficiency and the storage capacity of dairy produce and preventing or mitigating the need for the disposal of milk; and (ii) preventing or mitigating the need for the disposal of surplus milk or limiting the environmental impact of any disposal of surplus milk, in each case resulting from disruption in demand caused by a reason relating to coronavirus. Only certain activities are permitted under the order and conditions apply for the order’s application. Further, in no circumstances, does the order permit the sharing of information relating to costs or pricing.

As mentioned in previous briefings, exclusion orders exempt certain types of agreements in specific sectors from competition law. However, they only permit the specified activities and conditions apply. Other orders issued to date have concerned the groceries sector (grocery chain retailers, suppliers and logistics service providers), agreements to assist the NHS in addressing the effects or likely effects of COVID-19 on the provision of health services to patients in England and, separately, Wales and existing ferry transport operators in the Isle of Wight.

Commission adopts package of measures to further support the agri-food sector

On 4 May 2020 the Commission published a package of exceptional measures to support the agricultural and food sectors most affected by coronavirus. The measures include: (i) support for private storage aid for the dairy and meat sectors; (ii) flexibility in the implementation of certain market support programmes and the EU’s school scheme; and (iii) temporary derogations from certain EU competition rules allowing operators to self-organise and implement market measures to stabilise the milk, flower and potatoes sectors, subject to certain conditions. The Commission has stated that it will closely monitor ‘consumer price movements’ and’ any possible partitioning of the internal market’ in order to avoid any negative market effects flowing from this derogation.

Further details can be found here.

Remember whilst some co-operation may be tolerated in the current environment, this is not without limits. Careful assessment is required as to whether a particular co-operation will be tolerated and safeguards must be put in place to ensure that the co-operation goes no further than strictly necessary to deal with critical issues. Companies facing issues with supply or distribution or considering co-operating with competitors should consult with counsel.

Consumer protection

CMA statement on law in relation to cancellations and refunds

On 30 April 2020 the CMA published guidance setting outs its general views on how consumer protection law operates in relation to the area of cancellation and refunds. The CMA has stated that its COVID-19 Taskforce has seen “increasing numbers of complaints in relation to cancellations and refunds, which now account for 4 out of 5 complaints being received”. The CMA has identified three sectors of particular concern in this respect, including: (i) weddings and private events; (ii) holiday accommodation; and (iii) nurseries and childcare providers. It has stated that it will tackle these sectors as a priority and then move on to examine other sectors. In its statement, it also warned businesses that, where it finds evidence that businesses are failing to comply with consumer protection law, it would take “tough enforcement action” to protect consumers’ rights. The CMA has also advised that businesses should not be profiting during these time by recovering their money twice – once from the Government and once from customers.

The CMA’s guidance can be found here

If you need advice on the extent to which your refund and cancellation terms, policies or practices comply with UK consumer laws, or receive an information request from the CMA, our lawyers are on hand to assist.

2. CORPORATE GOVERNANCE (INCLUDING ACCOUNTS, DISCLOSURE AND REPORTING OBLIGATIONS)

No update to our COVID-19 UK Bulletin – 29 April 2020.

3. CYBERSECURITY AND DATA PROTECTION

No update to our COVID-19 UK Bulletin – 29 April 2020.

4. DISPUTES

Courts and tribunals data

HMCTS has updated its published data on the number of remote hearings held since the beginning of the lockdown, indicating that 90% of hearings have been held using audio or video technology in recent weeks.

Civil circuit guidance

The Judiciary has published a civil circuit guidance page gathering guidance and orders issued for different circuits around England.

Operation of the criminal justice system

The Jury Trial Working Group, chaired by Mr Justice Edis and comprised of representatives from across the criminal justice system and legal professions (including the Law Society of England and Wales, Bar Council and Criminal Bar Association), met on 30 April 2020 to progress plans to resume jury trials as soon as appropriate safety arrangements adhering to social distancing are in place. A small number of Crown Courts, identified as potentially suitable due to size or design, are being assessed this week by Public Health England and Public Health Wales.

