Community Support & Business Response Legal Team


COVID-19 is impacting almost all aspects of business and our community. The drastic changes are happening daily, in real time. Our Community Support & Business Response Legal Team is analyzing COVID-19 and its effect on Arizona’s businesses. We’re building on our 40+ years in Arizona to offer thoughtful guidance on how businesses can navigate this complex and fast-changing situation. We’re here to help. If the information below does not answer your pressing questions, please feel free to contact our team of professionals.

Gallagher & Kennedy’s Business Continuity Response to COVID-19, 3/18/2020


Table of Contents to Business Guidance

Considerations for Board and Shareholder Meetings

Contracts

Employment & Labor

Financial Distress, Bankruptcy & Creditor’s Rights

Impact on Litigation

Insurance Recovery for Business Losses and Expense

Real Estate

Securities

Tax Developments

Tort Liability for Businesses


Considerations for Board and Shareholder Meetings

Terry Thompson
(602) 530-8515
twt@gknet.com

In-person meetings of shareholders, directors, partners, or other owners or managers may prove difficult to convene in light of governmental restrictions on the occurrence, size, time, or place of gatherings.

  • Under applicable law and governing documents, it may be feasible to implement an alternative such as telephonic or web-based communications or conferences. For example, for business corporations, Arizona Revised Statutes (A.R.S.) § 10-708 permits participation in shareholders’ meetings by remote communication under certain conditions.
  • Statutes and/or governing documents may provide alternative means of meeting in the case of “emergencies.” For example, under A.R.S. § 10-3303 facilitates the ability of the board of directors of a nonprofit corporation to take action during emergencies.
  • Written consents or other means can be used to take action in some instances. For example, in the case of limited liability companies, A.R.S. § 29-3407(D) permits an action requiring the approval of members or managers to be taken without a meeting if the action is approved by the minimum number of members or managers required to approve the action.

Obtaining signatures on legal documents may present logistical problems when people are away from business offices or in places where electronic communication is not available or reliable.

  • A government agency, contract party, or other person may be willing to accept instruments or methods that might facilitate the signing of documents. For example, the Arizona Corporation Commission allows persons to complete most business filings online and to fax or mail filings.
  • Traditional documents such as powers of attorney or proxies might help in consummating a transaction. For example, A.R.S. § 29-3407(D) permits a member of a limited liability company to appoint a proxy or other agent to vote, consent, or otherwise act for the member by signing an appointing record, personally or by the member’s agent.
  • Electronic means of obtaining or affixing signatures can be lawful and acceptable in a particular situation. For example, the Arizona Electronic Transactions Act (A.R.S. §§ 44-7001 et seq.) authorizes the use of electronic records and electronic signatures relating to a transaction.

With the temporary closure of certain governmental offices and private businesses, the obtaining of official certifications or other third-party confirmations might not be practical.

  • To the extent the certification is expected by another party to the transaction, it is possible that the law allows the requirement to be ignored, or the other party might be willing to waive the requirement or to accept delivery of the certificate after the fact. For example, a party might be willing to waive a requirement that a landlord certify that the tenant is not in default under a lease.
  • Often there is an alternative and lawful means of evidencing the matter in issue. For example, instead of having a copy of a limited liability company’s articles of organization certified by the Arizona Corporation Commission, a party might be willing to accept a certificate signed by one of the company’s officers attesting to the organizational documents.
  • A party might be able and willing to accept a previous certification in lieu of a recent certification. For example, a certificate of good standing of a limited liability company from the Arizona Corporation Commission pursuant to A.R.S. § 29-3211 might have been obtained last year in connection with a previous transaction, and a party might be willing to accept that as good evidence of the company’s existence, even though a more recent certificate would be preferable.

Terry Thompson is available to answer questions about Considerations for Board and Shareholder Meetings.


