196 Search Results

June 26, 2020 |
Webcast: Bankruptcy and Financial Distress: Fiduciary Duty and Fraud Considerations for Private Equity Firms

Private Equity firms and other investors naturally are identifying opportunities and challenges that are arising in the highly disrupted post-COVID 19 markets. But those actions are subject to second guessing by other market participants, official creditors’ committees, lenders and regulators. In this hour-long discussion among Gibson Dunn’s Bankruptcy and White Collar Defense and Investigations Practice Group Co-Chairs, a leading economic research commentator from Cornerstone and Harvard Business School’s renowned Bankruptcy expert, we will identify and address credit and valuation risks, fiduciary duty obligations and potential civil and criminal bankruptcy fraud issues that may embroil even cautious investors who participate in the new market opportunities. View Slides (PDF)



PANELISTS: Joel M. Cohen, a trial lawyer and former federal prosecutor, is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group, and a member of its Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen's experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery. Stuart “Stu” Gilson is the Steven R. Fenster Professor of Business Administration at the Harvard Business School. Professor Gilson is an expert on corporate restructuring, business bankruptcy, credit analysis, business valuation, corporate financial analysis, and financial strategy. His research and teaching focus on strategies that companies use to revitalize their business, improve performance, and create value in a challenging business environment. Professor Gilson’s research has been cited by news media, including The Wall Street JournalThe New York TimesBusiness Week, and Bloomberg. Professor Gilson has served on the advisory boards of various organizations distressed debt investment funds. Professor Gilson has testified as an expert on a number of high profile bankruptcy matters. Robert A. Klyman is Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group. Mr. Klyman represents debtors, acquirers, lenders, ad hoc groups of bondholders and boards of directors in all phases of restructurings and workouts. His practice regularly includes advising PE Firms and boards of directors of portfolio companies with respect to navigating financial distress, and he has significant experience litigating claims for breach of fiduciary duty, equitable subordination, alter ego and related matters arising in chapter 11 cases, both at trial and on appeal. Mr. Klyman also represents (a) debtors in connection with traditional, prepackaged and “pre-negotiated” bankruptcies, (b) lenders and bondholders in complex workouts, (c) strategic and financial players who acquire debt or provide financing as a path to take control of companies in bankruptcy, and (d) buyers and sellers of assets through Section 363 of the Bankruptcy Code. Allie Schwartz is a principal at Cornerstone Research and the co-head of the firm’s bankruptcy practice, where she leads teams in supporting experts during the litigation process. She specializes in valuation of businesses, securities, and financial instruments in the context of bankruptcy, securities litigation, and regulatory disputes. Dr. Schwartz has worked with hedge funds, asset managers, private equity firms, FinTech firms, broker/dealers, and major financial institutions in addressing issues related to valuation and solvency, as well as allegations of insider trading, market manipulation, and disruptive trading. Emma Strong is a litigation associate in Gibson Dunn’s Palo Alto office. Her practice focuses on internal investigations, government investigations, and enforcement actions regarding business crimes and civil fraud. Ms. Strong also represents clients in high-stakes litigation involving fraud, breach of contract, and patent infringement claims.
MCLE CREDIT 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 vchan@gibsondunn.com 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.

June 25, 2020 |
Best Lawyers in France 2021 Recognizes 17 Gibson Dunn Attorneys

Best Lawyers in France 2021 recognized 17 Gibson Dunn attorneys and named Gibson Dunn the Insolvency and Reorganization Law “Law Firm of the Year.” The partners highlighted, with their respective practice areas, include: Nicolas Autet – Public Law, and Regulatory Practice; Ahmed Baladi – Information Technology Law, Intellectual Property Law, Privacy and Data Security Law, Technology Law, and Telecommunications Law; Nicolas Baverez – Administrative Law, Public Law, and Regulatory Practice; Maïwenn Béas – Administrative Law, and Public Law; Amanda Bevan-de Bernède – Banking and Finance Law, and Investment; Eric Bouffard – International Arbitration; Bertrand Delaunay – Mergers and Acquisitions Law, and Private Equity Law; Jérôme Delaurière – Tax Law; Jean-Pierre Farges – Arbitration and Mediation, Banking and Finance Law, Insolvency and Reorganization Law, and Litigation; Pierre-Emmanuel Fender – Insolvency and Reorganization Law, and Litigation; Benoît Fleury – Corporate Law, and Insolvency and Reorganization Law; Bernard Grinspan – Corporate Law, and Information Technology Law; Ariel Harroch – Corporate Law, Mergers and Acquisitions Law, Private Equity Law, and Tax Law; Patrick Ledoux – Corporate Law; Vera Lukic – Information Technology Law, Privacy and Data Security Law, and Technology Law; Judith Raoul-Bardy – Corporate Law; and Jean-Philippe Robé – Banking and Finance Law, and Corporate Law. The list was published on June 25, 2020.

June 23, 2020 |
Webcast: Securities Laws Issues in Restructuring and Bankruptcy

Compliance with securities laws is a crucial element of any restructuring. This webcast addresses a range of potential securities laws issues arising in a variety of restructuring and bankruptcy scenarios (whether out of court or in a free-fall, pre-negotiated or pre-packaged case under chapter 11 of the Bankruptcy Code), including the registration requirements of the Securities Act of 1933 (and potential exemptions therefrom); the potential application of the tender offer regulations under the Securities Exchange Act of 1934; the role of Regulation FD for public company debtors and other concerns about material non-public information that may be obtained in creditor diligence of debtor-provided information and negotiations with the debtor; issues arising under the Trust Indenture Act of 1939; and more. View Slides (PDF)



PANELISTS: Alan Bannister is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Firm’s Capital Markets, Global Finance, Securities Regulation & Corporate Governance and Business Restructuring & Reorganization Practice Groups. Mr. Bannister concentrates his practice on securities and other corporate transactions, acting for underwriters and issuers (including foreign private issuers), as well as strategic or other investors, in high yield, equity (including ADRs and GDRs), and other securities offerings, including U.S. public offerings, Rule 144A offerings, other private placements and Regulation S offerings, as well as re-capitalizations, NYSE and NASDAQ listings, shareholder rights offerings, spin-offs, PIPEs, exchange offers, other general corporate transactions and other advice regarding compliance with U.S. securities laws, as well as general corporate advice. Mr. Bannister also advises issuers and underwriters on dual listings in the U.S. and on various exchanges across Europe, Latin America and Asia. In addition, Mr. Bannister works closely with the Gibson Dunn bankruptcy and restructuring team, advising on applicable securities laws issues that arise in such transactions. Michael A. Rosenthal is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring & Reorganization Practice Group. Mr. Rosenthal has extensive experience in reorganizing distressed businesses and related corporate reorganization and debt restructuring matters. He has represented complex, financially distressed companies, both in out-of-court restructurings and in pre-packaged, pre-negotiated and free-fall chapter 11 cases, acquirors of distressed assets and investors in distressed businesses. Mr. Rosenthal’s representations have spanned a variety of business sectors, including investment banking, private equity, energy, retail, shipping, manufacturing, real estate, engineering, construction, medical, airlines, media, telecommunications and banking.
MCLE CREDIT 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 vchan@gibsondunn.com 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.

June 15, 2020 |
Ninth Circuit Ruling in Bankruptcy Appeal Has Significant Implications for Lenders in Bankruptcy Cases

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  1. Introduction
Section 364(e) of the Bankruptcy Code provides important protections to lenders that provide post-bankruptcy financing (known as “DIP Financing”) to companies that are in chapter 11 bankruptcy cases (known as “Debtors”). By its plain terms, Section 364(e) provides a lender with material protections in the event that an order authorizing DIP Financing is later reversed or modified on appeal: The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith … unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.[1] These protections have the practical effect of mooting appeals of orders authorizing DIP Financing where the order contained findings that the lender acted in good faith and the objecting party did not obtain a stay of the order pending appeal. Many courts have held that Section 364(e)’s protections should be strictly limited to (a) lenders providing DIP Financing (“DIP Lenders”) because Section 364 only applies to DIP Financing and (b) preserving the validity of debt incurred and priorities and liens granted by a Debtor to secure DIP Financing.[2] According to one leading decision, “[t]he questions which arise under this section are: (1) whether the creditor attempting to challenge an authorization of credit obtains a stay pending an appeal; and (2) whether the lender or group of lenders acts in good faith in extending the new credit.”[3] In contrast to these other courts, on June 9, 2020, the Ninth Circuit took a more expansive view of the scope of Section 364(e) by applying that section’s protections to pre-bankruptcy lenders that did not provide any DIP Financing. See Official Committee of Unsecured Creditors of Verity Health System of California v. Verity Health System of California (“Verity”).[4] The Ninth Circuit applied Section 364(e) to moot an appeal seeking to revoke certain rights afforded to pre-bankruptcy lenders, even though (a) those rights were wholly unrelated to the validity of debt or any priority or lien granted to a DIP Lender, and (b) the DIP Financing had been paid in full.
  1. Background
The Debtors in Verity owned hospitals and other healthcare facilities. On August 31, 2018, the Debtors commenced chapter 11 bankruptcy cases in the United States Bankruptcy Court for the Central District of California. To sustain their operations during the chapter 11 cases, the Debtors sought bankruptcy court approval of DIP Financing. If approved, the DIP Lender would receive a “superpriority lien” on the Debtors’ assets pursuant to Section 364(d) of the Bankruptcy Code, giving the DIP Lender priority over the liens and claims held by the Debtors’ pre-bankruptcy lenders (the “Pre-Bankruptcy Lenders”). The DIP Lender was not one of the Pre-Bankruptcy Lenders, and the Pre-Bankruptcy Lenders provided no DIP Financing in the chapter 11 cases. The DIP Lender conditioned the DIP Financing on the Pre-Bankruptcy Lenders’ agreement to subordinate their pre-bankruptcy liens and claims to the liens and claims that would secure the DIP Financing. The Pre-Bankruptcy Lenders conditioned that agreement upon, among other things, the bankruptcy court’s approval of waivers of (a) the Debtors’ right to surcharge the Pre-Bankruptcy Lenders’ collateral for the costs and expenses of preserving or disposing of such collateral, and (b) the court’s authority to exclude post-petition proceeds of the Debtors’ assets from the Pre-Bankruptcy Lenders’ collateral based on the “equities of the case,” pursuant to Sections 506(c) and 552(b) of the Bankruptcy Code, respectively. The Official Committee of Unsecured Creditors appointed in the Debtors’ chapter 11 cases (the “Committee”) objected on the grounds that the waivers would undermine the unsecured creditors’ prospect for a recovery by precluding their ability to obtain recoveries from the Pre-Bankruptcy Lenders. The bankruptcy court entered an order overruling the objection and approving the DIP Financing, and granted the waivers demanded by the Pre-Bankruptcy Lenders as necessary to induce the DIP Lender to extend DIP Financing. The bankruptcy court further held that the waivers constituted part of the “adequate protection” afforded pre-bankruptcy lenders under Bankruptcy Code Section 361, which is mandated by Section 364(d) to protect against any diminution in value of the Pre-Bankruptcy Lenders’ claims as a result of the DIP Financing.[5] The Committee appealed the bankruptcy court’s order to the United States District Court for the Central District of California. Following Ninth Circuit precedent in In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987), the district court explained that “if the court’s order ‘is within the purview of section 364,’ then the protections of § 364(e) apply.”[6] The district court concluded that the waivers were “a condition that was necessary to obtain credit” and the court was “not persuaded that it can cause the modification of a necessary term in the DIP Agreement without implicating § 364(e).”[7] Having determined that Section 364(e) applied to the appeal, the district court dismissed the appeal as moot because neither of the exceptions to Section 364(e) applied; the Committee had not obtained a stay of the bankruptcy court’s order pending appeal or contended that the DIP Lender failed to act in “good faith.”[8] The Committee timely appealed to the Ninth Circuit. III.   The Ninth Circuit Affirms the Dismissal of the Appeal as Statutorily Moot Pursuant to Section 364(e) of the Bankruptcy Code On appeal, the Committee argued that Section 364(e) did not cover the waivers because the statute’s plain language is limited to appeals regarding “any priority or lien … granted” to a DIP Lender. The Committee further argued that, whereas the purpose of Section 364(e) is to protect DIP Lenders in order to incentivize them to provide DIP Financing, the appeal could not adversely affect the DIP Lender because it had already been repaid in full and the Committee had stipulated that any ruling in the appeal would not affect the DIP Lender. The Ninth Circuit affirmed the dismissal of the appeal as moot pursuant to Section 364(e). The court reasoned that, although the waivers were part of the Pre-Bankruptcy Lenders’ adequate protection package that is authorized under Section 361 of the Bankruptcy Code and is “not expressly included in § 364,” “the waivers are included in the Final DIP Order−a postpetition financing arrangement authorized under § 364.”[9] The court also relied on Ninth Circuit precedent holding that Section 364(e) “broadly protects any requirement or obligation that was part of a post-petition creditor’s agreement to finance.”[10] According to the Ninth Circuit, “the waivers were ‘part of a post-petition creditor’s agreement to finance’ and ‘helped to motivate [the DIP Lender’s] extension of credit’”[11] because (a) the DIP Lender conditioned the DIP Financing on the Pre-Bankruptcy Lenders’ consent to subordinate their claims and liens, and (b) the Pre-Bankruptcy Lenders conditioned that required consent on receipt of the waivers at issue in the appeal. The Ninth Circuit also rejected the Committee’s argument that Section 364(e) was inapplicable because the DIP Lender had been repaid in full and the Committee stipulated that the appeal would not affect the DIP Lender. According to the Ninth Circuit, that argument “does not change the analysis” because “the [Pre-Bankruptcy Lenders] are also entitled to § 364(e)’s protections.”[12]
  1. Conclusion
Verity is noteworthy because it extended Section 364(e) beyond its plain language to bar any appeal regarding waivers that were approved for the benefit of pre-bankruptcy lenders that did not provide DIP Financing. It remains to be seen whether courts will follow Verity and apply the protections of Section 364(e) to non-DIP Lenders or if courts will seek to distinguish Verity by limiting Section 364(e)’s protections to the plain language of the statute. _______________________    [1]   11 U.S.C. § 364(e) (emphasis added).    [2]   See, e.g., Kham Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1355 (7th Cir. 1990) (holding that the purpose of § 364(e) is to assure a post-petition lender that extends credit in good faith reliance upon a financing order that it is entitled to the benefit of the order regardless of whether it is later determined to be legally or factually erroneous); Shapiro v. Saybrook Mfg. Co. (In re Saybrook Mfg. Co.), 963 F.2d 1490, 1493, 1495 (11th Cir. 1992) (held that Section 364(e) did not moot appeal regarding cross-collateralization of pre-petition debt because, “[b]y its own terms, section 364(e) is only applicable if the challenged lien or priority was authorized under section 364(d),” and section 364(d) “appl[ies] only to future—i.e., post-petition—extensions of credit” and “do[es] not authorize the granting of liens to secure pre-petition loans”); In re Joshua Slocum Ltd, 922 F.2d 1081, 1085 n.1 (3rd Cir. 1990) (“Section 364(e) concerns the validity of debts and liens.”); In re Main, Inc., 239 B.R. 59, 72 (Bankr. E.D. Pa. 1999) (held that Section 364(e) did not moot appeal from order permitting payment of debtor’s counsel because Section 364(e) “relates strictly to appeals from orders creating liens with preferential position or authorizing debt against the bankruptcy estate under 11 U.S.C. § 364(d)”).    [3] New York Life Ins. Co. v. Revco D.S., Inc. ( In re Revco D.S., Inc.), 901 F.2d 1359, 1364 (6th Cir. 1990). [4]   Case No. 19-55997 (9th Cir. June 9, 2020). This opinion was not published and, therefore, is not considered precedential even in the Ninth Circuit, though it can be cited to other courts in the circuit. See Ninth Circuit Local Rule 36-3.    [5]   Section 361 provides that, “[w]hen adequate protection is required under section … 364 of this title of an interest of an entity in property, such adequate protection may be provided by … (1) requiring the trustee to make a cash payment or periodic cash payments to such entity … (2) providing to such entity an additional or replacement lien … or (3) granting such other relief … as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.” 11 U.S.C. § 361. Section 364(d) provides that the bankruptcy court can approve a senior lien only if it finds that “there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.” 11 U.S.C. § 364(d).    [6]   In re Verity Health System of California, Inc., Case No. 2:18-cv-10675-RGK, at 6 (C.D. Cal. Aug. 2, 2019) (quoting Adams Apple, 829 F.2d at 1488) (emphasis added).    [7]   Id. at 7−8.    [8]   Id. at 7.    [9]   Verity at 3. [10]   Id. at 2−3 (quoting Weinstein, Eisen & Weiss, LLP v. Gill (In re Cooper Commons, LLC), 430 F.3d 1215, 1219 (9th Cir. 2005)). [11]   Id. at 3 (quoting Cooper Commons, 430 F.3d at 1219−20) (bracketed material in original). [12]   Id. at 4.
Gibson, Dunn & Crutcher's lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Business Restructuring and Reorganization practice group, or any of the following: Robert A. Klyman - Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Douglas G. Levin - Orange County, CA (+1 949-451-4196, dlevin@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman - New York (+1 212-351-2366, dfeldman@gibsondunn.com) Scott J. Greenberg - New York (+1 212-351-5298, sgreenberg@gibsondunn.com) Robert A. Klyman - Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause - Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal - New York (+1 212-351-3969, mrosenthal@gibsondunn.com)   © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 27, 2020 |
Key Considerations for Issuers and Auditors Regarding Going-Concern Analysis