The final decision to restart jury trials will be made by the Lord Chief Justice—who is in close discussion with the Lord Chancellor—once he is confident that the system as a whole is ready. The Lord Chancellor has previously ruled out judge-only trials, though has indicated that trials with fewer jury members may be a possibility.

HMCTS has announced that it is rolling out its new Cloud Video Platform to criminal hearings, allowing all magistrate and crown courts in England and Wales to hold secure hearings. The technology will not be used for jury trials.

Operation of the civil justice system

The Judiciary announced on 1 May 2020 the Civil Justice Council has commissioned an independent review to gather feedback on the impact of COVID-19 measures on the civil justice system. The review will run for the first two weeks of May, and will concentrate on the experience of court users and offer practical recommendations to inform the ongoing response to COVID-19, with a report due by 22 May 2020.

Feedback from the Bar Council

On 27 April 2020 the Chair of the Bar Council, Amanda Pinto QC, issued an update on the Bar Council’s efforts to support the Bar during the crisis. She expresses a “genuine concern for the delivery of justice and for the sustainability of the profession” prompted by reports that many cases are being adjourned for no apparently good reason, rather than taking place remotely, which should be the default position.

Commercial dispute resolution

Further to our last update, on 27 April 2020 British Institute of International and Comparative Law (BIICL) published a press release to accompany its Concept Note on its “breathing space” project (which was introduced by the former President of the UK Supreme Court, Lord Neuberger, on BBC’s Today programme). The press release quotes former members of the senior judiciary who attended the 7 April meeting hosted by BIICL, including Sir David Edward, a former Judge of the European Court of Justice, who has stated that “the law cannot insist that parties’ contracts must continue as if nothing has happened, or simply declare that frustration has brought them to an end. If commercial life is to go on, a rational and equitable solution must be found.” Echoing the Concept Note, the press release advocates that, as the economy begins to reopen, parties should be encouraged to negotiate rather than to focus on their contractual rights, which are in any event going to be uncertain.

Arbitration hearings

The Stockholm Chamber of Commerce (SCC) announced on 23 April 2020 that it will be offering a version of its SCC Platform (launched in September 2019) to ad hoc arbitrations globally, in a joint pro bono initiative with Thomson Reuters to support the online administration of proceedings during the COVID-19 crisis. The Ad Hoc Platform is a secure digital platform for communications and file sharing between parties and the tribunal, and use and storage of data will be free of charge during the outbreak.

5. EMPLOYMENT

No update to our COVID-19 UK Bulletin – 29 April 2020.

6. ENERGY

Government support packages for the Norwegian and UK Continental Shelf

The Norwegian Government has announced a proposed support package for its oil and gas sector, one of the first packages announced in response to COVID-19 which specifically targets the sector.

The temporary tax relief measures are designed to maintain planned investment in the sector during the COVID-19 pandemic. The measures include an ability to claim immediate tax deductions (rather than over a six year period) for depreciation on investments made in 2020 and 2021 and an ability to receive a cash refund on tax losses in 2020 and 2021.

The Norwegian Government expects the proposals to boost liquidity in the sector by up to £7.7 billion in 2020 and 2021. The proposals will be submitted for parliamentary approval on 12 May 2020. A green restructuring package for business and industry will also be presented towards the end of May.

This temporary shift in the Norwegian tax authorities’ approach to depreciation in the oil and gas sector has certain similarities with the UK’s capital allowances rules for companies in the corporation tax ring fence, which already provide for 100% first year allowances on certain qualifying capital expenditure and decommissioning expenditure, subject to various conditions. For further details please do not hesitate to get in touch with our Tax team (details below).