Contracts

Community Support & Business Response Legal Team

Kelly Mooney
(602) 530-8075
kcm@gknet.com

Force Majeure Clauses

Due to the Coronavirus (COVID-19) pandemic, many businesses are confronting unique and unforeseen circumstances that could either excuse or delay the obligation to perform under existing contracts as a result of the occurrence of a force majeure event. Force majeure is a contractual defense generally allowing a party to postpone, defer, or discontinue performance of its contractual obligations in certain specified circumstances. What constitutes a force majeure event is determined on a case-by-case basis and depends upon the terms of the relevant contract, applicable law, and the relevant facts and circumstances. Concerned business should be analyzing the following:

  • Reviewing and determining whether a contract includes a force majeure provision, including: (i) the specific events and circumstances that qualify for force majeure treatment; and (ii) other relevant terms and conditions in the contract (including governing law, events of default, dispute resolution, etc.).
  • Analyzing whether the performance of any of the parties to the contract will be impracticable or impossible because of COVID-19, as opposed to for a different reason.
  • Ensuring timely compliance with any notice requirements, including the production of documentary support and the specific method of notice.
  • Documenting steps taken to mitigate or avoid the impact of COVID-19 on the ability to perform under the contract, as well as all other relevant facts and circumstances.

For businesses that have received a force majeure notice, they should be:

  • Reviewing the notice to determine whether it falls within the scope of the contract’s force majeure provision or applicable law and whether the form and timing of the notice was proper.
  • Determining when and how to respond, including whether to terminate the contract in response to the notice.
  • Considering whether the notice has an impact on any other contracts and whether a copy of the notice should be provided to other parties.
  • Evaluating whether the party claiming force majeure has fulfilled its other obligations under the contract.

Kelly Mooney is available to answer questions about Contracts and the possibilities of force majeure claims.


Employment & Labor

Don Johnsen
(602) 530-8437
dpj@gknet.com

What are our basic legal obligations with regard to the prevention of infection in the workplace?

Employers do not have a legal duty to “guarantee” that no one in the workplace will ever be infected with COVID-19.  But you definitely should take reasonable steps to reduce the risk of infection, as recommended by the CDC and OSHA: frequent hand‑washing, sanitizing, and disinfecting of surfaces, and other proper hygiene practices.  And you should follow the CDC guidelines when employees show symptoms of COVID‑19 (see below).

What should we do when an employee actually has symptoms of COVID-19?

When an employee has symptoms (fever, cough, or shortness of breath), you should follow the CDC guidelines: Send the employee home, and don’t let him or her return to work until he or she meets the CDC’s announced criteria for discontinuation of home isolation.

If the employee reports that he or she actually has tested positive for COVID-19, it also is good practice to advise other personnel with whom that employee routinely had contact that “a company employee” has received a positive test result, and that other personnel should be even more conscientious about follow proper infection control practices (frequent hand‑washing, sanitizing, and disinfecting of surfaces), and that they also should closely monitor themselves for any their own wellbeing for any symptoms of COVID‑19.

If an employee has to be absent because of COVID-19, is that paid time off?

Absences that are due to the employee’s own illness, the need to care for a family member who is ill, or the need to stay home with a child whose school has been ordered closed qualify for Paid Sick Time under Arizona’s Proposition 206.  Employees who have PST available, therefore, must be permitted to use it to cover an absence caused by COVID‑19.

After April 2, absences caused by COVID‑19 also may qualify for paid time off under the new Emergency Paid Sick Leave Act.  That law applies to all employers with fewer than 500 employees, and basically mandates that employers provide 80 hours of paid sick time (subject to certain caps on the rate of pay) for various absences caused by COVID‑19.

Absences after April 2 due to an employee’s need to stay home to care for a child whose school has been ordered closed also will qualify for time off under the new Emergency FMLA Leave Expansion Act.  That new law similarly applies to all employers with fewer than 500 employees, and mandates up to 12 weeks of paid leave (again, subject to certain caps on the rate of pay) for employees who need to stay home due to a school closure.