Click for PDF Issuers in the United States and their auditors have related, but distinct, obligations to evaluate on a periodic basis whether there is substantial doubt about the issuer’s ability to continue as a going concern.[1]  In normal times, this evaluation, conducted with an appropriate level of diligence, results as to almost all major public companies in the conclusion that there is no substantial doubt about the entity’s ability to meet its obligations in the months to come. But these are not normal times.  As the COVID-19 crisis takes an ever-greater toll on the American economy, and as multiple well-known companies declare bankruptcy,[2] the going-concern assessment has taken on new relevance for issuers, auditors, and others in the financial-reporting community.  As a result, the number of issuer filings that contain a going-concern disclosure appears to have substantially increased.[3]  In this piece, we review some of the significant considerations that apply to the going-concern analysis from both the issuer’s and the auditor’s perspectives. Summary of Issues

  • Financial Accounting Standards Board (“FASB”) accounting standards and PCAOB auditing standards both require an assessment of whether there is substantial doubt about the issuer’s ability to continue as a going concern, including evaluating concrete management plans to address the circumstances giving rise to the reasonable doubt. The auditor is required to make an independent assessment, not simply evaluate management’s process.
  • Important differences between the accounting and auditing standards include that the management assessment occurs quarterly and looks forward one year from the date the financial statements are issued, whereas the auditor annually considers the period one year from the balance sheet date, with different quarterly review procedures.
  • Both auditors and issuers should anticipate potential exposure to regulatory and private litigation should their forecasts of the effects of the COVID-19 pandemic prove inaccurate.
Background American Institute of Certified Public Accountants (“AICPA”) and, later, PCAOB auditing standards have for decades required auditors to evaluate on an annual basis whether there is substantial doubt about the ability of the audited entity to continue as a going concern.[4]  Under current PCAOB standard AS 2415, an auditor assesses, based on the relevant information obtained during the audit,[5] whether substantial doubt exists about the entity’s ability to meet its obligations as they come due over a reasonable period of time after the balance sheet date (not to exceed one year in the future) without the entity’s having to resort to measures such as disposing of significant assets or restructuring its debt.[6]  The relevant information could include evidence such as negative operating trends, loan defaults, loss of key customers or patents, or even natural disasters.[7]  If the auditor concludes that substantial doubt does exist, then as a second step it is required to consider management’s plans to address the circumstances giving rise to the substantial doubt, such as selling assets, restructuring debt, or raising capital.  Under AS 2415, the auditor’s focus is on whether those plans are feasible and whether the assumptions underlying them are reasonable, such that they represent an adequate plan to address the circumstances.[8]  If the auditor concludes even after assessing management’s plans that substantial doubt about the entity’s ability to meet its obligations over the coming year still exists, then the auditor must, among other steps, include an explanatory paragraph to that effect in the audit report.[9] In addition, if an auditor, during an interim review of an entity’s quarterly financial statements, becomes aware of “the entity's possible inability to continue as a going concern,” the auditor is required to make certain inquiries of management and assess whether management’s disclosures are adequate.[10] On top of this established framework, the FASB in 2014 adopted a requirement that companies make their own assessments on a quarterly basis of their ability to continue as a going concern, a requirement codified as ASC Subtopic 205-40.[11]  Subtopic 205-40 differs from the PCAOB’s AS 2415 in some important ways.  For example, unlike the PCAOB, the FASB defined the concept of “substantial doubt” in connection with its standard: specifically, it stated that substantial doubt exists as to an entity’s ability to continue as a going concern “when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.”[12]  In other respects, Subtopic 205-40 bears close similarities to AS 2415, including in the circumstances that can indicate that substantial doubt exists and in the requirement to assess management plans to alleviate the substantial doubt.[13] Even apart from the considerations specific to the COVID-19 crisis, there are two differences between Subtopic 205-40 and AS 2415 that are important to bear in mind:
  • First, management’s disclosure obligations differ from those of the auditor. While the auditor’s disclosure consists of an explanatory paragraph in the audit report,[14] management’s disclosure of substantial doubt about its ability to continue as a going concern is found in the notes to the financial statements and management typically also includes disclosure of the issue in the liquidity section of management’s discussion and analysis (“MD&A”), as well as in the issuer’s risk factors.[15]  Additionally, under Subtopic 205-40, where an issuer that concludes that management’s plans have alleviated the substantial doubt about its ability to meet its obligations, the issuer still must disclose in the notes to the financial statements that substantial doubt existed in the absence of those plans.[16]  AS 2415, on the other hand, does not require disclosure by the auditor in situations where management’s plans have alleviated the substantial doubt.
  • Second, while management’s obligation to evaluate its going-concern status is identical at the annual and quarterly stages,[17] the auditor’s obligations vary considerably between year-end and quarter-end. Unlike many audit procedures, in which the auditor evaluates the reasonableness of management’s accounting or disclosures, the annual going-concern analysis represents a standalone process for the auditor to arrive at a conclusion regarding the entity’s status.[18]  In an interim review, by contrast, the procedures are both more limited and more tied to management’s assessment.[19]
Although global pandemics were not included on the list of adverse conditions in either AS 2415 or Subtopic 205-40, the economic shock that COVID-19 has created will provide a basis for many companies and auditors to conduct a more searching going-concern analysis than usual in the months to come.  As we address in the next section, this analysis will be especially difficult in a crisis such as COVID-19 whose duration and economic effects are so unpredictable.  We will then address some other key considerations for issuers and auditors as they assess the potential for substantial doubt to exist concerning management’s ability to meet upcoming obligations. Addressing the Significant Uncertainty of the COVID-19 Crisis The list of adverse events set out in AS 2415 and Subtopic 205-40 that could potentially call a company’s viability into question includes items such as negative operating trends, work stoppages, and loan defaults.[20]  In some cases, the ultimate outcome of those events or circumstances will be uncertain at the time of management’s or the auditor’s assessment.  The COVID-19 pandemic, however, raises a set of global uncertainties—concerning areas from public health to financial markets—whose complexity is an order of magnitude greater than that of the circumstances that may drive an entity’s going-concern analysis in normal times. While Subtopic 205-40 requires only that an entity assess its ability to meet its obligations based on “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued,”[21] and AS 2415 similarly requires only that the auditor consider “his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor's report,”[22] both issuers and auditors should be aware that regulators and private plaintiffs will later assess their actions with twenty-twenty hindsight.  Plaintiffs, in particular, will have an incentive to ignore that the auditor “is not responsible for predicting future conditions or events,”[23] and likely will seek to claim that the events of the next year were clearly on the horizon at the time that companies and auditors issued their financial statements and reports, based on the progression of the COVID-19 crisis as of that time.  In assessing the risk that an entity will be unable to meet its obligations in the coming months, both issuers and auditors should anticipate that they will face potential legal exposure for failing to accurately predict the future. In the current environment, both management and auditors are likely best served by: (i) making, documenting, and disclosing a good-faith attempt to identify the operational, financial, and economic factors that will affect the company’s ability to meet its obligations in the coming year, including those that are likely to indicate a worse outcome for the company; (ii) comprehensively documenting what they believe is known and reasonably knowable, as of their assessment date, about the implications of each factor for the company’s ability to meet its obligations in the coming months—including, as appropriate, based on consultation with third-party experts such as outside counsel or valuation experts; and (iii) making, and documenting, a good-faith assessment, based on that forecast, of how likely it will be that a point arrives within the relevant timeframe at which, individually or in the aggregate, one or more of those factors causes the company to be unable to meet its obligations as they come due. Other Key Considerations In addition to the problem of uncertainty in the progression of the COVID-19 crisis, there are other considerations that issuers and auditors should bear in mind as they conduct their going-concern assessments. First, if an entity’s management concludes that substantial doubt exists concerning its ability to meet its obligations absent management plans to address the situation, then management should keep in mind the requirements that apply to the plans that it develops. Subtopic 205-40 makes clear that substantial doubt about an entity’s ability to continue as a going concern is alleviated only if two conditions are met: (i) “It is probable that management’s plans will be effectively implemented within one year after the date that the financial statements are issued,” and (ii) “It is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.”[24] Concerning the first condition, the standard states that for management’s plans to be considered probable for implementation, they generally must already have been approved by management at the time the financial statements are issued.[25]  That is, they should generally not be merely theoretical or even under active consideration.  This means that, if management anticipates that its quarter-end analysis may lead to an initial conclusion that substantial doubt exists concerning its ability to continue as a going concern, it should take anticipatory steps during the quarter to plan its response, to help ensure that it has time to approve any alleviating plans that may become necessary. Concerning the second condition, Subtopic 205-40 states that the magnitude and timing of management’s plans must be measured against “the magnitude and timing of the relevant conditions or events that those plans intend to mitigate.”[26]  If, for example, management adopts a plan to address its liquidity needs that will not become effective until after the principal period of its liquidity shortfall has passed, then it may be difficult for it to conclude that the plan is effectively timed to alleviate the substantial doubt concerning its ability to meet its obligations.  Issuers should try to ensure, therefore, that they develop plans that will realistically meet their expected liquidity and related needs in terms of both timing and magnitude. Management should remain aware as to both of these conditions that the probability of execution or success that it assigns to its plans may differ from the probability that its auditor assigns to those same plans; thus, if it hopes to avoid a going-concern explanatory paragraph in the audit report, it will need to communicate early and often with the auditor to understand the auditor’s views as to how it anticipates evaluating management’s plans. Second, PCAOB standards similarly prescribe particular considerations should an auditor initially conclude that substantial doubt about the entity’s ability to continue as a going concern does exist such that management’s plans become relevant.  AS 2415 directs the auditor to focus especially on two points: (i) “those elements that are particularly significant to overcoming the adverse effects of the conditions and events,” and (ii) any “prospective financial information [that] is particularly significant to management's plans.”[27]  The standard requires the auditor to obtain audit evidence specifically to address the most significant aspects of management’s plan, including the evidence that supports management’s assumptions about the prospective financial effects of its plans.  This information should be considered with appropriate professional skepticism, and the auditor should keep in mind that the PCAOB would likely conclude that the provisions of auditing standards that require an auditor to consider contrary audit evidence would apply to this exercise.[28] Third, complications may arise even after the annual audit if the issuer intends to incorporate by reference its financial statements with the Securities and Exchange Commission (“SEC”) as part of a registered offering conducted pursuant to the Securities Act of 1933, as amended.  If the issuer does incorporate its financial statements by reference, the issuer is required to obtain the auditor’s consent to include the audit report as part of the registered offering.  PCAOB standards require auditors to conduct certain procedures in that situation,[29] and if as a result of those procedures the auditor determines that its audit report would be misleading in the absence of a going-concern explanatory paragraph (even though the conditions giving rise to the substantial doubt occurred after the issuance of the report), then the auditor might re-issue its audit report to include a going-concern explanatory paragraph and require that the issuer update its financial statements to reflected this added disclosure.  Depending on the timing, this re-issuance may or may not occur in conjunction with the issuer’s conducting its own quarterly evaluation of its ability to continue as a going concern. Fourth, there is a slight discrepancy between the time period applicable to an issuer’s going-concern analysis and that applicable to the auditor, but the period during which both parties obtain the evidence that is relevant to their analysis is the same. AS 2415 states that the auditor’s going-concern evaluation is conducted with reference to the balance-sheet date; meanwhile, Subtopic 205-40 states that management’s evaluation should occur as of the date the financial statements are issued.[30]  FASB noted in adopting Subtopic 205-40 that it had received input “from many auditors indicating that, in practice, they already assess over a period of one year from the audit report date instead of one year from the balance sheet date.”[31]  More importantly, however, AS 2415 makes clear that the auditor’s consideration of the going-concern question must be “based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor's report.”[32]  The fact that the auditor’s balance-sheet date is used as a reference date, then, does not provide the auditor with an excuse to ignore subsequent events that occur prior to the audit report. A recent SEC case addressing an auditor’s going-concern analysis demonstrated this fact in practice.  In the Matter of the Application of Cynthia C. Reinhart, CPA was an appeal to the SEC from sanctions that the PCAOB had ordered be imposed on the engagement partner for an audit of a mortgage lender, Thornburg Mortgage, Inc. (“Thornburg”).[33] The PCAOB charged that Ms. Reinhart had, among other things, failed to properly assess whether there was substantial doubt about Thornburg’s ability to continue as a going concern.  Although the SEC recognized that Ms. Reinhart and her team had, consistent with AS 2415, assessed the question of substantial doubt over a period lasting until the following fiscal year end, the SEC’s discussion of the sufficiency of her assessment concentrated in large part on events that occurred between the balance-sheet date and the report date, such as fluctuations in Thornburg’s ability to meet margin calls leading up to the filing of its Form 10-K.[34]  The Reinhart case is a useful reminder that the difference between management’s and the auditor’s reference date does not create any distinction between them in terms of the available evidence that may affect their assessment. Fifth, it has been discussed that auditors may be concerned about issuing going-concern opinions in part because doing so could accelerate the financial decline of the entity being audited, such that the going-concern paragraph becomes a self-fulfilling prophecy.[35]  Given the widespread economic dislocations that the COVID-19 crisis has caused, there may be reason to think that the stigma of a going-concern opinion is not as acute as it has been under normal circumstances.  In either case, however, audit engagement teams should keep in mind that protecting their own, and their firms’, interests depends on the team ensuring that it considers the relevant evidence with appropriate skepticism and documents that its process was thorough and appropriate. Sixth, issuers should seek counsel sooner rather than later about their fiduciary obligations when potential going-concern issues exist because it is critical that officers and directors fully understand their fiduciary obligations and how best to comply with them and make reasoned, disinterested, good faith decisions that receive the benefit of the business judgment rule.  Members of the Firm’s Business Restructuring and Reorganization Group can assist officers and directors to understand and comply with these obligations. Conclusion Hopefully, the period when going-concern analyses occupy a heightened level of attention will pass in the coming months as the COVID-19 health crisis wanes and the U.S. and world economies rebound.  Until that time comes, issuers and auditors should ensure that they are approaching the going-concern analysis with the care that it will now warrant. ____________________________    [1]   This alert focuses on the considerations applicable to issuers who report their financial statements on the basis of U.S. Generally Accepted Accounting Principles and to audits of those issuers performed pursuant to Public Company Accounting Oversight Board (“PCAOB”) auditing standards.  We note, however, that International Financial Reporting Standards (“IFRS”) also contain a requirement that an entity assess its status as a going concern.  See IAS 1.25, Presentation of Financial Statements.  As a result, many of the observations contained herein may also be relevant to issuers who report using IFRS.    [2]   See, e.g., Hertz Global Holdings, Inc., Form 8-K filed May 26, 2020; J. C. Penney Co., Inc., Form 8-K filed May 18, 2020; J.Crew Group, Inc., Form 8-K filed May 4, 2020.    [3]   Among the companies that have recently issued going-concern notices are: Chesapeake Energy Corp., see Form 10-Q filed May 11, 2020; and Dave & Buster’s Entertainment, Inc., see Form 10-K filed Apr. 3, 2020.  See also SandRidge Energy, Inc., Form 10-Q filed May 19, 2020 (disclosing substantial doubt concerning ability to continue as a going concern alleviated by management plans to sell headquarters).    [4]   See AU § 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.  AU Section 341 was adopted as an interim standard by the PCAOB pursuant to PCAOB Rule 3200T, see PCAOB Rel. No. 2003-006 (Apr. 18, 2003), and is now codified in PCAOB auditing standards as AS 2415, Consideration of an Entity’s Ability to Continue as a Going Concern.    [5]   AS 2415 does not require any procedures to be performed solely for purposes of the going-concern evaluation.  Instead, it contemplates that “[t]he results of auditing procedures designed and performed to achieve other audit objectives should be sufficient for that purpose.”  AS 2415.05.    [6]   AS 2415.01-.03.    [7]   AS 2415.06.    [8]   AS 2415.07-.09.    [9]   AS 2415.12.   [10]   AS 4105.21, Reviews of Interim Financial Information.   [11]   See Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (Aug. 2014) (“ASU 2014-15”).   [12]   ASU 2014-15, Glossary (emphasis in original, other emphasis removed).  FASB made clear that the term “probable” as used here has the same meaning as it does in the context of assessing loss contingencies under ASC Topic 450. See id. In the relevant contingencies standard, FASB defined “probable” to mean that “[t]he future event or events are likely to occur.”  See Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, ¶ 3(a).  Although the standard does not assign percentages to this term, practitioners generally note that “probable” represents approximately a seventy percent chance or greater of occurrence.  See, e.g., A Roadmap to Accounting for Contingencies and Loss Recoveries, at 21 (Deloitte 2019).   [13]   See ASC 205-40-55-2 (using same list of adverse conditions as that used by PCAOB); ASC 205-40-50-6 (consideration of management plans).   [14]   See AS 2415.12.   [15]   See ASC 205-40-50-13 (requiring both footnote disclosure and “information that enables users of the financial statements to understand” three points: (i) the “[p]rincipal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern”; (ii) “[m]anagement’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations”; and (iii) “[m]anagement’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern”).   [16]   Specifically, management’s disclosures must include (i) the “[p]rincipal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)”; (ii) “[m]anagement’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations”; and (iii) “[m]anagement’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.” ASC 205-40-50-12.   [17]   In adopting ASU 2014-15, FASB explicitly stated that it considered limiting the going-concern analysis to an annual exercise but elected to adopt a quarterly requirement instead, “to ensure that uncertainties about an entity’s ability to continue as a going concern were being evaluated comprehensively for each reporting period, and being reported timely in the financial statement footnotes.”  ASU 2014-15, ¶ BC23.   [18]   In the wake of FASB’s adoption of Subtopic 205-40, the PCAOB staff issued a release emphasizing that an issuer’s “determination that no disclosure is required under [applicable accounting principles] is not conclusive as to whether an explanatory paragraph is required” under PCAOB standards.  PCAOB Staff Audit Practice Alert No. 13, Matters Related to the Auditor’s Consideration of a Company’s Ability to Continue as a Going Concern (Sept. 22, 2014).  The exception to the principle in AS 2415 that the auditor is in a proactive rather than reactive position in conducting its annual assessment is that, should the entity determine that substantial doubt exists, then the auditor is required to assess the reasonableness of management’s disclosures on that point.  See AS 2415.10-.11.   [19]   See AS 4105.21.   [20]   See ASC 205-40-55-2; AS 2415.06.   [21]   ASC 205-40-50-3.   [22]   AS 2415.02.   [23]   AS 2415.04.   [24]   ASC 205-40-50-7.   [25]   See ASC 205-40-50-8.   [26]   ASC 205-40-50-10.   [27]   AS 2415.08-.09.   [28]   See AS 1105.29, Audit Evidence (requiring auditor to perform procedures to address any inconsistency or lack of reliability in the audit evidence it obtains).  As an example, the SEC in the Reinhart matter (see infra note 33) considered in connection with Ms. Reinhart’s going-concern analysis the predecessor standard to AS 1105, which likewise directs an auditor to “consider relevant evidential matter regardless of whether it appears to corroborate or to contradict the assertions in the financial statements.”  AU 326.25, Evidential Matter.  In its order, the SEC appeared to assume that Ms. Reinhart was required to consider inconsistent audit evidence as well as confirmatory evidence when assessing the issuer’s ability to continue as a going concern.  See, e.g., In the Matter of the Application of Cynthia C. Reinhart, CPA, SEC Rel. No. 85964 at 19 n.38 (May 29, 2019).   [29]   See AS 4101, Responsibilities Regarding Filings Under Federal Securities Statutes.   [30]   Compare AS 2415.02 (“date of the financial statements being audited”) to ASC 205-40-50-1 (“date that the financial statements are issued”).   [31]   ASU 2014-15, ¶ BC28.   [32]   AS 2415.02 (emphasis added).   [33]   See generally SEC Rel. No. 85964.   [34]   See id. at 8 (use of subsequent balance-sheet date for analysis); 8-11 (evidence concerning liquidity arising during subsequent period after balance-sheet date).   [35]   See, e.g., John H. Eickemeyer, “The Concerns with Going Concern,” The CPA Journal (Jan. 2016).
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Securities Regulation and Corporate Governance or Business Restructuring and Reorganization practice groups, the Gibson Dunn lawyer with whom you usually work, or the following authors: AuthorsBrian Lane, Michael Scanlon, Michael Rosenthal, Jeffrey Krause, David Ware, and David Korvin © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 20, 2020 |
Bankruptcy Fraud Prosecutions May Increase Post-Pandemic