The Norwegian Government’s announcement comes as Oil & Gas UK (OGUK, the industry body for the UK Continental Shelf) announced that it is working with the Confederation of British Industry (CBI) to develop detailed proposals for an equity-based support package for the UK sector. The scheme would involve banks or private equity firms making convertible loans (backed by the UK Government) to major supply chain companies. Separately, the Offshore Coordinating Group (a coalition of trade unions representing the UK’s offshore oil and gas industry) has proposed convertible loans that would be provided directly by the UK Government.

Energy Industry calls on Government

OGUK has released a report (available here) detailing a three step plan for preserving and developing the energy industry, while continuing to move towards net-zero emissions. As some companies have struggled to access support from the schemes currently in place, the first step is aimed at supporting the industry now through an equity-based finance solution being developed in conjunction with the CBI, mentioned above. The second concerns stimulating the recovery of the sector and OGUK points to the importance of “international competitiveness and attractiveness for investors”. The third step relates to accelerating net zero and notes that OGUK will be releasing industry-wide targets for mapping the journey to net zero in the near future.

Texas regulator drops proposed production cuts

We previously reported that the Railroad Commission of Texas (RRC), the state’s oil and gas regulator, was considering mandating pro-rata production cuts for all Texas producers. After consideration, the Texas RRC has now dropped this proposal.

Impact of COVID-19 on projects

COVID-19 continues to delay projects and create issues on projects and installations. Some specific items of note include:-

Owing to a 46% fall in net income for Q1 2020, Shell will cut its dividend for the first time since World War II, from 47 cents to 16 cents.
UK-based independent EnQuest has warned that it plans to make redundancies in the North Sea. It has begun the consultation period to discuss around 530 potential redundancies.
Workers at Gazprom’s Chayanda gas field onshore Eastern Russian Federation are reported to be protesting the lack of action to tackle the spread of infections.
Cases amongst offshore workers in Singapore have accelerated to 133 confirmed cases.However some projects and companies continue as planned, including Australia-based Santos’s Narrabri coal-seam gas project onshore New South Wales, Australia which is reportedly continuing without any delay.

7. FINANCE

No update to our COVID-19 UK Bulletin – 29 April 2020.

8. FINANCIAL SERVICES REGULATORY

LIBOR transition

The FCA has published a further statement on the impact of COVID-19 on firms’ LIBOR transition plans. Among other things, it confirms that the central assumption remains that firms cannot rely on LIBOR being published after the end of 2021.

9. FORCE MAJEURE

No update to our COVID-19 UK Bulletin – 29 April 2020.

10. GOVERNMENT SUPPORT SCHEMES

Coronavirus Business Interruption Loans Scheme (CBILS)

The CBILS has, in the three weeks to 30 April 2020, approved 25,262 loans for approximately £4.1 billion, from 52,807 applications. In addition and following the changes to CBILs that were announced by the Government (and covered in our COVID-19 UK Bulletin – 22 April 2020), the largest accredited lenders for CBILS have announced they will not require forward-looking financial information and will only ask businesses for information and data they might reasonably be able to provide at speed. This measure is intended to enable lending decisions to be approved more quickly following sustained criticism from businesses on access to the scheme.

Bounce Back Loans Scheme (BBLS)

The Government’s BBLS for small and medium-sized enterprises (SMEs) launched on 4 May 2020 following announcement of the scheme on 27 April 2020. The scheme is intended to support SMEs with loans of between £2,000 and £50,000 with a UK Government guarantee for the entire loan. On 1 May 2020, the Chancellor of the Exchequer also wrote to accredited lenders on the BBLS to specify that the interest rate for BBLS loans should be 2.5% p.a. in order to ensure that the loans are affordable and accessible. The Chancellor’s letter also introduces a number of legislative and regulatory changes that will be made to encourage accredited lenders to advance loans under the BBLS. Finally, the Chancellor’s letter goes on to specify that borrowers that have received loans under the CBILS which would otherwise qualify as loans under the BBLS, are entitled to transfer their loan from the CBILS to BBLS before November 2020, in order to benefit from the fixed rate of interest and the Government’s 100% guarantee of BBLS loans.