Keep in mind that an employee who needs to be at home for one reason or another might still be able to work remotely.  If remote work is feasible and can be productive in any given case, the employee would not be “absent,” and therefore would not need or qualify for any of these types of paid time off.

We may need to implement some layoffs to deal with the economic crisis. What are the rules concerning reductions-in-force, furloughs, layoffs, etc.?

Non‑union employers with 100 or more workers may need to consider whether a particular reduction or layoff might be subject to the federal plant closing law (the “WARN Act”) or to any state‑law version of the WARN Act.

But in the absence of WARN Act or similar coverage, non‑union owners and managers have significant discretion to exercise their best business judgment to structure workplace adjustments, reductions, and layoffs in the manner they feel is best for the operation.  Employers can use whatever business-related criteria they prefer to select personnel for a reduction or layoff: seniority, salary level, scores on most recent performance reviews, production levels, preservation of relationships, for example, and/or any combination thereof.  Employers also can weight those criteria however they wish, in the exercise of their own business judgment.  And employers are not legally required to provide workers with any specific “recall” or “rehire” rights.

Don Johnsen is available to answer questions about Employment & Labor issues.

G&K Employment Law Alerts


Financial Distress, Bankruptcy & Creditors’ Rights

Dale Schian
(602) 530-8140
dale.schian@gknet.com

COVID-19 will affect both prosperous and already distressed businesses. Bankruptcy, moratoriums, and other tools implemented to ameliorate the disruption are initially likely to apply to all companies seeking relief. It will be necessary to understand modifications of creditor rights as companies receive an opportunity to see if they can successfully operate in a post-COVID-19 economy.

There will be indirect consequences experienced by individuals and companies as their employees, customers, borrowers, and others struggle to meet their commitments.  It will be necessary to understand how defaults or delays in performance are best addressed and which transactions are no longer possible or prudent.

Below are some initial, practical steps businesses can take in evaluating their current situation and determining how to proceed in the future:

  • Realistically assess your situation.
  • Communicate with those you have relationships with, whether contractual or professional.
  • Understand that we are in this together and it will be much harder to get through it alone.
  • In light of the current uncertainty, it is unrealistic to expect hard commitments. Communicate and agree to set a time to talk again.
  • Do not look for a band aid or stop-gap solution until you understand what happens next.
  • Beware of extraordinary solutions or transactions. Consider those carefully with your advisors.
  • Expect additional delays in performance and remedies.
  • Understand that we will get through this.

Dale Schian is available to answer questions about Financial Distress, Bankruptcy & Creditors’ Rights.

Helpful Articles


Impact on Litigation

COVID-19 Business Response Team

Mike Ross
(602) 530-8498
michael.ross@gknet.com

COVID-19 has created significant uncertainty for parties in contractual and other business relationships regarding their on-going obligations and remedies.  While the specific impact of the pandemic on current and future litigation is unknown, below are some of the key issues businesses are facing:

  • Can my company still insist on the performance of contractual obligations?
  • Does the COVID‑19 pandemic excuse my duties to perform under a contract?
  • How has the COVID‑19 pandemic affected the timing and progress of cases in Federal and State courts?
  • If not litigation, what are the other alternatives?

Mike Ross is available to answer questions about the Impact on Litigation for businesses in litigation or contemplating litigation.


Insurance Recovery for Business Losses and Expense

Community Support & Business Response Legal Team

Jennifer Cranston
(602) 530-8191
jennifer.cranston@gknet.com

Many businesses are and will continue to be financially impacted by COVID-19. Depending on the circumstances and terms of the policy, insurance coverage may be available to defray some of the losses and additional expenses incurred as a result of the virus outbreak.  Below are steps businesses can take to evaluate their potential insurance coverage.