New York partner Joel Cohen, Los Angeles partner Robert Klyman and Palo Alto associate Emma Strong are the authors of "Bankruptcy Fraud Prosecutions May Increase Post-Pandemic," [PDF] published by Law360 on May 19, 2020.

May 7, 2020 |
Gibson Dunn’s MAXpower deal wins IFLR Asia-Pacific Restructuring Deal of the Year 2020

International Financial Law Review has named MAXpower’s Bank Debt Restructuring as the Restructuring Deal of the Year at the IFLR Asia-Pacific Awards 2020.  Gibson Dunn Singapore lawyers Jamie Thomas and Troy Doyle represented MAXpower Group Pte Ltd (“MAXpower”), a power and energy group in Southeast Asia, in a complex restructuring of its debt and equity structure. The awards were presented on May 7, 2020. Jamie Thomas’s practice spans a range of markets including South and Southeast Asia.  His focus is on international corporate finance transactions, as well as restructurings, reorganizations and insolvencies.  He regularly represents sponsors, borrowers and lenders on complex cross-border leveraged and acquisition finance transactions as well as project finance, debt buy-backs, asset-backed lending, receivables financing, and pre-IPO financings.  In addition, he has extensive expertise in reserves-based and other upstream oil & gas financing and financing for energy and commodity sectors and the telecoms industry in Asia.  Recently, he has been assisting a number of corporates, private equity funds and other alternative capital providers with alternative capital solutions such as Term Loan B, Unitranche and subscription line financings. Troy Doyle focuses on restructuring and insolvency across the Asia-Pacific region.  He has practiced in the region for over 22 years and combines investment and corporate finance knowledge with his restructuring and insolvency legal expertise to provide commercial, pragmatic and strategic solutions. He frequently advises corporate clients as they undertake a restructuring process.  This process often involves challenging stakeholder negotiations, raising new debt and equity (including debtor-in-possession financing), distressed investment and divestment, and implementing a consensual or court approved restructuring plan.

April 30, 2020 |
Criminal Bankruptcy Fraud: Will the COVID-19 Crisis Make It the New Prosecutorial Darling?

Click for PDF The COVID-19 crisis and the resulting disruption to business have adversely affected many corporate entities’ financial stability and outlook. Even rock-solid, liquid companies have been jolted into a new reality, and may be evaluating options for restructuring their business in accordance with Chapter 11 of the Bankruptcy Code. In rarer cases, a company may opt to liquidate under Chapter 7. In such circumstances, counsel, directors, and executives of these corporate entities are well-served to understand the statutes criminalizing fraudulent actions related to bankruptcy, and the attendant risk of costly government investigations, litigation expenses, fines, and jail time. Although there has not been extensive historical application of these statutes to corporate entities, prosecutors and investigators invariably follow the money in their pursuit of alleged fraud, and bankruptcy is thus a natural area of focus in a financial crisis. Prosecutors looking to bring charges befitting the economic environment may be enticed by the many options bankruptcy fraud statutes offer to pursue what they perceive as financial wrongdoing.

I.    Relevant Statutes

Bankruptcy fraud is most commonly prosecuted under Sections 152 and 157 of Title 18 of the United States Code.[1] Each imposes a maximum statutory sentence of five years. 18 U.S. Code § 152. Concealment of assets; false oaths and claims; bribery[2]: In nine subparts,[3] Section 152 broadly criminalizes various actions prior to[4] and during bankruptcy proceedings, including knowingly and fraudulently[5] concealing assets, making false statements, and withholding information from the bankruptcy trustee.[6] Paragraph 7 of Section 152 specifically covers transfers or concealment by an “agent or officer” of a corporation in or contemplating bankruptcy. 18 U.S. Code § 157. Bankruptcy fraud[7]: Section 157 criminalizes utilization of bankruptcy proceedings to further a broader fraudulent scheme.[8] 18 U.S. Code §§ 153 to 156[9]: Sections 153 through 156 criminalize other less commonly prosecuted offenses—including embezzlement of bankruptcy estate assets, agreements to fix fees or compensation, and knowing disregard of bankruptcy rules and procedures. 18 U.S. Code § 1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy[10]: Section 1519 imposes higher penalties—up to twenty years’ imprisonment—for the destruction, alteration, or falsification of records to interfere with an investigation or bankruptcy proceeding. 18 U.S. Code § 3057. Bankruptcy investigations[11]: Section 3057 imposes mandatory reporting requirements on judges, receivers, and trustees who reasonably believe a legal violation has occurred, requiring that they report the possible violation to the U.S. Attorney’s office.

II.    Sentencing Guidelines

The penalties applicable to bankruptcy fraud convictions can be as severe as any financial crime. Section 2B1.1 of the United States Sentencing Guidelines is used to determine the base offense level for the majority of bankruptcy fraud crimes.[12] The base offense level is six for violations under Sections 152 and 157—where the maximum term of imprisonment is five years.[13] However, the base offense level can be adjusted depending on certain characteristics of the offense.[14] Substantial financial loss, or intended loss, has the most significant increase in offense levels, up to 30 levels (resulting in a range of 108 to 405 months incarceration when combined with the base level) for losses over $550,000,000.[15] The sentencing judge is also obligated to order restitution to any identifiable victim, most commonly creditors of the bankruptcy estate.[16] The amount of restitution will depend on the particular offense—for example, restitution for violations under Section 152(1) (relating to concealment of assets) may be measured by the value of the concealed assets.[17] The amount of restitution will always, however, be limited to the victims’ actual losses, not the intended losses relevant to sentencing.[18] A sentencing court is required to order full restitution “without consideration of the economic circumstances of the defendant.”[19]

III.    The U.S. Trustee Program (USTP)

The USTP—commonly referred to as the “watchdog” of the bankruptcy system—is a civil, litigating component of the U.S. Department of Justice, designed to protect “the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders—debtors, creditors, and the public.”[20] The USTP is headquartered in Washington, D.C. and has 92 field offices covering 21 regions.[21] The USTP has a statutory duty to refer matters to the U.S. Attorney for prosecution,[22] and has made over 2,000 such referrals annually since 2012.[23] Members of the public can submit reports of suspected bankruptcy fraud to the U.S. Department of Justice and USTP.[24] Of course, an increase in bankruptcy filings can be expected to correspond to a greater incidence of referred or reported suspicions of bankruptcy fraud.

IV.    Trends in Criminal Bankruptcy Fraud Prosecution

Historically, the bankruptcy fraud statutes have been applied primarily to prosecute individual bankruptcy filers, rather than corporate entities. Nonetheless, corporate officers and agents, including board members, could face liability under the statute. Indeed, an article recently published in a DOJ bulletin suggests prosecutors should add charges of bankruptcy fraud to other criminal charges where applicable to strengthen their case and bolster admissibility of persuasive evidence, such as testimony from sympathetic creditor victims and the defendants’ testimony under oath and detailed financial history submitted in connection with the bankruptcy proceedings.[25]   Misuse of bankruptcy proceedings by legal and other advisers to hide assets, as well as to defraud potential bankruptcy candidates, may well surface as an investigative focus in the aftermath of the COVID-19 financial crisis.[26] Regardless of whether bankruptcy fraud charges are filed, the existence of a bankruptcy can be the thin edge through which problematic activity is pursued. As investigators follow the flow of money, they may mine bankruptcy filings for evidence to strengthen existing cases or to bring new charges. This is particularly so with respect to Ponzi schemes, the extent of which often surface once bankruptcy filings occur.[27] Clients should also be cautioned that communications with and work product by attorneys may be discoverable if the court finds there is a “reasonable likelihood [the attorney] either knew or was willfully blind” to the facts forming the basis of a bankruptcy fraud allegation against the client. See in re Grand Jury Proceedings, G.S., F.S., 609 F.3d 909, 915 (8th Cir. 2010) (affirming that attorney work product and communications related to pre-bankruptcy asset transfer transactions were discoverable under the crime-fraud exception).

V.    Examples of Relevant Prosecutions and Settlements of Individuals

Often, charges brought against executives related to misconduct concerning a company nearing or in bankruptcy proceedings involve other charges, such as wire fraud, bank fraud, and conspiracy. For example, in May 2017, a former CEO of the electronics and appliance retailer Vann’s Inc. was convicted of 170 counts, including bankruptcy fraud, and sentenced to over five years in prison, including a $2.4 million criminal forfeiture verdict. The defendant, in conjunction with Vann’s former CFO, was accused of establishing two shell companies as part of a real estate leaseback scheme. The jury found the defendant had committed bankruptcy fraud by making a claim for $2.4 million against Vann’s estate on behalf of the shell companies after Vann’s declared bankruptcy in 2012.[28] Similarly, in 2016, the former President and CEO of PureChoice, Inc. was sentenced to 22 years in prison for 11 counts, including three for bankruptcy fraud, arising out of an investment fraud scheme. As the scheme unraveled and victims began demanding payment, the defendant filed for personal bankruptcy, and was ultimately charged with bankruptcy fraud for falsifying statements and concealing property in connection with the bankruptcy proceeding. The defendant also was ordered to pay over $22 million in restitution and $7.6 million in a forfeiture judgment.[29] In some cases of alleged embezzlement and concealment of bankruptcy assets, prosecutors have declined to include bankruptcy fraud as a charge altogether, instead relying on the broader counts of mail fraud, embezzlement, or money laundering.[30] Conversely, in other cases, bankruptcy is one of only one or two charges brought. For example, in 2018, the owner of a number of gas stations pled guilty to bankruptcy fraud and was sentenced to 45 months in prison for “scrambling” his finances and destroying records to defraud his creditors. In 2012, the Bankruptcy Court had denied the defendant’s request to discharge his debts because he had failed to retain business records that would enable the court to analyze his financial condition.[31] Also in 2018, a husband and wife who had previously served as partners in a business venture were each sentenced to 50 and 27 months prison time, respectively, for tax evasion and bankruptcy fraud.[32] The couple filed for bankruptcy after attempting to settle over $600,000 in taxes due with the IRS. However, at the same time, the couple caused their companies to pay substantial amounts of personal expenses, including vacation home rental payments and a country club membership. After a jury trial, the defendants were sentenced to jail time and ordered to pay $1.6 million in restitution to the IRS, and over $130,000 in a forfeiture money judgment.[33]

VI.    Risk of Securities Fraud Liability for Corporate Insiders During Financial Distress

Corporate insiders who trade company stock prior to the company filing for bankruptcy may face civil and criminal liability, as well as costs associated with defending against an SEC investigation. Indeed, the SEC has previously brought enforcement actions against insiders who traded securities before news of the company’s financial difficulties or insolvency became public.[34] In a recent press release, the SEC enforcement division acknowledged that due to the COVID-19 crisis, “a greater number of people may have access to material nonpublic information,” and admonished corporate insiders to be “mindful of their of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.”[35] Multiple public officials have faced scrutiny and resulting reports to the DOJ and SEC regarding their trading of stock prior to disclosure of the extent and seriousness of the COVID-19 crisis.[36] Similar public scrutiny is likely to result if corporate insiders engage in significant or uncharacteristic securities transactions during this crisis. This risk is particularly heightened due to the SEC permitting delayed disclosure filing in light of disruptions to business caused by COVID-19—thereby extending the duration of time in which information can be kept non-public.[37]

VII.    Potential Liability for Collusive Bidding on Bankruptcy Assets

 Companies seeking to acquire assets of a bankrupt entity also should be aware of the risk of liability under the Sherman Antitrust Act, 15 U.S.C. §§ 1 et seq., if they engage with competitors regarding the purchase of assets from the bankruptcy estate.  Indeed, the Department of Justice has previously charged companies with violations of the Sherman Act for collusive bidding in a bankruptcy court auction.[38]  The criminal penalties for a Sherman Act violation are severe—up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison.[39] Separately, the bankruptcy trustee can bring claims for civil liability against the purchaser under the Sherman Act during the bankruptcy court proceedings, in addition to claims under Section 363(n) of the Bankruptcy Code.[40]  If a bankruptcy trustee fails to object to the sale during the bankruptcy proceedings, a later suit under the Sherman Act may be barred under res judicata, although a 363(n) claim will not.[41]