PRA statement on regulatory treatment of CBILS and CLBILS loan schemes

On 27 April 2020, the UK Prudential Regulation Authority (PRA) published a statement on the regulatory treatment of CBILS and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), responding to HM Treasury’s changes to these loan schemes.

Particular areas of the statement to flag include:

the PRA’s observations on whether the guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy under the CBILS and CLBILS are eligible for recognition as unfunded credit risk mitigation under the Capital Requirement Regulation (575/2013); and
the PRA’s recognition that it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes. It noted that lenders are expected to use their judgement on what information is required to make credit decisions. They should consider the range of information available to them including, for example, the performance of the business before the COVID-19 outbreak and the overall prospects for the sector in which the business operates once the effects of the pandemic have receded.

FCA statement on regulation of firms regarding CBILS and BBLS

Also on 27 April 2020, the UK Financial Conduct Authority (FCA) published a statement on the CBILS and the new BBLS, outlining its approach to the regulation of firms relating to these loan schemes.

In its statement, the FCA, amongst other things:

recognises the need to make changes to the CBILS scheme immediately. It notes that, as an interim measure, prior to the roll-out of the BBLS, if firms comply with the relevant requirements of the CBILS, the FCA does not expect them to comply with certain FCA rules where the lending is regulated; and
recognises that, currently, the need to manage the risks of fraud and money laundering should be balanced against the need for the fast and efficient release of funds to businesses under the CBILS and BBLS. For existing customers, the FCA considers that where a firm has carried out appropriate customer due diligence before it receives an application under the loan schemes, it does not need to make further checks, unless this has flagged potential issues.

11. INSOLVENCY

No update to our COVID-19 UK Bulletin – 29 April 2020.

12. INTERNATIONAL TRADE AGREEMENTS (PRIVATE AND PUBLIC)

Further to our update of 1 April 2020 on export restrictions on personal protective equipment (PPE), on 23 April 2020 the EU issued amended restrictions (Commission Implementing Regulation (EU) 2020/568) following its issue on 15 March 2020 of Commission Implementing Regulation (EU) 2020/402, which prohibited the export of PPE outside of the EU for an initial six weeks. The latest amendments (i) narrow the scope of products affected by the restriction to masks, spectacles and protective garments, (ii) extend the geographical scope of the exemption from the authorisation requirements, and (iii) require Member States to grant expedited authorisations for exports made for humanitarian purposes. The amended restrictions came into force on 26 April 2020 and will remain in force until 25 May 2020. The UK has implemented the latest regulation and provided updated guidance for economic operators wishing to export PPE to destinations outside the EU, EFTA or certain dependent or other territories.

13. LOCKDOWN AND PUBLIC LAW ISSUES

Review of lockdown restrictions

Under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 the Government is required to review the appropriateness of the lockdown restrictions every 21 days, with the next review taking place by 7 May 2020. Although Prime Minister Boris Johnson said on 4 May 2020 that “[t]he worst thing we could do now is ease up too soon and allow a second peak of coronavirus”, a “roadmap” out of the lockdown is expected to be announced on 10 May 2020 with draft rules already having been leaked.

14. M&A AND PRIVATE EQUITY

W&I insurance

Considerations relating to warranty and indemnity (W&I) insurance remain key for M&A deals that progress in the new market conditions resulting from the spread of COVID-19. We have summarised certain of the salient considerations below.