  • Gather all policies.
    • If you don’t have complete or current copies, contact your agent/broker or the insurance companies directly.
    • Don’t be discouraged by warnings from your agent/broker or carrier indicating that coverage is not available; it’s important to check for yourself.
  • Review all polices carefully.
    • Be sure to review all portions of the policies, especially endorsements which can reduce or expand the scope of your coverage.
    • Note any provisions that appear to apply to your situation as well as provisions that confuse or surprise you.
    • For many businesses, the most likely candidates for coverage of business losses are (1) business owner policies and (2) property damage policies with business interruption clauses. Key provisions to review in these policies include:
      • Language requiring “direct” or “actual” loss or damage to property: Such requirements are found in standard form policies and are already being relied upon by carriers to reject business loss claims. However, not all policies use the standard forms and, for those that do, legal arguments are being developed based on the theory that – for some industries – exposure of property to the virus meets the actual physical damage requirement.
      • Exclusions for viruses, contagions, or pandemics: Some standard form policies contain these kinds of exclusions. If clearly worded and easily identifiable, these exclusions are typically enforceable to preclude coverage, which is another reason why reading policies in their entirety is so critical. Also, the absence of such exclusions in an otherwise standardized policy may support a claim for coverage.
      • Provisions or endorsements that add additional coverage for “extra expense” or “civil authority”: These provisions may be broad enough to provide relief if your business is forced to shut down due to the virus. They may include prerequisites (such as a requirement that the suspension is caused by property damage or is necessary to provide civil authorities with access) as well as sub-limits to your coverage (limiting the recovery available to a specific dollar amount or cap on the number of days/weeks of suspension).
  • Businesses in specialized industries may have additional policies or endorsements addressing unique businesses losses and needs during emergency and crisis situations, which is why we recommend gathering and reviewing all policies.
  • Contact your agent/broker or carrier:
    • Once you’ve reviewed your policies, contact your agent/broker or the carrier about the specific provisions you believe provide coverage.
    • Be prepared to provide specific examples of your loss (including lost income and additional expenses incurred or expected to be incurred).
    • Make sure you provide notice of your claim using the procedures outlined in the policy or policies (typically found in a portion of the policy describing “conditions” or duties/obligations in the event of a loss).

Jennifer Cranston is available to answer questions about coverage and communicating with carriers regarding your business insurance policies.

Helpful Articles


Real Estate

COVID-19 Business Response Team

Jim Connor
(602) 530-8524
jbc@gknet.com

For many aspects of a real estate transaction, a pandemic, a public emergency, and perhaps (if applicable) a “stay in shelter” order, may rise to the level of “force majeure” or act of God, which in turn allows for the excuse, delay, extension or waiver of performance. Where the performance by a party to a contract is rendered impossible, or materially and adversely affected, by unforeseeable factors, then under the principles of force majeure that party may be excused.

In assessing whether an event or condition would qualify for such treatment under the concept of force majeure, often the “foreseeability” of the event is a significant factor. At its essence, a force majeure clause is an attempt to recognize that some risks are not reasonably foreseeable, and therefore, no single party should suffer the resulting consequences and losses.

COVID-19 has created significant uncertainty in the real estate industry, and we are currently sorting through numerous issues including the following:

  • How might a pandemic, or a resulting governmental mandate, impact a party to a real estate transaction?
  • Would tenants or borrowers be excused from prompt satisfaction of payment obligations? Or of non-payment obligations?
  • If a purchaser is required to fund an acquisition, and is informed that due to the turmoil in the credit markets the lender cannot perform when required, what is the status of the transaction and what might be the remedies?
  • How are contract provisions interpreted, or in absence of an express contract provision, how is a pandemic to be addressed?
  • Would the economic loss be subject to insurance coverage, including under business interruption insurance?
  • How would a pandemic alter the standard of care, for businesses conducting a retail business?
  • Is there a reasonable, mutually acceptable solution to the situation, where all parties can absorb some of the impact?
  • Is there a requirement – whether express or implied – of prompt notification to the other party in the event of a materially adverse condition?

Jim Connor is available to answer questions about the impact of the current business climate on commercial and residential Real Estate.