VIII.    Recommendations

While investigators and prosecutors have rarely pursued criminal bankruptcy fraud allegations against companies and executives, the opportunities to do so are significant. The lack of prosecution could be a consequence of prosecutors’ unfamiliarity with the criminal bankruptcy fraud statutes and investigating agents’ preference for the traditionally more titillating fraud statutes to encompass the same conduct. These preferences can change quickly, including if the Department of Justice or FBI focus on bankruptcy in the aftermath of the COVID-19 financial crisis. These risks should be kept in mind when evaluating options for restructuring. Further, disgruntled former employees, such as those who may be laid off or furloughed due to COVID-19, increase the likelihood of a financially distressed company being reported to the USTP. Even baseless reports—if investigated—could result in significant costs in reputational harm and defense expenses. In light of the risk of criminal penalties and associated costs, counsel and directors of companies facing financial difficulties should seek competent guidance to navigate these concerns prior to initiating bankruptcy proceedings. ______________________ [1] While the commencement of a bankruptcy case imposes an “automatic stay” against most legal and administrative actions that could have been brought pre-bankruptcy against a debtor, the Bankruptcy Code expressly exempts from that automatic stay governmental criminal actions and claims. See 11 U.S.C. §§ 362(a), 362(b)(1). [2] “A person who— (1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor; (2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11; (3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11; (4) knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity or as or through an agent, proxy, or attorney; (5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11; (6) knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 11; (7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation; (8) after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; or (9) after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor, shall be fined under this title, imprisoned not more than 5 years, or both.” [3] The nine subparts can constitute multiple counts, provided they are not based on the same set of facts. See, e.g., United States v. Roberts, 783 F.2d 767, 769 (9th Cir. 1985); United States v. Ambrosiani, 610 F.2d 65, 70 (1st Cir. 1979), cert. denied, 445 U.S. 930 (1980). [4] Acts prior to, but in contemplation of, a bankruptcy filing are sufficient to support a violation. United States v. Martin, 408 F.2d 949, 954 (7th Cir. 1969) (affirming convictions under prior version of Section 152 based on defendants’ transfer of corporate assets prior to filing bankruptcy). [5] The term “fraudulently” means that the act was done with the intent to deceive. United States v. Diorio, 451 F.2d 21, 23 (2d Cir. 1971), cert. denied, 405 U.S. 955 (1972). [6] See also Stegeman v. United States, 425 F.2d 984, 986 (9th Cir. 1970) (“[Section 152] attempts to cover all the possible methods by which a bankrupt or any other person may attempt to defeat the Bankruptcy Act through an effort to keep assets from being equitably distributed among creditors.”) (quoting 2 Collier on Bankruptcy 1151 (14th ed. 1968)). [7] “A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so— (1) files a petition under title 11, including a fraudulent involuntary petition under section 303 of such title; (2) files a document in a proceeding under title 11; or (3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both.” 18 U.S.C. § 157. [8] See United States v. Milwitt, 475 F.3d 1150, 1155 (9th Cir. 2007) (“[T]he focus of § 157 is a fraudulent scheme outside the bankruptcy which uses the bankruptcy as a means of executing or concealing the artifice.”). [9] “(a) Offense.—A person described in subsection (b) who knowingly and fraudulently appropriates to the person’s own use, embezzles, spends, or transfers any property or secretes or destroys any document belonging to the estate of a debtor shall be fined under this title, imprisoned not more than 5 years, or both. (b) Person to Whom Section Applies.— A person described in this subsection is one who has access to property or documents belonging to an estate by virtue of the person’s participation in the administration of the estate as a trustee, custodian, marshal, attorney, or other officer of the court or as an agent, employee, or other person engaged by such an officer to perform a service with respect to the estate.” 18 U.S.C. § 153 (“Embezzlement against estate”). “A person who, being a custodian, trustee, marshal, or other officer of the court— (1) knowingly purchases, directly or indirectly, any property of the estate of which the person is such an officer in a case under title 11; (2) knowingly refuses to permit a reasonable opportunity for the inspection by parties in interest of the documents and accounts relating to the affairs of estates in the person’s charge by parties when directed by the court to do so; or (3) knowingly refuses to permit a reasonable opportunity for the inspection by the United States Trustee of the documents and accounts relating to the affairs of an estate in the person’s charge, shall be fined under this title and shall forfeit the person’s office, which shall thereupon become vacant.” 18 U.S.C. § 154 (“Adverse interest and conduct of officers”). “Whoever, being a party in interest, whether as a debtor, creditor, receiver, trustee or representative of any of them, or attorney for any such party in interest, in any receivership or case under title 11 in any United States court or under its supervision, knowingly and fraudulently enters into any agreement, express or implied, with another such party in interest or attorney for another such party in interest, for the purpose of fixing the fees or other compensation to be paid to any party in interest or to any attorney for any party in interest for services rendered in connection therewith, from the assets of the estate, shall be fined under this title or imprisoned not more than one year, or both.” 18 U.S.C. § 155 (“Fee agreements in cases under title 11 and receiverships”). “Offense.—If a bankruptcy case or related proceeding is dismissed because of a knowing attempt by a bankruptcy petition preparer in any manner to disregard the requirements of title 11, United States Code, or the Federal Rules of Bankruptcy Procedure, the bankruptcy petition preparer shall be fined under this title, imprisoned not more than 1 year, or both.” 18 U.S.C. § 156(b) (“Knowing disregard of bankruptcy law or rule”). [10] “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.” 18 U.S.C. § 1519. [11] “(a) Any judge, receiver, or trustee having reasonable grounds for believing that any violation under chapter 9 of this title or other laws of the United States relating to insolvent debtors, receiverships or reorganization plans has been committed, or that an investigation should be had in connection therewith, shall report to the appropriate United States attorney all the facts and circumstances of the case, the names of the witnesses and the offense or offenses believed to have been committed. Where one of such officers has made such report, the others need not do so. (b) The United States attorney thereupon shall inquire into the facts and report thereon to the judge, and if it appears probable that any such offense has been committed, shall without delay, present the matter to the grand jury, unless upon inquiry and examination he decides that the ends of public justice do not require investigation or prosecution, in which case he shall report the facts to the Attorney General for his direction.” 18 U.S.C. § 3057. [12] Section 2J1.2 provides a base offense level of fourteen for violations of Section 1519. U.S.S.G. § 2J1.2. [13] U.S.S.G. § 2B1.1(a)(2). [14] U.S.S.G. § 2B1.1(b); see also United States v. Messner, 107 F.3d 1448, 1457 (10th Cir. 1997) (holding bankruptcy fraud constitutes a violation of judicial process warranting the imposition of a two-level sentence enhancement under Section 2F1.1. of the Sentencing Guidelines). [15] U.S.S.G. § 2B1.1(b)(1); see also id. at Application Note 3 (“[L]oss is the greater of actual loss or intended loss.”); https://www.ussc.gov/guidelines/2018-guidelines-manual/annotated-2018-chapter-5. [16] 18 U.S.C. § 3663A(a)(1); see also U.S.S.G. § 5E1.1(a)(1). [17] United States v. Maturin, 488 F.3d 657, 661–63 (5th Cir. 2007) (restitution should be based on the value of the concealed assets covered by the count of conviction, but should not include the value of other concealed assets). [18] 18 U.S.C. §§ 3663A, 3664. A victim may receive more than its actual losses pursuant to a plea agreement. 18 U.S.C. § 3663(a)(3). [19] 18 U.S.C. § 3664(f)(1)(A). [20] https://www.justice.gov/ust; see also 28 U.S.C. § 586. [21] https://www.justice.gov/ust. [22] 28 U.S.C. § 586(a)(3)(F). [23] See https://www.justice.gov/ust/bankruptcy-data-statistics/reports-studies (FY 2019 data not yet available). [24] https://www.justice.gov/ust/report-suspected-bankruptcy-fraud. [25] Charles R. Walsh, Why is a Bankruptcy Charge Valuable to Any Investigation, United States Attorneys’ Bulletin (Mar. 2018), https://www.justice.gov/usao/page/file/1046201/download at 131. [26] See, e.g., Paul Kiel, How to Get Away With Bankruptcy Fraud, ProPublica (Dec. 22, 2017), https://www.propublica.org/article/how-to-get-away-with-bankruptcy-fraud (acknowledging a lack of resources available for bankruptcy-related prosecutions, but quoting DOJ as stating USTP activities and “collective efforts within the Justice Department and with the wider bankruptcy community may result not only in an increase in referrals and prosecutions, but also in greater deterrence of bankruptcy crimes at the outset”). [27] See, e.g., https://www.justice.gov/usao-sdny/file/762811/download, https://www.justice.gov/usao-sdny/file/762821/download (sentencing Bernie Madoff to 150 years in prison and imposing a money judgment of $170 billion in connection with his Ponzi scheme, following appointment of a trustee to oversee liquidation of his corporation Bernard L. Madoff Investment Securities LLC pursuant to the Securities Investor Protection Act of 1970); https://www.justice.gov/archive/usao/nys/pressreleases/July09/dreiermarcsentencingpr.pdf (sentencing attorney Marc Dreier to 20 years in prison and ordering over $1 billion in restitution and forfeiture after he pleaded guilty to fraud related to his operation of a Ponzi scheme and following the bankruptcy of Dreier’s firm, Dreier LLP). [28] https://www.justice.gov/usao-mt/pr/former-ceo-vann-s-inc-sentenced-5-years-prison-0. [29] https://www.justice.gov/usao-mn/pr/purechoice-founder-sentenced-22-years-prison-28-million-dollar-investment-fraud-scheme. [30] E.g., https://www.justice.gov/usao-mdla/pr/former-chief-financial-officer-restaurant-chain-indicted-wire-fraud-embezzlement. [31] https://www.justice.gov/usao-wdmi/pr/2018_0423_Vernier. [32] The husband was charged with three additional crimes. [33] https://www.justice.gov/usao-co/pr/stapleton-couple-sentenced-income-tax-evasion-and-bankruptcy-fraud. [34] See, e.g., https://www.sec.gov/news/press-release/2012-2012-198htm (charging former bank executive and his son with insider trading when the son bought and sold shares of the bank’s stock before and after information about the bank’s asset sale became public); https://www.sec.gov/news/digest/1993/dig102893.pdf at 3–4 (referencing charges brought against the chairman of the board of J. Baker, Inc. for selling 200,000 shares of stock prior to disclosure that the company planned to close a significant number of its retail outlets). [35] https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity. [36] E.g., https://www.commoncause.org/press-release/doj-sec-ethics-complaints-filed-against-senators-burr-feinstein-loeffler-inhofe-for-possible-insider-trading-stock-act-violations/. [37] https://www.sec.gov/rules/other/2020/34-88318.pdf. [38] https://www.justice.gov/archive/atr/public/press_releases/1993/211588.htm (bringing Sherman Act and bankruptcy fraud charges against a Spanish company for conspiring to rig bids for an aircraft at a bankruptcy auction); see also United States v. Seminole Fertilizer Corp., No. 97-1507-CIV-T-17E, 1997 WL 692953, at *6 (M.D. Fla. Sept. 19, 1997) (final judgment on Sherman Act charges related to its alleged agreement with another company to provide bid support to enable the defendant to defeat a rival bid during a bankruptcy auction). [39] 15 U.S.C. § 1. [40] See 11 U.S.C. § 363(n) (permitting the avoidance of a sale “if the sale price was controlled by an agreement among potential bidders,” along with the recovery of the difference in the value of the property and the price paid, along with costs, fees, and punitive damages); In re New York Trap Rock Corp., 160 B.R. 876, 881 (S.D.N.Y. 1993) (“§ 363(n) is in effect a supplementary antitrust law akin to § 1 of the Sherman Act (15 U.S.C. § 1) with its own separate jurisdictional groundwork and separate sanctions for violation).”), aff’d in part, vacated in part, 42 F.3d 747 (2d Cir. 1994). [41] See In re International Nutronics, Inc., 28 F.3d 965 (9th Cir. 1994), cert. denied, 513 U.S. 1016 (1994).
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s White Collar Defense and Investigations or Business Restructuring and Reorganization practice groups, or the following authors: Joel M. Cohen - New York (+1 212-351-2664, jcohen@gibsondunn.com) Mary Beth Maloney - New York (+1 212-351-2315, mmaloney@gibsondunn.com) Zainab N. Ahmad - New York (+1 212-351-2609, zahmad@gibsondunn.com) Robert A. Klyman - Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Scott J. Greenberg - New York (+1 212-351-5298, sgreenberg@gibsondunn.com) Emma Strong - Palo Alto (+1 650-849-5338, estrong@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 22, 2020 |
COVID-19: Update on UK Financial Support Measures

Click for PDF In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”).  In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million. In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”). See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more resources on the response to COVID-19. Background to the CLBILS Design Flaws with the CBILS and Pressure from Industry Whilst the UK Government announced a package of measures worth approximately £330 billion in mid-March 2020, in recent days, the UK Government has come under pressure to ensure that all UK businesses are able to access the financial and liquidity support measures that have been made available. As at close of business on 13 April 2020, UK Finance (the industry body for the banking and finance sector in the UK) reported that of 28,461 applications made to lenders to access the CBILS, only 6,016 loans had been approved with total lending reaching £1.1 billion. Further, it has become clear that the CCFF would only be available to a select number of investment grade companies in the UK that already had a commercial paper issuance programme or those that would otherwise meet the criteria for such a programme. Criticism of the CBILS have been growing since its launch. Industry bodies, including the British Private Equity and Venture Capital Association (the “BVCA”) have been reporting a number of structural issues with the scheme that meant large business and portfolio companies of private equity firms were not able to access much needed financial support. This is supported by the views of our private equity clients, whose portfolio companies have encountered difficulties in accessing the scheme. Some of the issues identified have been:

  • Process and Timing: Difficulties with access to the scheme and the process for approving applications has had a significant impact on the liquidity position of a number of companies.
  • Eligibility Criteria:
    • Companies and industry bodies have been reporting that banks are only lending to those companies that are credit-worthy with a strong balance sheet (i.e. those companies with retained profits/equity capital and low leverage). This is because lenders retain a 20% exposure to loans advanced under the CBILS. This has prevented many venture capital backed companies and innovative tech and healthcare companies that are not typically profitable from accessing much-needed financial support.
    • Importantly for our clients, guidance from the British Business Bank to lenders also provided that companies that are majority-owned by a private equity firm would not be eligible to participate in the CBILS in circumstances where additional equity funding is available to be provided by the private equity firm.
    • Lenders have also been aggregating the annual revenues of private equity firm’s majority-owned portfolio companies to determine whether a single portfolio company is eligible for a CBILS loan, which had the effect of excluding the large majority of portfolio companies backed by mid to large-cap private equity firms (estimated by the BVCA to be 750+ companies).
  • Level of Funding: When the CLBILS was initially announced on 3 April 2020, it was suggested that the scheme would provide £25 million of funding to businesses with an annual revenue of between £45 million and £500 million. For larger companies with an annual revenue of £500 million, a loan of £25 million would represent just over half of a business’ revenue for a month. The concern expressed is that if the current low levels of economic activity prevail for a significant period into the summer months, the loans available would not provide a sufficient liquidity buffer, even with the other support measures available, to prevent many companies from going out of business.
In the context of the growing criticism of the design flaws with the CBILS and the lack of access to the CCFF, the UK Government was forced to act by launching: (i) the CLBILS to provide genuine support to the majority of medium to large-sized UK businesses, and (ii) the Innovation and Development Scheme to support innovative development and research companies, including those backed by venture capital firms. Regulatory Pressure On 15 April 2020, the Financial Conduct Authority (FCA) published a “Dear CEO” letter setting out its expectations of banks, in relation to lending to SMEs. In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the CBILS, is passed through to businesses as soon as possible. The FCA also highlighted that responsibility for these specific lending activities should be allocated to one or more Senior Managers. In the letter, the FCA also stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against banks where it does not consider that its expectations have been met. The pressure on commercial lending institutions to deliver the UK Government’s schemes and provide access to liquidity has, therefore, been increasing. The Coronavirus Large Business Interruption Loan Scheme On 3 April 2020, the UK Chancellor of the Exchequer, Rishi Sunak MP, announced that support would be provided to larger businesses in the UK (i.e. those with an annual revenue of in excess of £45 million) through the CLBILS. There followed an announcement on 16 April 2020, which set out the scope of the CLBILS, a scope broader than that initially announced on 3 April 2020. The UK Government has sought to design the CLBILS to support those businesses that hitherto had been unable to access funding through the CBILS or that had been ineligible to obtain funding through the CCFF. The CLBILS launched on Monday, 20 April 2020, and the key details of the scheme are as follows:
  • Businesses with UK-based business activity and annual revenue of more than £45 million are eligible.
  • Businesses with an annual revenue of between £45 million and £250 million will be able to access to up to £25 million of loans and businesses with an annual revenue of more than £250 million will have access to up to £50 million of loans.
  • The UK Government will guarantee 80% of each loan but unlike the CBILS, the UK Government will not cover the first twelve months of interest.
  • The business needs to have a borrowing proposal which the lender would consider viable, that will enable the business to trade out of any short-term to medium-term difficulty caused by the COVID-19 pandemic.
  • The business should be able to self-certify that it has been adversely impacted by the COVID-19 pandemic.
  • The business should not have received a facility under the CCFF.
  • Majority-owned portfolio companies of private equity firms will now be able to access the scheme following updated guidance to lenders, as such companies’ annual revenues will be assessed on a standalone basis (i.e. there will be no grouping of all of a private equity firm’s portfolio companies’ annual revenues).
  • Personal guarantees will not be permitted for loans of up to £250,000.
  • The scheme will be available through a series of accredited lenders, that will be listed on the British Business Bank website.
  • Credit institutions, insurers, reinsurers, building societies, public sector bodies, grant-funded further education establishments and state-funded schools are not eligible to participate in the scheme.
As a result of pressure from UK-businesses, the CLBILS appears to address some of the key issues relating to eligibility and levels of funding that had been identified with the CBILS. Large businesses now have access to up to £50 million of funding (depending on annual revenues) and companies that are not eligible to access the CCFF may still able to access the loans under the CLBILS. Importantly for the private equity industry, it also appears as though revenue-grouping for portfolio companies has been abolished together with the exclusion from the schemes of companies that are majority-owned by private equity firms. However, one key point to note is that it appears as though businesses will need to still be credit-worthy with a viable business plan to access finance under the CLBILS. The decision on credit-worthiness remains in the hands of a business’ lenders and so businesses which maintain a high leverage levels may continue to be excluded. The Innovation and Development Scheme On 20 April 2020, the Chancellor of the Exchequer announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the Covid-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the Covid-19 pandemic, delivered in partnership between UK Government and the private-sector (the “Future Fund”); and (ii) £750 million of grants and loans to SMEs focussing on research and development. The Future Fund In an unprecedented step, the Future Fund will make convertible loans of between £125,000 and £5 million available to high-growth innovative businesses in the UK. The Fund will be delivered by the British Business Bank and will provide UK-based companies with funding from the UK Government. Private investors will be obliged to match the UK Government funding amount for companies to participate. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid, meaning the UK Government will become a shareholder in these companies. To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The UK Government has also published a term sheet which sets out the terms of the convertible loans provided under the Future Fund here. The UK Government’s initial commitment to the Future Fund will be £250 million, with the Future Fund due to open for applications in May 2020 and run until September 2020. The UK Government has announced that it will keep the scale of its investment in the Future Fund under review. Grants and Loans for Research and Development £750 million of targeted support will be made available for research and development intensive SMEs. The grants and loans will be provided through existing schemes of the UK’s national innovation agency, Innovate UK. Innovate UK, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. It has been announced that the first payments will be made by mid-May. Conclusions We are in unprecedented times in the United Kingdom, as is the case for many leading economies globally. The UK State (and accordingly, the UK taxpayer) is being asked to underwrite British business for it to survive during the COVID-19 pandemic. The UK Government is having to make policy announcements an almost daily basis in a very fluid situation and then rush to provide guidance and infrastructure for policy to be delivered. This has led to much criticism but the new measures appear to be designed to plug the design flaws in the initial schemes that were adopted in the early days of the developing COVID-19 crisis. However, it remains to be seen whether the new schemes and updated guidance will enable lenders to speed up processes for approving loans and funding businesses at a time when the liquidity squeeze is being keenly felt. Central to the loan approval processes is the issue that the UK Government is guaranteeing only 80% of the exposure for lenders under the schemes with 20% of the residual risk carried by commercial lenders. In the current economic environment and prevailing macro-economic uncertainty, some lenders are discouraged from approving the loans under the schemes where they carry such residual risk. It is considered likely that further measures may need to be enacted, including having the UK Government or the Bank of England step in to guarantee 100% of the loans issued under the schemes to enable lenders to have the confidence in lending to British business. In these unprecedented times, it will remain to be seen whether further unprecedented measures are needed or whether the UK Government’s latest schemes will provide sufficient funding and liquidity for UK Business to survive what is fast-turning into a global economic crisis.
This client update was prepared by Tom Budd, Greg Campbell, Michelle Kirschner, Mark Sperotto, Attila Borsos, Amar Madhani and Martin Coombes. 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. In the UK, the contact details of the authors and other key practice group lawyers are as follows: The Authors: Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, mkirschner@gibsondunn.com) Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, msperotto@gibsondunn.com) Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, aborsos@gibsondunn.com) Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com) Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, mcoombes@gibsondunn.com) London Key Contacts: Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com) Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) James A. Cox – London, Employment (+44 (0)20 7071 4250, jcox@gibsondunn.com) Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Ben Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com) Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, chaynes@gibsondunn.com) James R. Howe – London, Private Equity (+44 (0)20 7071 4214, jhowe@gibsondunn.com) Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, ahowell@gibsondunn.com) Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, jkenley@gibsondunn.com) Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, pamadden@gibsondunn.com) Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, anikpay@gibsondunn.com) Philip Rocher – London, Litigation (+44 (0)20 7071 4202, procher@gibsondunn.com) Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, ssagayam@gibsondunn.com) Alan A. Samson - London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, asamson@gibsondunn.com) Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, jtrinklein@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 13, 2020 |
Best Lawyers in Singapore 2021 Recognizes Five Gibson Dunn Attorneys

Best Lawyers in Singapore 2021 has recognized five Gibson Dunn attorneys as leading lawyers in their respective practice areas: Troy Doyle – Insolvency and Reorganization Law; Jai Pathak – Banking and Finance and Mergers and Acquisitions Law; Brad Roach– Energy Law and Mergers and Acquisitions Law; Saptak SantraBanking and Finance and Energy Law; and Jamie Thomas – Banking and Finance. The guide was published April 9, 2020.

April 6, 2020 |
Fiduciary Duties and Board Options in a Time of Pandemic

Click for PDF NOTE:  This Client Alert, which focuses on Delaware law, does not purport to provide an exhaustive guide to the issues directors should consider in times of financial stress. The rapid spread of COVID-19, increasingly stringent government orders in response, and the profound effects on the global economy have raised concerns among corporate directors about how to adequately discharge their fiduciary duties. First and foremost, directors can rest assured that the flexibility and protections afforded to them by the business judgment rule remain as vital today as they did before the COVID-19 pandemic. The COVID-19 pandemic does not alter the business judgment deference afforded to decisions made by a well-informed and non-conflicted board that acts in good faith towards what is best for the corporation and its stockholders. However, directors do need to recognize that as a result of the COVID-19 pandemic, economic, regulatory, and public health related events are unfolding faster than ever.  Directors must make decisions on tight timetables and with limited resources.  This note is a tool for directors to help them identify some of the issues they should consider to ensure that their decisions are protected by the business judgment rule as they guide their companies during these challenging times. Ensure Information and Reporting Systems Are Adequate.  Directors generally must attempt to assure a reasonable information and reporting system exists as part of their oversight obligations.  This is an area that had already become the focus of boards and their advisors over the last 18 months, as recent Delaware cases have criticized boards for failing to properly discharge their oversight obligations.[1] Most companies already have in place systems for typically encountered business issues, including regularly scheduled management updates.  Those systems should be adapted as needed to respond to the current pandemic and its impact on your business.  At a minimum, evaluate whether your system involves:

  • Regular Management Updates. To satisfy their duties, directors are expected to require management to deliver updates about the business to the board on a consistent basis—and to document those requirements where possible.  Management is likely gathering information related to COVID-19 and tracking the effects of the pandemic on the organization.  Directors should ensure they receive updates with the benefit of that information.
  • Board Review and Adoption of Relevant Policies. Directors are often expected to play a role in reviewing policies that a company develops in response to applicable regulations and should oversee policies, among other things, relating to the regulatory response to COVID-19, when appropriate.
  • Written Materials. It is not always possible to prepare written materials ahead of a board meeting; however, it is a good practice to provide written materials whenever practicable.  While the addition of written materials to update the directors places an additional burden on management, should a board decision later be subjected to judicial review, courts may consider whether directors reviewed written materials in making significant corporate decisions.  Note that written materials that reflect legal advice should be marked “privileged and confidential.”
Maintain Complete and Accurate Board Minutes.  Contemporaneously recorded board minutes are generally entitled to a presumption that they accurately reflect the substance of the board’s discussions. Whenever practicable, clients should continue to record board minutes contemporaneously with any meeting to ensure that if needed, the board has a written record of its actions.  And boards should evaluate how much detail is required under the circumstances:  for example, merely referring to a discussion of COVID-19 as an “operational update” is unlikely to provide a sufficient basis to determine whether the directors adequately discharged their fiduciary duties, unless the record reflects that additional written materials were provided to directors that reflect in a more fulsome manner the relevant “operational update.”   Be Aware of Privilege Issues.  Directors should be especially vigilant about protecting privilege given the range of third-party non-legal advisors that may be assisting  clients in responding to the COVID-19 pandemic.  While board communications with in-house and outside counsel are generally privileged, the mere presence of an attorney at a board meeting will not cloak a communication in privilege because privilege only attaches to legal advice, including requests for legal advice, and attorney-client communications.  Additionally, the presence of third parties at board meetings where legal advice is being provided likely will constitute a waiver of privilege if the third parties (including observers and financial advisors) are not necessary for legal advice discussed.  Therefore, directors should evaluate regularly whether third parties should be excused from any portion of a meeting.  Directors should also exercise caution when forwarding or disseminating company materials to third parties, because doing so could constitute a waiver of privilege.  In addition, communications among the directors that do not involve communications with lawyers are likely not privileged. Regularly Evaluate Solvency.  Businesses that were previously on strong financial ground are now facing financial challenges of a size and speed that was not contemplated prior to the COVID-19 pandemic.  Businesses already facing financial stress will likely face even greater financial stress, potentially pushing them closer to insolvency at a faster rate.  Directors should evaluate how often they need to receive reports on the financial condition of their business.
  • Fiduciary Duties Expand to Cover Creditors. The board of directors owes fiduciary duties to the corporation.  Generally, when a corporation is solvent, the beneficiaries of those fiduciary duties are the stockholders; creditors do not benefit from fiduciary duties and instead are instead afforded protection through contracts and other sources of creditor rights.  But when a corporation becomes insolvent, under Delaware law, creditors become the primary beneficiaries of those fiduciary duties, and this shift will require that boards take into account the interests of creditors as well as stockholders when making strategic decisions.  Even when fiduciary remedies extend to creditors, they are still be subject to the default business judgment rule if the underlying actions were taken by non-conflicted directors.  Note that under Delaware law, LLC operating agreements can include broad waivers of fiduciary duties, so boards of those entities may want to confirm whether applicable waivers are in such operating agreements.
  • Insolvency May Prohibit Scheduled Actions. Certain board decisions made before the COVID-19 pandemic may require re-evaluation to account for the company’s post-COVID-19 financial status.  For example, the board may have approved an extraordinary capital expenditure prior before to the COVID-19 pandemic (g., opening a new factory), which it is prudent to revisit given the current climate.  Or the board may have declared a dividend prior to the pandemic, but before paying a dividend, certain state statutes require that the corporation have sufficient assets such that the payment would not leave the corporation insolvent.  Should the board determine the company is sufficiently stressed that it cannot issue a dividend, that may create legal peril if the dividend was previously declared.  The prior declaration of a dividend may have created an irrevocable debtor-creditor relationship between the corporation and its stockholders, and the only lawful option might be to postpone the record date (if it has not yet passed) and payment date until a future date when adequate funds become lawfully available for distribution to stockholders.  This is just one of the many previously approved board actions that boards may need to reassess after being fully informed about the company’s financial condition. 
Check Your D&O Insurance.  Evaluate whether you have sufficient coverage.  Confirm whether your insurance policy has, or whether you need, Side A coverage (direct coverage for directors and officers who the company is unable or unwilling to indemnify) or Side B coverage (reimbursement to the company for indemnity payments made on behalf of directors and officers).  Evaluate whether your policy has exclusions that would vitiate coverage in the event the company files for bankruptcy. Key Employee Retention Plan.  Evaluate whether steps should be taken to retain key management.  Particularly in cases where the company is in distress, typical equity grants may be insufficient as a retention tool.  Further, key employees may consider a future promise of retention payments to be too speculative or risky in light of the company’s financial stress.  One strategy that may mitigate the risk is to make an upfront cash retention payment to key employees, with a written agreement that the employee will keep the payment if by a designated milestone the employee has not been fired for cause or did not resign without cause. __________________    [1]   See Gibson, Dunn & Crutcher LLP, Delaware Supreme Court Revisits Oversight Liability (July 29, 2019), https://www.gibsondunn.com/delaware-supreme-court-revisits-oversight-liability/. __________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work, or the authors: Authors:  Shireen Barday, Mary Beth Maloney, Dennis Friedman, Eduardo Gallardo, Robert Klyman, Jonathan Fortney and Patrick Hayden

March 27, 2020 |
COVID-19: UK Financial Support for Businesses through Purchases of Commercial Paper and Lending to SMEs

Click for PDF The UK Government has launched two funding mechanisms to assist firms with the potential impact of COVID-19 on their businesses:

  1. a joint lending facility between the UK HM Treasury and the Bank of England (“BoE”) designed to support liquidity among larger firms through the purchase of commercial paper, the Covid Corporate Financing Facility (“CCFF”); and
  2. financial support for smaller businesses by giving lenders a government-backed guarantee for loan repayments, the Coronavirus Business Interruption Loan Scheme (“CBILS”).
This client alert provides an overview of the CCFF and CBILS and provides practical guidance as to how firms can make use of these facilities. (1) The Covid Corporate Financing Facility The CCFF is a joint lending facility between HM Treasury and the BoE designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.
Is my firm’s commercial paper eligible? The CCFF will purchase sterling-denominated commercial paper, with the following characteristics:
  •  Maturity of one week to twelve months.
  • Where available, a credit rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020.
  • Issued directly into Euroclear and/or Clearstream.
The BoE will accept commercial paper with standard features that is issued using ICMA market standard documentation.  Commercial paper with non-standard features such as, for example, extendibility or subordination is not eligible. The BoE may consider accepting simplified versions of documentation, based on standard ICMA materials. Commercial paper issued by banks, building societies, insurance companies and other financial sector entities regulated by the BoE or the Financial Conduct Authority will not be eligible. Commercial paper will also not be eligible if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.
Can my firm use the CCFF? The CCFF is available to companies, and their finance subsidiaries, that “make a material contribution to the UK economy.” The BoE states that, in practice, firms that meet this requirement would typically be:
  • UK incorporated companies (including those with foreign-incorporated parents and with a genuine business in the UK);
  • companies with significant employment in the UK;
  • firms with their headquarters in the UK.
The BoE notes that it will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK. The CCFF is open to firms that can demonstrate they were in “sound financial health” prior to the impact of COVID-19. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent.  If firms have different ratings from different agencies, and one of those is below investment grade then the commercial paper will not be eligible.  The CCFF is open to all firms and sectors, providing that the eligibility criteria as set out above are satisfied.  The BoE has indicated that the CCFF will be available for at least 12 months.
How does the CCFF work in practice?
  • Purchase operations – These will be held every working day between 1000 – 1100 am. Offers to sell commercial paper to the CCFF should be submitted by phone to the BoE’s Sterling dealing desk (or as advised on the BoE’s wire services page).
  • Minimum size - The minimum size of an individual security that the CCFF will purchase from an individual participant is £1 million nominal. The BoE requires offers to be rounded to the closest £0.1 million.
  • Primary market pricing - For primary market purchases the BoE will purchase securities at a spread above a reference rate, based on the current sterling overnight index swap (OIS) rate. The respective reference OIS rate will be determined at 9:45 am on the day of the operation.
  • Secondary market pricing - For secondary market purchases the BOE will purchase commercial paper at the lower of amortised cost from the issue price and the price as given by the method used for primary market purchases as set out above. The BOE will apply an additional small fee (currently set at 5 bps and subject to review) for use of the secondary facility, payable separately.
  • Spreads - The respective spreads, which are subject to review, as at 23 March 2020 are:

Rating

Spread to OIS

A1 / P1

20 bps

A2 / P2

40 bps

A3 / P3

60 bps

  • Settlement arrangements – The BoE will send a written electronic confirmation of each transaction on the day of purchase. The CCFF’s purchases will normally settle on a T+2 basis.
  • Published information - The BoE will publish each Thursday at 3 pm information on the use of the CCFF, including: (i) the total amount of commercial paper purchased that week up until the previous day, in terms of the amount paid to the sellers; and (ii) the sum of commercial paper purchased, less redemptions, to date.
What if my firm does not have a credit rating? The BoE notes that some firms wishing to access the scheme will not have a credit rating.  The BoE encourages such companies to discuss the matter with their bank.  If that bank’s advice is that the firm was viewed as equivalent to investment grade as at 1 March 2020, the BoE suggests such companies contact the BoE. Alternatively, the BoE notes that companies can contact one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with the BoE and HM Treasury. What if my firm has not previously issued commercial paper? Companies do not need to have issued commercial paper prior to using the CCFF.  The BoE recommends that such businesses contact their bank regarding issuing commercial paper. If eligible, banks can assist firms with issuing such commercial paper to the CCFF. How do I apply to use the CCFF? Applications to participate as counterparties in the CCFF are now open.  Firms wishing to participate in the CCFF must complete and file the following documents:
  • Issuer Eligibility Form;
  • Issuer Undertaking and Confidentiality Agreement; and
  • evidence of the signatory’s authority to act.
If the commercial paper is issued by another group entity, that entity may need to provide: (1) guarantee in favour of the BoE; and (2) a legal opinion on the capacity and authority of the guarantor. Additional documentation is required from banks acting as dealers on behalf of companies. The CCFF application documents are now available on the BoE’s website.  Once the relevant paperwork has been submitted, the BoE will confirm if a firm’s commercial paper is eligible as soon as possible.  If eligibility is confirmed before 4 pm on a working day, a firm will be able to sell commercial paper to the BoE the next working day. (2) Coronavirus Business Interruption Loan Scheme How does the CBILS work? The British Business Bank operates CBILS via its “accredited lenders”. This includes over 40 lenders ranging from high street banks, challenger banks, asset-based lenders and smaller specialist lenders.