Due diligence. Sellers should anticipate that both buyers and insurers will want to understand the impact that COVID-19 has had (or is likely to have) on the target business(es) and attempt to address related concerns early in any process. Insurers are requiring robust due diligence into the impact of the pandemic on matters such as material contracts, banking arrangements, cash flow position, financial forecasts, supply chain management and employment matters. Buyers should be ready to discuss with insurers how they are addressing COVID-19 issues in their due diligence process (such as potential inability to conduct commercial / environmental site visits etc.).
Specific disclosure. Sellers may be expected to provide specific disclosure on the ways in which COVID-19 impacts the target business, including an assessment of financial losses, events triggered in lending arrangements, termination rights in contracts and potential disputes.
Impact on W&I policy terms. As the pandemic progresses, we expect to see the following changes in the W&I policy terms:

	•	Insurers are predicted to become more conservative with respect to the maximum policy limits that they are willing to offer on any given deal and more selective with respect to the industry sectors / jurisdictions where they take exposure. With respect to distressed deals involving more challenging targets, insurers will likely require higher premiums and/or deductibles than were generally required prior to the COVID-19 outbreak.
	•	Buyers can expect that term sheets provided by insurers will propose COVID-19 pandemic coverage exclusions. Parties to the transaction may decide to allocate the resulting COVID-19 adverse risks/liabilities amongst themselves (for example, through special indemnities, purchase price reduction or deferred payment / earn-out structures).
	•	Insurers will expect parties to carefully consider the wording of each warranty, indemnity and/or representation in light of COVID-19. For example, previously negotiated representations and/or warranties may now be untrue or may need to be repeated at completion under the relevant transaction documents.
	•	Buyers will likely consider inserting COVID-19-specific representations and warranties into their transaction document(s) to assist with a better understanding of the exposures/risks and associated operational and financial impact of the pandemic on the target business and to get a handle on any safeguards that the seller has already put in place. Sellers should consider ring-fencing warranties most relevant to COVID-19 risks and include appropriate materiality limitations and/or awareness qualifications.
	•	Careful thought should be given to the inclusion and breadth of material adverse change (MAC) clauses within transaction documents and particularly the inclusion of specific references such as “epidemic”, “pandemic” or “quarantine restrictions”. It will be important for insurance policies to remain in place even if parties agree to complete the deal following a MAC event (although any loss(es) incurred as a result of the MAC event likely will not be covered under the policy).

Insurers have speculated that COVID-19 may enable buyers (in the short-term) to place increased pressure on solvent sellers to stand behind warranties either in their entirety or to a more meaningful extent than has become customary. This may in turn lead to an increase in the amount of the deductible under buy-side W&I insurance policies or even an increased demand for sell-side policies.

15. REAL ESTATE

More lobbying and new Government measures for commercial real estate

The British Property Federation (BPF), a representative body for UK landlords, met with John Glen, economic secretary to the Treasury, and Robert Jenrick, Secretary of State for Housing, Communities and Local Government to discuss plans to assist landlords. The Government’s approach to date has been criticised across the RE sector and the recent tenant-friendly guidance, previously reported on in our last bulletin, came as a major blow to landlords. The measures proposed by the BPF, some of which were put to the Government before its last announcement, include the institution of a Furloughed Space Grant Scheme, similar to those already in place in some other European countries and which we reported on here. The BPF has also encouraged the Government to assist landlords with business rates holidays for empty premises, and to call on lenders to show forbearance to landlords. BPF’s chief executive, Melanie Leech, has said that the Government is “considering [the Furloughed Space Grant Scheme] seriously” and is discussing how to “fill the gap” between what tenants can pay and the rent concessions landlords can afford to make.

The Government has now announced grants of £671 million to try to provide for small businesses in shared premises, amidst calls that those in shared premises, which have no rateable value, have therefore been ineligible to apply for the initial Government loans. Adam Marshall, director-general of the British Chambers of Commerce, warns that many of companies “are already on borrowed time” and urges the grants to be paid out swiftly.