Securities

COVID-19 Business Response Team

Steve Boatwright
(602) 530-8301
steve.boatwright@gknet.com

Raising Capital with COVID‑19 As a Disclosure Requirement

Securities laws require disclosures of material factors that may impact among other things business operations and financial results. Disclosures are both of existing conditions and prospective impact of macroeconomic events or so called acts of God. Clients raising capital will need to consider how COVID‑19 could impact sales, result in layoffs, create supply issues if components need to be shipped from China or Italy and related logistics of reduced transport options with flight curtailments, consider whether key employees are not able to work due to illness from COVID‑19, and many other factors specific to their business.

For example, a medical facility meant to be a surgical center may need disclosure as it may be repurposed for COVID‑19 patients.

Disclosures need to be in private offering documents and public securities reports both in the form of risk factors and the narrative on the business itself. They may even be in the management discussion impacting liquidity particularly if the client has a blown covenant with a lender. There is no “one size fits all” and working with the management team and auditor will help securities counsel determine the needed disclosures.

Steve Boatwright is available to answer questions about Securities Law, Raising Capital, and Disclosure Requirements.

Helpful Articles


Tax Developments

COVID-19 Business Response Team

Tim Brown
(602) 530-8530
tdb@gknet.com

Administrative Relief

  • Extension of Tax Filing and Payment Deadlines – In IRS Notice 2020, the deadline for filing any tax return and paying any tax (including self-employment taxes and 2020 estimated tax payments) due on April 15, 2020 was extended until July 15, 2020. This extension does not apply to any return that was due on March 15, 2020 (e.g., partnership tax returns). Returns due on July 15, 2020 may be further extended to October 15, 2020 by filing an extension request on or before July 15, 2020.
  • IRS’s People First Initiative – On March 25, 2020, the IRS announced its People First Initiative in news release IR-2020-59, which provides additional administrative relief on several fronts including the following:
    • No New Audits – Until July 15, 2020, the IRS will not start new field, office, and correspondence examinations and will continue to work refund claims where possible and without in-person contact. However, the IRS may start new examinations where deemed necessary to protect the government’s interest in preserving the applicable statute of limitations.
    • Installment Agreement Payment Deferrals – For taxpayers under an existing Installment Agreement with the IRS, payments due between April 1 and July 15, 2020, are suspended, although interest will continue to accrue on any unpaid balance.
    • Offer-in-Comprise (OIC) Relief – The IRS will allow taxpayers until July 15, 2020 to provide requested additional information to support a pending OIC. The IRS will also not close any pending OIC request before July 15, 2020, without the taxpayer’s consent. Taxpayers also have the option of suspending all payments on accepted OICs until July 15, 2020, although interest will continue to accrue on any unpaid balances. The IRS will not default an OIC for those taxpayers who are delinquent in filing their tax return for tax year 2018, provided that it is filed on or before July 15, 2020.
    • Field Collection Activities – Liens and levies (including any seizures of a personal residence) initiated by field revenue officers will also be suspended until July 15, 2020. New automatic, systemic liens and levies will also be suspended until July 15, 2020.