What are the lending criteria?

In order to be eligible, businesses that wish to use the facility must satisfy all of the following criteria:
  • the application must be for business purposes;
  • the applicant must be a UK-based SME with annual turnover of up to £45 million;
  • the applicant’s business must generate more than 50% of its turnover from trading activity;
  • the CBILS-backed facility will be used to support primarily trading in the UK;
  •  the applicant wishes to borrow up to a maximum of £5 million; and
  • the applicant has a borrowing proposal which the lender:
    • would consider viable, were it not for the COVID-19 pandemic; and
    • believes will enable the business to trade out of any short-term to medium-term difficulty.
The following businesses are not eligible:
  • banks and building societies;
  • insurers and reinsurers (but not insurance brokers);
  • public sector organisations (including state-funded primary and secondary schools);
  • employer, professional, religious or political membership organisations; and
  • trade unions.
What are the key finance terms and the maximum loan covered? As noted above, lenders can provide up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance.  The lender is given a government-backed guarantee for the loan repayments. However, the borrower remains 100% liable for the debt.  The CBILS can be used for: (1) term loans and asset finance facilities of up to six years; and (2) for overdrafts and invoice finance facilities of up to three years. What payments will the UK Government make? The UK Government will make a “Business Interruption Payment” to cover the first 12 months of interest payments and any lender-levied charges. What is the position with respect to security? The position is that if a lender can offer finance on normal commercial terms without making use of the CBILS, it will do so.  The lender can choose to use the CBILS for unsecured lending for facilities of £250,000 or less.  If the facility is over £250,000, the lender must establish if the borrower is unable to provide security, before it uses CBILS.  It is open to banks to ask for security including personal guarantees from directors and security over their assets in support of such guarantees, however, there is a prohibition on taking such security over a director’s primary residential property. Are there any guarantee fees for businesses? There are no guarantee fees for SMEs, however, lenders pay a fee to access the scheme. How do businesses access the CBILS? Businesses should approach a CBILS accredited lender.  A full list of accredited lenders is available on the British Business Bank’s website.[1] ____________________ [1] https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/
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. Gibson Dunn's lawyers regularly counsel clients on the compliance issues raised by this pandemic, 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 Financial Institutions Group, or the authors: Gregory A. Campbell - London (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) Christopher Haynes - London (+44 (0)20 7071 4238, chaynes@gibsondunn.com) Michelle M. Kirschner - London (+44 (0)20 7071 4212, mkirschner@gibsondunn.com) Steve Thierbach - London (+44 (0)20 7071 4235, sthierbach@gibsondunn.com) Martin Coombes - London (+44 (0)20 7071 4258, mcoombes@gibsondunn.com) Financial Institutions Group: Matthew L. Biben - New York (+1 212-351-6300, mbiben@gibsondunn.com) Michael D. Bopp - Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Stephanie Brooker - Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) Gregory A. Campbell - London (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) M. Kendall Day - Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Christopher Haynes - London (+44 (0)20 7071 4238, chaynes@gibsondunn.com) Michelle M. Kirschner - London (+44 (0)20 7071 4212, mkirschner@gibsondunn.com) Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Steve Thierbach - London (+44 (0)20 7071 4235, sthierbach@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 27, 2020 |
“… whatever it takes” – German Parliament Passes Far-Reaching Legal Measures in Response to the COVID-19 Pandemic

Click for PDF On March 25, 2020, the German Parliament (Bundestag) passed a far reaching rescue package to respond to the COVID-19 pandemic and its dramatic economic effects. The full text of the package can be found here.[1] The package is a combination of significant changes on different levels: (i) Temporary changes in the German civil code to protect individual tenants, debtors, and obligors under continuous obligations; (ii) the relaxation of provisions for businesses that are otherwise threatened by insolvency, (iii) practical solutions for companies to handle their corporate affairs in a virtual or remote setting, and – a bit out of step with the other context - (iv) extending strict court deadlines in a criminal proceedings to ensure criminal hearings keep pending during the COVID-19 crisis. Below are the specific elements of the comprehensive package that are each discussed in more detail below:

I. Protect Individual Consumers, Micro-Businesses and Tenants Affected by COVID-19

For cases in which consumers or micro-enterprises are no longer able to meet their obligations under continuing obligations due to the COVID-19 pandemic, the temporary (non-waivable) moratorium should enable them to cover liquidity losses due to their loss of income through June 2020. With the "Act on Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law" (the “Act”), the German legislator has adopted a new temporary right to refuse performance under these contracts (See Article 240 of the Introductory Act to the German Civil Code). The new regulation not only raises substantial questions of economic policy and constitutional law, but will also lead to substantial legal uncertainties due to the large number of legal “blanket terms” used and the required weighing of interests.

1. Temporal scope of application

The moratorium is initially limited to June 30, 2020, but can subsequently be extended by directive - if the Bundestag does not object - through September 30, 2020. The short period reflects that the moratorium is intended to bridge short-term liquidity constraints of those affected until the start of government aid measures (ultima ratio function).

2. Personal scope of application

Consumers and micro-enterprises are supposed to be the beneficiaries of the moratorium. Section 13 of the German Civil Code (BGB) defines the term “consumer” as an individual that concludes a transaction for primarily private purposes. The definition of a micro-enterprise can be found in the EU Commission’ Recommendation 2003/361/EC of May 6, 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36). Therein, a micro-enterprise is defined in particular as an enterprise which employs fewer than ten employees.

3. Substantive scope of application

Specifically, the legislator provides that the beneficiaries of the moratorium can refuse to fulfill obligations arising from “substantial continuing obligations”. Rental and property lease agreements are specifically regulated in Section 2, and loan relationships specifically in Section 3 (for more details, see below). Employment contracts are exempted from the scope of application. With regard to the term ”continuing obligation”, the legislator apparently uses the long-established definition from civil law. For consumers, substantial continuing obligations are those which serve to provide goods/services of general interest (e.g. the supply of electricity and water), and for micro-entrepreneurs those which are “necessary for the appropriate continuation of their business”. Thus, the scope of application for micro-entrepreneurs appears to be wider and includes regular supplies of goods to the micro-entrepreneur based on agreements with continuing obligations, and services that the micro-entrepreneur has to provide himself under such agreements. With regard to insurance contracts, for example, it will be necessary to differentiate based on their relevance.

4. Standards to be met to refuse performance

In order to be entitled to refuse performance, it is necessary that, due to circumstances caused by the COVID-19 pandemic, the beneficiary is not able to provide the service without risking its “reasonable standard of living” (consumers) or the “economic basis of its business” (micro-enterprises). What this means will have to be clarified on a case-by-case basis. In particular, the legislator has not clarified, to what extent the use of one's own assets - in the case of micro-entrepreneurs also of private assets - can be demanded. It is also open to what extent the use of state aid, if available, will be required first. It is also unclear from the wording of the law who will bear the burden of proof. For property lease agreements, the legislator allows an affidavit to prove a connection between the COVID-19 pandemic and the difficulty of performance. In view of the fact that this is found in the provisions dealing with property lease agreements, it is doubtful whether this applies accordingly to other continuing obligations.

5. Legal consequence

The moratorium postpones the obligation to fulfil the primary performance obligations. Once the moratorium ends, these obligations must be fulfilled if the other prerequisites are met. In addition, the moratorium prevents damage claims caused by default, in particular default interest, coming into existence for a period of three months.

6. Exclusion

The right to rely on the moratorium is excluded if the moratorium puts an unreasonable burden on the creditor because failure to perform “would threaten his [own] reasonable standard of living or the reasonable standard of living of his dependent relatives or the economic basis of his business”. In this case, the debtor has the unilateral right to terminate the contract. Obviously, questions similar to those regarding reasonableness naturally arise on the debtor side.

7. The moratorium's objection character

If the affected person decides to claim the moratorium, he or she must raise the objection (it is not recognized ex officio). This bears substantial risks when applying the law. In particular, it will be up to the courts to interpret the legal “blanket terms”, and to clarify the relevant questions of fact. Considering the current delays in the courts, this could take years in some cases.

8. Recommendations

Going forward, companies should scrutinize their contractual portfolio to identify which contracts vis-a-vis consumer and micro-enterprises qualify as governing “substantial continuing obligations”. In this context, it will be particularly important to distinguish contracts on „continuing obligations“ from such which only stipulate subsequent delivery instalments (Sukzessivlieferverträge). Once such contractual relationships which are subject to the new law are identified, the accounting department should be notified where the relevant collection processes need to be amended. In this context, a standard letter should be prepared confirming receipt of a notice by the respective consumers or micro-enterprises claiming rights under the moratorium. The standard letter should not go beyond acknowledging the difficult economic situation in general, but also include language reserving the right to scrutinize whether the legal requirements under the law are in fact met, and reminding the consumer or micro-enterprise that the payment obligation becomes due after the moratorium has expired.

II. Protect Debtors under Consumer Loans and Relax Filing Requirements for Insolvency

The Bundestag has furthermore made significant changes in the laws of consumer loans and insolvency:

1. Changes to the law of consumer loan agreements

A temporary waiver of rights relating to consumer loans has been implemented. Specifically, for any consumer loans that were executed prior to March 15, 2020, claims of the lender for the payment of principal or interest which fall due between April 1, 2020 and June 30, 2020 will be deferred by three months if the borrower claims that performing on such claims would be unreasonable for him due to loss of income caused by the COVID-19 pandemic. Where the borrower can establish that it has suffered a loss of income, it will be assumed that such loss is actually due to the COVID-19 pandemic. In addition, the right of the lender to terminate the consumer loan for payment default, deterioration of the financial condition or value of any collateral granted will be temporarily suspended in these cases. If by the end of the suspension period the lender and the borrower have not agreed to amend the loan agreement otherwise, the term of the loan will automatically be extended by three months and any due dates for performance under the loan agreement, including for any payments due during the suspension period, will be extended by three months as well. No deferral of payments or temporary suspension of termination rights applies where this would not be reasonably acceptable for the lender taking into account all relevant circumstances, including the changes in living conditions generally caused by the COVID-19 pandemic. Note that the Federal Government may, by way of regulation, extend the personal scope of the new rules. The law sets out that it may particularly include micro-enterprises but it appears that it may even go beyond.

2. Changes to German insolvency law

The German legislator has also passed a law to make certain temporary adjustments to German insolvency laws. Previous obstacles and pitfalls for lenders granting bridge loans or rescue financings to distressed companies shall be eliminated to a large extent. This can be an effective way to support (dis)stressed companies in Germany. The obligation on directors to file for insolvency will be suspended for scenarios caused by COVID-19.

a. Filing requirement

With effect from 1 March 2020 until September 30, 2020 German companies do not have to file for insolvency in case of cash flow insolvency unless it is not caused by the COVID-19 pandemic or there is no prospect that the cash flow insolvency will be remedied. To give directors comfort that there is no obligation on them to file, it will be assumed that an illiquidity is caused by the COVID-19 pandemic where the company was not already cash flow insolvent on December 31, 2019.

b. Payments by companies in a crisis

As a consequence the company can make payments in the ordinary course of business without management risking personal liability. This shall stabilize stressed companies and enable them to continue business with its contractual partners.

c. Lender liability

The new law also eliminates legal risks in connection with the provision of financing in a crisis. Potential lender liability due to a delayed filing for insolvency is suspended. Also, claw-back risks relating to loans granted between March 1 and September 1, 2020 and repaid until September 30, 2023 or the granting of security for such financing have been minimized for all customary scenarios of financing in a crisis. This shall assist lenders in quickly making a decision to support stressed borrowers.

d. Shareholder financing

Last but not least, also shareholders can benefit from this new law. A shareholder shall be able to may make available financing to its subsidiary between March 1 and September 30, 2020 without running the risk of legal subordination of such a loan in insolvency proceedings of the debtor until September 30, 2023. Legal subordination of shareholder loans had in the past often been an obstacle in many rescue financings attempted by shareholders.

3. What am I supposed to do?

The wider economic impacts of the amendments now introduced cannot be predicted and will also depend on how debtors and creditors will sort out their affairs under the new regime. While hurry does hardly ever make good law, businesses need to adapt to these changes, particularly if they or their close business partners significantly lend consumer loans. With regard to the changes to insolvency law, the German legislator has significantly released the burden on directors of companies to promptly file for insolvency. The assumption that a business that was not cash flow insolvent on December 31, 2019 has been affected by COVID-19 allows the management – without the threat of criminal prosecution and personal liability - to use the additional time granted to find reasonable arrangements with its creditors to hopefully avoid insolvency altogether. However, as this is only a temporary relaxation through September 30, 2020, due care should be taken to get a crystal clear understanding of the prospects of the business before that date to avoid criminal and individual liability if a deadline to file for insolvency would be missed after September

III. Keep the Germany AG Running – Facilitate Virtual and Remote General Shareholders’ Meetings, Allow for Advance Dividends

Due to the COVID-19 related restrictions of gatherings of people numerous German blue-chip stock corporations have canceled their scheduled annual shareholders meetings causing uncertainty when the necessary resolutions can be passed, in particular on the distribution of dividends. The German legislator reacted quickly. It has passed legislation significantly simplifying shareholders meetings in 2020: In particular virtual-only-meetings may be held with limited rights of shareholders (regarding questions, motions, appeals), convocation periods may be shortened and advance payments on dividends (up to 50%) can be granted without authorization in the company’s articles. The respective rules are expected to take effect at the beginning of next week and apply to the year 2020, only. The key regulations are:

1. Purely virtual shareholders’ meeting possible for the first time

The management board may (with consent of the supervisory board) hold the annual shareholders meetings without physical presence of shareholders, provided (i) the entire meeting is broadcasted by audio and video, (ii) voting rights can be exercised by way of electronic communication (iii) shareholders are granted a „possibility to ask questions“ and (iv) shareholders may electronically raise objections until the end of the meeting (provided they have also exercised their voting right electronically).

a. No “information right”, “possibility to ask questions” (only)

The possibility to ask questions does not give a right to request information. Rather the management board may select and decide - in its best lawful judgment - which questions to answer and in what way. The management board may privilege questions of investors with major shareholdings. It may also require shareholders to electronically turn in their questions (up to) 2 days before the meeting.

b. Motions DURING meeting don’t need to be permitted

No possibility to file motions during the meeting needs to be provided. If this applies only requests for additional agenda items prior to the meeting are possible.

c. Appeals against resolutions extremely limited

Appeals against resolutions in a virtual general meeting – in particular with respect to appropriate answers to questions – are limited to cases of intentional breach on the side of the company, which has to be proven by the appealing party.

2. Reduction of convocation period

The management board (with consent of the supervisory board) may reduce the convocation period to 21 days (for virtual and physical shareholders’ meetings). If this is applied, the record date (date for proof of shareholding in case of bearer shares) and the timeline for notifications of shareholders are reduced accordingly. This leads to an extremely tight window between notification of the shareholders and the registration deadline which makes it extremely difficult to register in time, in particular for foreign investors.

3. Advance payment on dividend

For virtual and physical shareholders’ meetings alike, the management board (with consent of the supervisory board) may grant advance payments on the expected net profit (irrespective of a respective authorization in the AoA). This allows, once (preliminary) annual accounts 2019 are available, a payment of up to 50% of the annual profit 2019 (less statutory reserves), however, limited to a maximum of 50% of the net profit of the preceding financial year (2018).

4. Deadline for holding the annual meeting extended from 8 to 12 months (after end of fiscal year)

This does, however, not apply to companies in the form SE (Societas Europaea) which is subject to European law (requiring the meeting to be held within 6 months after the end of the fiscal year). The new law opens most unusual ways to conduct shareholders’ meetings in 2020. Whilst the new rules enable companies to pass necessary resolutions, in particular on the distribution of dividends, despite the COVID-19 restrictions, this comes at the price of limited participation rights of the shareholders. Investors, therefore, need to monitor carefully how to exercise their rights in this year’s AGM season.

IV. Termination for Cause of German Property Leases Restricted

The public health crisis caused by the COVID-19 pandemic increases the risk that residential and commercial tenants alike may no longer be in a position to pay their rent when due. A temporary moratorium has put a halt to this risk for the tenant.

1. Landlord’s termination for cause temporarily restricted

German lease agreements usually allow the landlords to terminate the lease for cause, if the tenants are in default with their rent payments for at least two months. To mitigate the termination risks for tenants, the Act now temporarily restricts the landlords’ termination right concerning German property lease agreements (Miet- und Pachtverträge). According to the Act, a landlord is not entitled to terminate such a lease agreement based on the argument that the tenant is in default with payment of the rent for the period April 1, 2020 – June 30, 2020 if the tenant provides credible evidence (glaubhaft machen) that the payment default is based on the impacts of the COVID-19 pandemic.