Rent payment challenges

Superdrug is the latest in a line of large organisations which has come under fire from landlords for refusing to pay their rent (see our coverage of Travelodge’s negotiations here). In a letter dated 22 April 2020 seen by The Financial Times, Superdrug told its landlords that the company would “reduce our lease payments to 25 per cent of our passing rent”, adding that this “is a rent reduction as opposed to a rent deferment”. This has led to criticism given that some of Superdrug’s stores remain open, although Superdrug has not disclosed the exact number of these. Boots, which also has open shops, has similarly come under fire. Correspondence from LCP, a landlord, to Boots, leaked to The Sunday Telegraph, stated that “it was wholly unfair for Boots to assume that they can transfer all the pain over to the larger landlords” and demanded payment of half of the rent “within 48 hours”.

Occupiers thinking on their office space

Analysis of whether lockdown might be eased often hinges on whether office workers can socially distance if back in the office; research indicated that the average worker sits only 4 foot 6 inches to 5 foot 2 inches apart, less than the recommended 6 feet.

Further, as companies have invested heavily in working from home, large employers may be reluctant to continue leasing the same amount of office space they had previously. Barclays CEO, Jes Staley, has said “there will be long-term adjustment in how we think about our location strategy”; Lord Wolfson, Next’s CEO, has said we “have learnt that there is work that can effectively be done from home” and guesses that “working practices will change irreversibly.”

On the landlord side, Chris Grigg, CEO of British Land, noted that expected levels of air-travel and demand for high rises did not fall after 9/11 and rationalises that the market’s requirement for office space should not be adversely impacted; Marcus Geddes, head of property at Land Securities, says he doesn’t “see the grim reaper falling on the office market just yet.”

New Land Registry measures on signing deeds

The Land Registry has announced updates to its Practice Guide 8: execution of deeds to facilitate the signing of deeds during social distancing, released on 4 May 2020. The updates to the Practice Guide suggest that witnessing can be done through a window, provided that the witness is “able to see clearly the signatory signing”. It also sets out an 8-step process for signing deeds which it will accept “until further notice” at paragraph 12 of the Guide.

16. UK TAX

Supplies of e-publications

At Budget 2020, the Government announced that it would zero rate certain supplies of e-publications with effect from 1 December 2020 to support literacy and reading in all its forms. Following the COVID-19 outbreak and the need for people to stay at home, the Government announced on 30 April 2020 that it will bring forward the implementation date to 1 May 2020. This is intended to reduce the cost of access to online publications during these challenging times when many people are confined to their homes and schools are closed. For more details, please see here.

VAT zero rating for personal protective equipment (PPE)

From 1 May 2020, PPE purchased by care homes, businesses, charities and individuals to protect against COVID-19 will be free from VAT for a three-month period. One point of interest is that EU law requires the UK to charge VAT on the equipment and the UK is bound by the relevant EU provisions until the end of the transitional period. The Government has said that it is acting under an exceptional basis allowed by EU rules during health emergencies. For more details, please see here and here.

Impact of COVID-19 on labour taxes

The OECD has published data providing a baseline for measuring the impact of COVID-19 on labour taxes. For further details, please see here.

COVID-19 UK TASKFORCE LEADERS

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contact or any member of the Firm’s (COVID-19) UK Taskforce:

Areas	Task Force Leaders
Competition and Consumers	Ali Nikpay – [email protected]
Corporate Governance	Selina Sagayam – [email protected]
Cybersecurity and Data Protection	James Cox – [email protected]
Disputes	Charlie Falconer – [email protected]
Employment	James Cox – [email protected]
Energy	Anna Howell – [email protected]
Finance	Greg Campbell – [email protected]
Financial Regulatory	Michelle Kirschner – [email protected]
Force Majeure	Patrick Doris – [email protected]
Government Support Schemes	Amar Madhani – [email protected]
Insolvency	Greg Campbell – [email protected]
International Trade Agreements	Patrick Doris – [email protected]
Lockdown and Public Law issues	Patrick Doris – [email protected]
M&A	Jeremy Kenley – [email protected]
Private Equity	James Howe – [email protected]
Real Estate	Alan Samson – [email protected]
UK Tax	Sandy Bhogal – [email protected]

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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