Legislative Tax Relief

  • Families First Coronavirus Response Act – President Trump signed the Families First Coronavirus Response Act on March 18, 2020. The Act provides the following two new refundable payroll tax credits to employers, which are designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees:
    • Paid Sick Leave Credit – For an employee who is unable to work because of COVID‑19 quarantine or self-quarantine or has COVID‑19 symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days. For an employee who is caring for someone with COVID‑19, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the COVID‑19, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are also entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
    • Child Care Leave Credit – In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the COVID‑19, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
  • CARES Act Tax Provisions – President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARE Act includes several tax provisions affecting business and individuals, including the following:
    • Business Tax Provisions
      • Deferral of Employer Social Security Taxes and Self-Employment Taxes – The 6.2% portion of an employer’s social security taxes and an individual’s self-employment taxes due after the enactment of the CARES Act may deferred. Fifty percent (50%) of any such deferral is due on December 31, 2021 and the other 50% is due on December 31, 2022.
      • Payroll Tax Credit for Employee Retentions – The CARES Act provides a refundable tax credit for 50% of wages paid by certain employers whose operations have been fully or partially suspended by the COVID-19 virus or whose quarterly gross receipt have declined by 50% from the prior calendar quarter. The credit is refundable if it exceeds the employer’s portion of social security taxes reduced by paid sick leave and paid extended FMLA provided by earlier COVID-19 legislation. For businesses relying on the reduction in gross receipts, relief ends when gross receipts are more than 80% of the employer’s gross receipts for the same calendar quarter in the prior calendar year. The credit is only for the first $10,000 of compensation (including health benefits). The credit applies to all wages for employers with 100 or less full-time employees and only to the wages paid to employees not providing services as a result of COVID‑19 for employers with more than 100 full-time employees.
      • Extension of NOL Carryback Period – The CARES Act provides a five-year carryback period for corporations for calendar years 2018-2020, and the 80% taxable income limitation for pre-2021 tax years is eliminated.
      • Deferral of Retirement Plan Funding – Employer retirement plan contributions due in 2020 may be deferred until December 31, 2020.
      • Relaxation of Business Interest Expense Limitations – The CARES Act increases the adjusted taxable income (“ATI”) used in calculating the business interest expense limitation from 30% to 50% in 2019 and 2020 (2020 only for partnerships). The Act also allows partners to deduct 50% of their 2019 excess business expense limitation passed through from a partnership in 2020. Taxpayers may also use their 2019 ATI for their 2020 ATI.
      • Repeal of Excess Business Loss Limitations for Non-Corporate Businesses – For businesses other than C corporations, the CARES Act repeals the excess business loss limitations for years prior to 2021.
      • Increase in Charitable Contribution Limitation for Corporations – The Cares Act increases the taxable income limitation in 2020 for charitable contributions by C corporations from 10% to 25%.
    • Individual Tax Provisions
      • Charitable Contribution Deduction for Non-Itemizers – The Cares Act enables individuals who do not itemize to deduct up to $300 of charitable contributions made in 2020.
      • Exclusion of Employer Provided Student Loan Benefits – The Cares Act allows individuals to exclude from income up to $5,250 received prior to 2021 from an employer for use in repaying student loans.
      • Waiver of Early Withdrawal Penalty – The Cares Act waives the 10% penalty for early retirement plan withdrawals up to $100,000 by individuals affected by COVID-19 and allows the tax on such withdrawals to be paid over three-years or avoided by recontributing the withdrawal.
      • Waiver of Required Minimum Distribution (RMD) Requirements – The Cares Act waives the RMD requirement for 2020 for individuals required to start taking mandatory distributions at age 72.

Tim Brown is available to answer questions about the challenges in Tax Developments for businesses.


Tort Liability for Businesses

COVID-19 Business Response Team

Shannon Clark
(602) 530-8194
slc@gknet.com

Employers and businesses may be concerned about civil liability arising from exposure to COVID‑19. Companies may wonder about their potential liability to persons who claim they were exposed to COVID‑19 and became ill on their property. Such claims will require a careful analysis of the facts and circumstances relating to the particular claim. Claims for sickness and injury to an employee would be subject to worker’s compensation laws and an employee’s exclusive remedy, with limited exceptions, would be through the worker’s compensation system. During that process, the employee would need to establish that the injury resulted from exposure at the workplace while performing a function in the course and scope of the employee’s work duties.

For non-employees, a company may have liability to a social guest or business invitee if the employee knew or had reason to know of a dangerous condition that caused the guest or invitee harm. The elements of any particular claim warrant specific analysis since the duties a person or entity owes to others depends on the nature of the relationship between the parties.

Of course, everyone is well-advised to continue to follow state and federal government recommendations and implement robust mitigation strategies, including social distancing in the workplace, frequent handwashing and regular cleaning and sterilization.

Shannon Clark and Lincoln Combs are available to answer questions about the interaction between tort liability and workers’ compensation laws and risk management best practices.