2. All other contractual and statutory provisions remain unaffected

All other contractual and statutory termination rights, however, remain unaffected. Consequently, the landlord remains entitled to terminate the lease for payment defaults that occurred before or after this period or based on other defaults of the tenant. The temporary moratorium also does not waive in any way all of the landlord’s right to the payments due under the property lease. As of July 1, 2022, the landlord retrieves its termination right with regard to the rental payments for the period April to June 2020, if the respective amounts are still outstanding at that time. By way of a separate regulation (Rechtsverordnung) to be issued by the Federal Government, the respective restriction to terminate the lease for cause may be extended to backlogs in tenant’s payments for the period between July 1, 2020 through September 30, 2020 if it is to be expected that the social life, economic activity of a multitude of enterprises or the work of many continues to be significantly affected by the COVID-19-pandemic.

3. Many things to talk about…

The Act is silent on the question whether and under which circumstances a tenant may request an abatement (in whole or partly) of rent (Mietminderung) due to the impacts of the COVID-19 pandemic, e.g., due to a shutdown of the tenant’s business by public authorities. An abatement, if the abatement is the result of a defect of the property, would reduce the respective obligation of the tenant to pay the rent (in full or partly). Absent of any stipulations in the lease agreement to the contrary, German statutory and case law provides for an allocation of risks between the landlord and the tenant. As a general rule, the landlord is responsible for the compliance of the leased object with the agreed and/or common use. Therefore, any defect related to the constructional status of the lease object (e.g., public order to close the leased object due to constructional related issues (objektbezogene Mängel) and/or its location (e.g., limitation of access due to works)) is within the scope of responsibility of the landlord. Instead, everything related to the operation of the leased object without having any impact on its constructional status is generally within the scope of responsibility of the tenant. Therefore, in case of a shutdown of the activity of the tenant due to a public order related to the activity of the tenant, the shutdown would typically – absent force major events - be considered as in the tenant’s responsibility and, therefore, the tenant would not be entitled to an abatement of rent.

4. What already happens in the marketplace and what can be done

We see that in cases where the tenant’s operations are temporarily shut down by public orders following the COVID-19 pandemic, many tenants turn to the landlord with an (unspecified) notification of non-payment. The risks for the tenant to doing so are now quite low as the tenant will likely be able to provide credible evidence that that the inability to pay the rent was caused by the COVID- 19 pandemic. If, at a later stage, the tenant will advance the argument that his notification was an abatement, the landlord may be at risk, to not only losing the liquidity provided by the rent through the relevant time period for which the moratorium lasted, but to lose part or all of its claims for the period in which his tenant was subject to the restriction order. Therefore, it might be advisable, in order to respond to the tenant’s notification of non-payment of a lease with a reference to the COVID-19 pandemic, to understand whether the non-payment is based on the moratorium or a request for abatement, and further seek a discussion about mutually acceptable contractual provisions to address the specific needs of the landlord and the tenant. In this context, it is important to keep in mind that the mutually agreed provisions may not provide for less favorable provisions for the tenant than provided in the moratorium. However, finding a mutually acceptable solution will definitely be preferable to ensure stability and a clear path forward. _____________________ All those of you that have lived through prior crises have seen, ad hoc legislative measures prepared under stress and without extensive public debate come with many uncertainties caused by inconsistent terminology, sloppy drafting, or well-intentioned programs that ultimately fail to address the core of the problem. Clearly, this package demonstrates the Federal Government’s determination to be bold in face of the crisis. The next weeks and months will show whether this approach represented the right strategy. We hope for the best. _____________________ [1]  http://dip21.bundestag.de/dip21/btd/19/181/1918110.pdf
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. The following Gibson Dunn lawyers prepared this client update: Markus Rieder, Finn Zeidler, Annekathrin Schmoll, Sebastian Schoon, Alexander Klein, Ferdinand M. Fromholzer, Silke Beiter, Wilhelm Reinhardt, Peter Decker, Daniel Gebauer, Benno Schwarz, Andreas Dürr, and Carla Baum. Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, 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, the authors, or any member of the team in Frankfurt or Munich: Gibson Dunn in Germany: Finance, Restructuring and Insolvency Sebastian Schoon (+49 69 247 411 505, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 505, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 180, mgeiss@gibsondunn.com) General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 170, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 503, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 502, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 502, apelster@gibsondunn.com) Marcus Geiss (+49 89 189 33 180, mgeiss@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 180, rroeder@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 25, 2020 |
European and German Programs Counteracting Liquidity Shortfalls and Relaxations in German Insolvency Law

Click for PDF The significant decline in sales or even temporary close downs of businesses in the last couple of weeks already led to a massive shortfall in liquidity available to entrepreneurs while the cost level remains largely the same. In a joint effort to back the economy the European Central Bank as well as the German Federal Government (Bundesregierung) and the State Governments (Landesregierungen) implemented several programs to counteract a break-down of companies from large multinationals to sole entrepreneurs. The below describes the measures available at the date hereof (or in the near future). Additional measures such as a federal emergency fund for small and medium sized enterprises are being discussed but details remain vague at this stage.

European Union Measures

In an effort to reduce interest rates, the European Central bank announced a program to acquire bonds including also corporate bonds in a volume of up to EUR 750 billion either directly from issuers or on the secondary market. Regional and sector specifics of the bonds targeted by the ECB are currently still open at this time. The European Union, acting through the European Commission is also involved in the authorization of support measures by the Member States. Generally, to the extent Member State measures constitute State aid under European State aid laws, these measures require notification by the respective Member State to, and approval by, the European Commission (unless e.g. pre-existing programs are used or de minimis exceptions apply). In this context, the European Commission has signaled a high degree of willingness to allow the use of State aid measures by Member States to salvage the European economy in the present circumstances and to decide quickly on any notifications from Member States in this respect. In particular, and following a similar temporary framework in 2008 in response to the global financial crisis, the European Commission has adopted a “Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the COVID-19 outbreak”. Together with many other support measures that can be used by Member States under the existing State aid rules, the Temporary Framework is intended to Member States to ensure that sufficient liquidity remains available to businesses of all types and to preserve the continuity of economic activity during and after the COVID-19 outbreak. For further details, please refer to our March 20, 2020 client alert “European Commission Adopts Initiatives to Support the Real Economy Amid the COVID-19 Outbreak”.

German Federal Support Programs

The measures adopted by the German Federal Government include the extension in volume and scope and the lowering of access conditions for pre-existing programs as well as the introduction of new programs. At federal level, support measures are generally granted through the involvement of KfW (Kreditanstalt für Wiederaufbau), Germany’s state-owned development bank, and require the cooperation of (and on-lending by) the relationship bank of the relevant applicant. Applications for support also have to be made through the applicant’s relationship bank. Details of the measures can be accessed on the KfW homepage. In the below sections, certain key preconditions and specifics are summarized. The support measures outlined below are open to companies and sole entrepreneurs who face financial issues as a consequence of the COVID-19 crisis. Thus, applicants have to show that they (i) were in a stable financial condition on December 31, 2019 (i.e. no payment defaults, no covenant breaches under existing financing occurred) and that (ii) assuming a return to a normal economic environment, there is a positive continuation prognosis (positive Fortführungsprognose) until year end 2020. Further, companies can only apply if a controlling majority is privately held. Thus, it seems that companies held by (foreign) state owned funds are excluded. The KfW’s Special Program 2020 (“KfW Sonderprogramm 2020 für Investitions- und Betriebsmittelfinanzierung”), which includes two measures for subsidized interest rates for loans, has been notified to the European Commission on 20 March 2020 under the under the “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” as set out above. The Commission approved the program on Sunday, March 22, 2020 (cf. State aid case SA.56714) and found that the program is in line with the conditions set out in the Temporary Framework. Similarly, on March 24, 2020, the Commission has also approved a loan guarantee scheme on the temporary provision of guarantees, counter-guarantees within the territory of the Federal Republic of Germany in relation to the outbreak of COVID-19 (“Bundesregelung Bürgschaften 2020”) (cf. State aid case SA.56787).
  • KfW Entrepreneur Loan (KfW Unternehmerkredit)
An entrepreneur loan can be granted for investments and general working capital purposes, but also for the acquisition of other companies. Companies doing business in excess of five years are eligible for this program. In the case of large enterprises (in excess of either 250 employees, or EUR 50 million annual sales, or a balance sheet amount (Bilanzsumme) of EUR 43 million), KfW can assume a credit risk of up to 80%. In case of small and medium sized companies (SME) below such thresholds, the risk assumption by KfW is increased to up to 90%. Thus, the exposure of the relationship bank can be reduced to as little as 20% or 10%, respectively. The maximum permissible loan amount is EUR 1 billion per group of companies (i.e. the applicant and its affiliates) but the amount is, in addition, limited to (i) a maximum of 25% of annual sales, (ii) two times the cost of labor in 2019, (iii) the amount of the liquidity required for the next 18 months (for SMEs) or the next 12 months (in respect of large enterprises), and (iv) loans in excess of EUR 25 million may not exceed 50% of the aggregate debt. The term of loans varies between five years (in which case quarterly repayments as of year two will have to be made) and a two year term with a repayment in full at the end of the term. The interest rate will be determined on the basis of the credit rating of the applicant and the available collateral.
  • ERP Start-Up Loan – Universal (EPR Gründerkredit – Universell)
For entrepreneurs doing business for three years (and up to five years) the program is comparable to the KfW Entrepreneur Loan provided that the interest rate can, in addition, be subsidized through funds of the EPR Special Fund (EPR Sondervermögen). It seems that there will be specific programs for SMEs and large entrepreneurs in business for less than three years but it seems that specifics are not yet publicly available.
  • KfW Special Program Syndicated Lending (KfW Sonderprogramm “Direktbeteiligung für Konsortialfinanzierung“)
Under this program, KfW participates in syndicated lending either directly as one of several lenders or indirectly through a sub-participation. It is envisaged that the KfW loan portion is in excess of EUR 25 million but is limited to (i) a maximum of 80% of the aggregate loan amount and 50% of the aggregate debt of the applicant, (ii) a maximum of 25% of annual sales, (iii) two times the cost of labor in 2019, (iv) the amount of the liquidity required for the next 12 months. This program is also available to foreign companies (if a controlling majority is privately held) in respect of projects in Germany.
  • Immediate Corona Support Program for small(est) enterprises and sole entrepreneurs (Corona Soforthilfe für Kleinstunternehmen und Soloselbstständige)
This program is designed for small(est) enterprises, sole entrepreneurs and members of the free professions with up to ten employees who have no access to regular bank financing. In deviation from the general precondition for SMEs and large enterprises, applicants have to show that they were financially stable prior to March 2020 and are now in financial distress due to the COVID-19 crisis. Amounts are limited to EUR 9,000 and EUR 15,000 respectively in the individual case. While the funds are provided by the German Federal Government, this program will be administered by the federal states or possibly local communities.

Federal and State Guarantees

For guarantees, competencies vary between federal and state level, usually depending on the guaranteed amount and/or underlying loan amount.
  • Large Guarantees Programs (Großbürgschaftsprogramme)
Such guarantees were in the past available to companies to secure general working capital and investment financing in structurally disadvantaged regions but are now open to companies generally. Generally, the federal states (Bundesländer) are in in charge, but for guarantees in excess of EUR 50 million the federal government is competent. The guarantees may cover up to 80% of the underlying debt. In respect of guarantees by state guarantee banks (Bürgschaftsbanken) the guarantee limit has been extended and doubled to EUR 2.5 million.

State Support Programs

Programs at federal state (Bundesländer) governmental level are equally important. Typically, these cover the aforementioned guarantees as well as support for medium sized and small companies and sole entrepreneurs. For example, in Bavaria state measures include a so called Immediate Loan Program (Akkutkredit) for medium sized commercial enterprises with a loan amount of up to 2 million, and an Emergency Relief “Corona” (Soforthilfe Corona) for sole entrepreneurs and small enterprises. It is also contemplated to set up a State Funds (Bayernfonds) for (larger) medium sized enterprises aimed at providing the liquidity for (state) participations in companies which are considered of “systemic importance” which are hit hard by the COVID-19 crisis but were previously financially healthy. Generally, for all these programs and support initiatives, the key factor for making them successful is the speed in making funds available to companies in need of emergency liquidity. This will be a challenge for the governmental bodies (and state banks) administering the programs as well as for the relationship banks involved who still need to make appropriate risk assessment as a certain – albeit considerably more limited - exposure remains in most cases. In addition, other existing lenders of an applicant may have to be involved if waivers allowing for additional debt and/or intercreditor agreements are necessary. Consequently, the time period between the application for support measures and the actual funding will take a number of weeks. The backing of the support measures by the relief granted to debtors in respect of insolvency filings outlined below will thus be important.

Changes to German Insolvency Law

The German legislator has on March 25, 2020 passed a law to make certain temporary adjustments to German insolvency laws. These measures aim at mitigating the effects of the Corona pandemic on German companies. Previous obstacles and pitfalls for lenders granting bridge loans or rescue financings to distressed companies shall be eliminated to a large extent. Together with the above liquidity programs this can be an effective way to support (dis)stressed companies in Germany. The obligation on directors to file for insolvency will be suspended for scenarios caused by COVID-19.
  • Filing requirement
With effect from March 1, 2020 until September 30, 2020 German companies do not have to file for insolvency in case of cash flow insolvency unless it is not caused by the Corona pandemic or there is no prospect that the cash flow insolvency will be remedied. To give directors comfort that there is no obligation on them to file, it will be assumed that an illiquidity is caused by the Corona pandemic where the company was not already cash flow insolvent on December 31, 2019.
  • Payments by companies in a crisis
As a consequence the company can make payments in the ordinary course of business without management risking personal liability. This shall stabilize stressed companies and enable them to continue business with its contractual partners.
  • Lender liability
The new law also eliminates legal risks in connection with the provision of financing in a crisis. Potential lender liability due to a delayed filing for insolvency is suspended. Also, claw-back risks relating to loans granted between March 1 and September 1, 2020 and repaid until September 30, 2023 or the granting of security for such financing have been minimized for all customary scenarios of financing in a crisis. This shall assist lenders in quickly making a decision to support stressed borrowers.
  • Shareholder financing
Last but not least also shareholders can benefit from this new law. A shareholder shall be able to may make available financing to its subsidiary between March 1 and September 30, 2020 without running the risk of legal subordination of such a loan in insolvency proceedings of the debtor until September 30, 2023. Legal subordination of shareholder loans had in the past often been an obstacle in many rescue financings attempted by shareholders. Governmental support programs in combination with the relaxation in respect of insolvency filings and the improved protection of lenders, other creditors and also funding shareholders aim to set a viable framework for rescue financings and, ultimately, may help to avoid mass insolvencies.
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. Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the team in Frankfurt or Munich, or the authors: Sebastian Schoon (+49 69 247 411 505, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Alexander Klein (+49 69 247 411 505, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 180, mgeiss@gibsondunn.com) Gibson Dunn in Germany: Finance, Restructuring and Insolvency Sebastian Schoon (+49 69 247 411 505, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 505, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 180, mgeiss@gibsondunn.com) General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 170, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 503, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 502, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 502, apelster@gibsondunn.com) Marcus Geiss (+49 89 189 33 180, mgeiss@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 180, rroeder@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 24, 2020 |
Gibson Dunn Adds Private Equity Partner Stefan dePozsgay in New York

Gibson, Dunn & Crutcher LLP is pleased to announce that Stefan dePozsgay has joined the firm’s New York office.  DePozsgay, formerly a partner at Paul Hastings LLP, will continue to focus on private mergers and acquisitions, joint ventures and private equity transactions, including leverage buyouts, growth equity and venture capital work. “We’re very excited to welcome Stefan to Gibson Dunn,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “Stefan is a strategic, commercially minded dealmaker who will add greater depth to our M&A and private equity teams.  He will bring substantial experience and expertise to our firm, particularly in the rapidly growing media, entertainment and technology sectors.” “I’m pleased that Stefan is joining our team,” said Steven Shoemate, Co-Chair of the Private Equity Practice Group.  “He is a well-known, energetic partner in the New York market, who will further deepen our strong bench of private equity lawyers.” “I’m thrilled to join Gibson Dunn, a leading law firm that’s known for having not only a solid platform that can handle the demands complex deals require, but that also offers a collaborative culture that attracts great talent,” said dePozsgay.  “I’m very much looking forward to this next phase of my career.” About Stefan dePozsgay DePozsgay regularly advises clients on private equity investments, mergers, acquisitions, divestitures, and joint ventures, as well as other transactional matters in the U.S., Latin America, and other jurisdictions.  He has significant experience advising on transactional matters in the sports, media and entertainment sector.  His clients include private equity firms and other financial sponsors, large family offices with direct investment capabilities, sports franchises and their owners, and media and hospitality businesses. He also represents emerging growth companies and venture capital investors in a variety of investments and fundraisings, as well as in strategic transactions and exit events. Before joining Gibson Dunn, dePozsgay served as a partner at both Paul Hastings LLP and Boies Schiller Flexner LLP.  He received his law degree in 2006 from Yale Law School.  He received his B.A. in political science from Duke University in 2003.

March 23, 2020 |
Crisis Management & COVID-19 Response: Plan Now to Mitigate Against the Ripple Effects of COVID-19 Crisis

Click for PDF The public health crisis caused by COVID-19 has already impacted companies’ business operations, procurement lines, and staffing resources. These short-term effects will likely have long-term implications in terms of operational uncertainty, brand, and legal risk. Now is the time to refresh and revise your existing emergency contingency plan to prepare for and mitigate against these risks. Your plan will likely have included the establishment of a designated team to manage the crisis and communicate with relevant stakeholders.  This is a time to exercise leadership, to communicate with stakeholders clearly and transparently, to build trust, and to continue to take and plan for concrete actions. Below, we identify some of the key steps that companies with strong crisis management plans have taken, and considerations that all companies should keep in mind moving forward, to reduce business and legal exposure.

High Priority Items Taken to Mitigate Business and Legal Risk.

Companies are currently taking steps to protect the safety of their employees, ensure business continuity, and minimize losses caused by operational and supply chain disruption.
  1. Crisis Management Plan: Review, refresh, and implement the company’s crisis management plan.
  2. Response Team: Response teams often have representatives from each business function with a direct line to the CEO. Designated response teams should include adequate regional/time-zone coverage taking into account the geographic spread of operations. To the extent they haven’t already, companies should consider engaging outside experts, including external counsel, public relations firms, and subject matter experts, to assist and be on call as new developments unfold.
  3. Public Relations and Communications Plan: Revise and modify as needed the communications plan for employees, vendors, customers, and the public. Companies frequently designate one or more specific people with the responsibility to deliver these messages.
  4. Safety and Welfare: Employers have been responding to the crisis by taking precautions, such as instituting work-from-home policies where appropriate, to protect the health of their employees and clients. Employers should also consider whether to implement changes to their HR policies. Please refer to our client alerts on U.S. and U.K.Employment Law Considerations for Companies Responding to COVID-19 for key considerations for businesses working to reduce the risk of employment exposure and steps to take when an employee tests positive for COVID-19 or must care for someone with the disease.
  5. Finance Stress Tests and Backup Plan: Disruptions in cash flow and market volatility may contribute to covenant defaults under key lending agreements. Customers or borrowers may request accommodations, indicating that they may be distressed. Companies have been and should continue to conduct financial stress testing, modeling their financials under potential scenarios to identify events that might significantly impair liquidity. This may include evaluating current and future financial covenant compliance, the impact of a ratings downgrade, and the implications of a negative watch notice, and proactively seeking covenant relief/forbearance agreements from lenders. Companies are developing, as appropriate, contingencies designed to stabilize the organization in each scenario (e.g., seeking additional capital from external sources). Many companies are drawing on their available lines of credit to ensure liquidity. Additionally, if a company is nearing insolvency, the board should obtain a briefing on how they should take into account the interests of creditors in the exercise of the board’s fiduciary duties. Please refer to the attached presentation on fiduciary duties for financially stressed companies for more details.
  6. Contractual Obligations: Companies are currently evaluating potential supply chain disruptions, counterparty financial difficulties, and premises closures, which may affect abilities to meet contractual obligations. This involves assessing whether companies and their counterparties can continue to meet contractual obligations, adapting arrangements for procuring goods or services necessary to manage the ongoing business, and the potential application of force majeure provisions, other frustration-related contractual provisions, notification obligations, and provisions permitting suspension of performance. It also involves analyzing the implications of any suspension of performance, in particular the potential application of liquidated damages provisions and demand guarantees. These issues of course vary from one contract to another, depending on the governing law. For example, under the laws of some common law jurisdictions, force majeure provisions may be interpreted strictly and restrictively, whereas other systems may more freely permit suspension or non-performance on force majeure grounds, irrespective of whether the issue is specifically addressed in the contract.
  7. MAE/MAC Provisions: Certain companies may evaluate whether the impact of COVID-19 constitutes a material adverse effect (“MAE”) or material adverse change (“MAC”) as a basis to terminate transactions. Whether the impact of the virus will be considered an MAE/MAC will depend upon the language of the agreement and what is known at the time execution of the agreement. Disputes regarding pre-crisis MAE/MAC provisions may focus on whether (1) definitional language that typically excludes general economic or market conditions and other broad-based factors impacting the business climate or the target’s industry generally is sufficient to exclude the impact of COVID-19, (2) whether the potential impact of the virus was reasonably foreseeable, and/or (3) whether the impact of the virus is sufficiently long-lasting. Companies currently negotiating MAC/MAE provisions would be well-advised to negotiate explicit language to address the COVID-19 risk-allocation. For more information on pre- and post-crisis MAE/MAC provisions and other M&A considerations, please refer to our client alert on M&A Amid the Coronavirus (COVID-19) Crisis: A Checklist.
  8. Insurance Policies: Companies are reviewing their insurance policies to determine whether losses and expenses incurred and/or anticipated might be covered, and to identify any notification requirements that must be satisfied.
  9. Disclosure Obligations for Listed Companies: Listed companies are evaluating potential additional disclosures with respect to material risks, material disruptions or impairments to business operations or outlook, and/or material changes in plans or transactions.

Prepare Now for Ripple Effects.

1. Assess Material Risks. 

Companies should consider (1) how the public health crisis has already impacted them – such as any effects on liquidity, earnings, and continuity of services – and (2) how the crisis may continue to affect them, factoring in the uncertainty of how long the effects of the crisis will last.

2. Engagement with Government Authorities. 

Companies should have a clear plan regarding their engagement with all relevant regulators and other governmental authorities – within the U.S., at local, state and federal levels, and outside the U.S., at local, regional and national levels, as well as any relevant supranational authorities.

3. Understand the Impact of Varying Local Regulations. 

Companies should have a clear plan in place to engage with key stakeholders at the corporate level, and consider how the COVID-19 public health crisis will likely affect the need for and practicalities surrounding board and shareholder communications. Each company should consider the implications of stakeholder engagement based on the laws of the country in which it is domiciled. For example, U.S. listed companies should consider how the crisis will likely affect each of the following:

4. Engagement with Stakeholders.

Local and state governments have implemented non-uniform response measures in efforts to curb the spread of the virus, including shelter-in-place orders restricting mobility within communities. Response plans should include working with counsel to understand and interpret how varying local measures impact their business operations. For multi-jurisdictional companies, this may require tailoring response plans based on the location of their operations.

  • Financial and Public Disclosures: Companies should consider whether their disclosed risks adequately address how the COVID-19 crisis has impacted their earnings. Companies should consider the extent to which new risks – such as logistical and procurement delays and difficulties meeting production timelines or continuing provision of services due to staff being forced to work from home – necessitate revision of previous disclosures.
  • Regulation Fair Disclosure: Company executives should wisely consult with in-house and outside counsel in communicating with stakeholders regarding the current health care crisis and its impact on the company, to ensure compliance with Regulation FD by not disclosing material nonpublic information to select investors prior to any public announcement. See Final Rule: Selective Disclosure and Insider Trading, 17 C.F.R. 240, 243, 249, Release No. 33-7881 (2000), https://www.sec.gov/rules/final/33-7881.htm.
  • Earnings Guidance: Companies should consider the extent to which they want to revise forward-looking statements based on how the crisis is likely to affect revenues and plans for future operations.
  • Board Meetings: Boards should consider whether to meet (virtually, as appropriate) to assess and provide input on and monitor company management’s steps to address the crisis.
  • Annual Meetings: On March 13, 2020, the Securities and Exchange Commission (“SEC”) issued guidance for companies conducting annual meetings amid the COVID-19 crisis (https://www.sec.gov/ocr/staff-guidance-conducting-annual-meetings-light-covid-19-concerns?auHash=zrsDVFen7QmUL6Xou7EIHYov4Y6IfrRTjW3KPSVukQs). Companies that have already mailed and filed their proxy materials may consider changing the date, time, or location of their meeting. The SEC advised that it would take the position that these companies do not need to mail additional materials or amend their proxy materials if they: “issue[] a press release,” “file[] the announcement as definitive additional soliciting material on EDGAR,” and “take[] all reasonable steps necessary to inform other intermediaries in the proxy process . . . and other relevant market participants.” Companies may also consider holding virtual meetings. These companies should review with counsel their governing documents and applicable state law to confirm such meetings are permitted. If virtual meetings are permitted, the SEC has advised that companies should notify all participants in a timely manner and provide clear directions on logistics (including how to access, participate in, and vote at the meeting). Companies that have yet to mail proxy materials should include such information there; companies that have already mailed and filed proxy materials should take the same steps outlined above for companies changing the date, time, and location of their meeting. The SEC guidance also addresses issues relating to shareholder proposal presentations at these meetings.
  • 10b5-1 Plans and Other Trading in Issuer Securities: Executives should consider whether the COVID-19 crisis and its impact on the company requires the extension of blackout periods for stock trading by personnel with material nonpublic information in light of the public health crisis, and/or whether appropriate changes should be made to the blackout periods for those directors and officers who do not have possession of material, nonpublic information but wish to show support for companies in this time of need.

5. Assess and Monitor Regulatory Developments.

Companies should consider regulators’ responses to the crisis, and assess whether their regulatory requirements are affected. In the U.S.:

Companies should consider whether they qualify for the relief announced under these orders, but not take them as indication that other regulatory agencies will offer similar relief from existing obligations. Companies should also proactively engage with regulators to communicate any anticipated inability to meet existing regulatory obligations.

6. Assess Ongoing Litigations and Investigations.

Companies need to account for the impact of COVID-19 on existing litigation and investigations, which may be affected by court closures and government agencies’ institution of work-from-home policies.

  • Litigation: Courts across the world have been restricting access, adjourning or continuing trials, and postponing hearings and arguments in light of COVID-19. Companies in litigation should anticipate that trials and other case deadlines may be delayed. Counsel on any ongoing matters should monitor court updates and proactively communicate with courts and counsel for other parties as appropriate to determine the impact on existing deadlines. Companies should also assess the risk that a litigation party may be distressed and could file for bankruptcy, and consider any proactive measures that can be taken to address this risk (including, for example, structuring settlements to mitigate bankruptcy risks).
  • Investigations: The same holds for ongoing investigations by regulators and prosecuting authorities; government office closures or work-from-home policies will likely affect existing timelines for investigations, including document productions and witness interviews. Depending on the circumstances, companies may wish to consider whether to engage with responsible government officials on these issues.  Under the right set of circumstances, proactive communication with regulators builds trust and may be helpful.

7. Down the Line: Regulatory Scrutiny, Shareholder Actions? 

The risks posed by the COVID-19 crisis necessitate that companies plan now for the long-term financial, operational, and logistical effects of the crisis. Companies’ reactions to the crisis – and whether they were adequately prepared – will likely be scrutinized by regulators and/or be the subject of future shareholder actions.

  • Upcoming Earnings Calls: March/April Quarterly Earnings calls are right around the corner. Companies will be asked how the public health crisis impacted them, and how they responded.
  • Questions to Prepare for: Were you prepared? Did you have the technological capabilities available to continue to offer services with staff working remotely? Did you act appropriately and in a timely manner when the risks – of supply-chain/procurement disruption, office closures, and need for remote working – became clear? Failing to take action to mitigate against these risks now and communicate your response plan to stakeholders may expose you to future shareholder actions.

Demonstrate Leadership.

Given the prevailing climate of uncertainty and adversity posed by the COVID-19 crisis, it will be important for those in leadership positions within major companies to demonstrate clear, calm, and measured stewardship. By having an adaptable action plan to mitigate business and legal risks, address the needs of staff and customers, and proactively communicate with government authorities and key stakeholders, companies can demonstrate their reliability in a time of crisis.
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. Gibson Dunn lawyers regularly counsel clients on the crisis management issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Crisis Management Group or Business Restructuring and Reorganization Group, or the authors: Debra Wong Yang - Co-Chair, Crisis Management Group, Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Reed Brodsky - Co-Chair, Crisis Management Group, New York (+1 212-351-5334, rbrodsky@gibsondunn.com) Penny Madden - London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com) Patrick Doris - London (+44 20 7071 4276, pdoris@gibsondunn.com) Robert A. Klyman - Co-Chair, Business Restructuring Group, Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Benno Schwarz - Munich (+49 89 189 33-110, bschwarz@gibsondunn.com) Virginia S. Newman - Hong Kong (+852 2214 3729, vnewman@gibsondunn.com) Alyssa B. Kuhn - New York (+1 212-351-2653, akuhn@gibsondunn.com) Matthew G. Bouslog - Orange County, CA (+1 949-451-4030, mbouslog@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 16, 2020 |
Gibson Dunn Ranked in Chambers Europe 2020

Gibson Dunn received 32 rankings in Chambers Europe 2020:  24 individual rankings and eight firm rankings.  The firm was recommended in the following categories:  Competition/European Law – Belgium; Corporate Investigations – Europe-wide; Corporate/M&A: High-End Capability – France; Restructuring/Insolvency – France; TMT: Information Technology – France; Compliance – Germany; Corporate/M&A: High-End Capability – Germany; Dispute Resolution: White-Collar Crime: Corporate Advisory – Germany.  The following Gibson Dunn partners were recognized as leaders in their fields:  Brussels partners Peter Alexiadis, Jens-Olrik Murach, Christian Riis-Madsen and David Wood; Frankfurt partners Dirk Oberbracht, Wilhelm Reinhardt, Sebastian Schoon, and Finn Zeidler; London partners Sandy Bhogal, Charlie Geffen, Chris Haynes, Ali Nikpay, Deirdre Taylor, and Steve Thierbach; Munich partner Benno Schwarz; and Paris partners Ahmed Baladi, Jérôme Delaurière, Jean-Pierre Farges, Pierre-Emmanuel Fender, Benoît Fleury and Ariel Harroch.

Oil and Gas Restructuring Support Team

Gibson Dunn lawyers have deep roots in the oil and gas industry, one of the premier U.S. corporate restructuring and reorganization practices and the nation’s leading litigation practice. The Business Restructuring and Reorganization group was named one of Law360’s top bankruptcy practice groups, the Oil and Gas group has been named practice group of the year, and members of both groups have been widely recognized by top industry publications, including Chambers, Legal 500 and The Guide to the World’s Leading Insolvency Lawyers.  Dubbed the “rescue squad” by The American Lawyer, our litigators are deeply skilled in prosecuting and defending the broad range of disputes that arise during the course of a bankruptcy case.  Our litigation practice was named The American Lawyer's Litigation Department of the Year 4 times out of the last 6 years. Our restructuring lawyers are at the center of work outs, in and out of court, of companies with highly complex, multibillion-dollar capital debt stacks. These lawyers regularly represent companies in financial distress or seeking options during challenging financial circumstances, their creditors (ad hoc lender and bondholder groups and official creditor committees) and investors  in the largest and most complex out-of-court restructurings and Chapter 11 bankruptcy cases in the US and around the world.  In oil and gas restructuring, efforts to build consensus can be supplemented by Gibson Dunn’s extraordinary bankruptcy litigators when a negotiated resolution cannot be reached.  Working with our firm’s Mergers and Acquisitions group, we represent both acquirers and companies seeking to be acquired or to spin off assets, both in and out of bankruptcy court. Gibson Dunn is recognized for excelling in the use of innovative ideas and adaptive strategies, including in advance of any actual restructuring needs. Our Oil and Gas lawyers have extensive experience advising clients on a comprehensive range of matters across the entire oil and gas value chain – from well‐head to LNG, refining and petrochemicals – including acquisitions, divestitures, financings, reorganizations and project work in the upstream, midstream, downstream, LNG and oilfield services segments of the business. This makes Gibson Dunn one of the rare global law firms with a true oil and gas practice capable of providing the full array of legal services needed by any company debtor, creditor group or investor, in any challenging or distressed situation.


Oil and Gas Restructuring Support Core Team Members:

Oil & Gas Business Restructuring and Reorganization Restructuring Litigation
Michael P. Darden David M. Feldman Shireen A. Barday
Hillary Holmes Scott J. Greenberg Jennifer L. Conn
Tull Florey Jeffrey A. Chapman Mitchell Karlan
Anna Howell James Chenoweth Marshall R. King
Elizabeth A. Ising Matthew K. Kelsey Mark A. Kirsch
Robert B. Little Jeffrey C. Krause Randy M. Mastro
Ronald O. Mueller Robert Klyman Matthew D. McGill
Robert L. Nelson Jr. Keith R. Martorana Robert Weigel
Shalla Prichard Michael A. Rosenthal
Gerald Spedale Matt J. Williams
Beau Stark
Steven Talley
Jonathan Whalen
Robyn Zolman

February 25, 2020 |
Le rôle du fiduciaire dans une opération de fiducie

Paris partner Pierre-Emmanuel Fender is the author of "Le rôle du fiduciaire dans une opération de fiducie," [PDF] published in the n°154 issue of the French publication Revue LAMY Droit des Affaire in December 2019.