Latin America: The Impact of COVID-19 on Companies with US Entities or Investments

Date: April 21, 2020
Well, thank you very much and good morning, good afternoon or good evening to each of you, depending where you are located. My name is Manuel Rajunov. And I would like to welcome each of you to our webinar, Latin America: The impact of COVID 19 on Companies with US Entities or Investments. Now, of course, while most of you or all of you are located in Latin America or have a strong involvement in Latin America. Obviously, the topics that we’re going to be discussing today are not exclusive to Latin American based companies or investors with US oppor—with US investments. However, we wanted to use this opportunity to reach out to you, our friends, our clients and our partners in the region to share with you some of the leadership expertise and knowledge that we have McDermott have. And, specifically, some of the issues that you or your clients with US entities or investments are facing, and some of the opportunities are available to them in the United States due to COVID 19. Also, I, I want to, on behalf of my partners and staff and lawyers at McDermott, wish that each and every one of you and your loved ones are staying safe and healthy, and that that continues. So as we move forward in these definitely uncertain times. Today, our speakers, I’m honored to share with you that my speakers are Lisa Richman, partner in our Washington DC office, will be talking to us about dispute resolution issues. Also, Richard Scharlat and Brian Cousin from our Labor and Employment practice. Jeff Reisner and David Grimes from our Restructuring and Corporate practices. And then Mike Silva and I will be talking to you about tax issues. For those of you that are interested in obtaining CLE/CPE credit from this presentation, we remind you that to be able to receive those credits you need to attend the discussion via Zoom on your computer. Unfortunately, we cannot provide you with that credit if you, if you’re joining us by phone. So if you have access to Zoom either on your, on your computer or your handheld device, please join through that platform. And then for those of you that are seeking New York, state of New York CLE/CPE, I will provide you the, the credit code at the end of the, at the end of the presentation so that you can obtain that credit. Please note that for those of you that are requesting CLE/CPE credit, you will receive a certificate via email within 6 to 8 weeks. And finally, before we get started, like to point out that there is at the top of your screen or the bottom of your screen, depending on your, on your, on your platform, there is a Q&A button. As we are going along through the presentation, please feel free to submit your questions through that platform, and our panelists will either address your questions during the presentation or at the end of the presentation. And if we don’t have time or the opportunity to get to your question, we will make sure to follow up by email to your specific questions and requests. So with that, I’d like to, at this time, turn it over to, my partners Richard and Brian that will be chatting with us about some of the issues that we’re facing vis-a-vis labor and employment. Richard?

Manuel, thank you very much. I’ll echo Manuel’s wish for a good, relevant part of the day to everybody. My name is Richard Scharlat and I’m a partner in McDermott Will & Emery’s Global Labor and Employment group. And I’m based out of the New York office. Currently though, I am in Israel with my family and have been in lock down for about two weeks longer than anyone in the United States. On Sunday, we hope to begin slowly phasing back to the new normal. So I’m here to say that maybe there’s some light at the end of the tunnel, eventually. Turning to our first slide.

We begin as the United States federal legislative response to COVID 19 began with the Families First Coronavirus Response Act, which I will call FFCRA. FFCRA was signed into law by the President on March 18th and took effect on April 1st. This act was designed to respond to the economic impact of COVID 19. And the sweeping legislation provided relief in many ways, including free COVID 19 testing, food assistance for vulnerable families, protection for healthcare workers, and in material part, and what my partner, Brian Cousin and I will be talking about today, provisions for paid leave that employers, in most cases, must provide to their employees. So FFCRA requires most private employers with fewer than 500 employees to provide paid sick and expanded family and medical leave resulting from COVID 19. The primary ways through which this leave is offered are the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. Change the slide, please.

The duration of FFCRA will be from April 1st to December 31st of this year. Notice of the provisions of FFCRA have to be conspicuously posted in the workplace. Of course, that’s going to be a little bit less effective than usual, given the circumstances of the pandemic. So putting it on the employer’s website or mailing it, emailing it to employees, however way you can get people notice is going to be encouraged, but it must be posted. The FFCRA is going to be administered and enforced by the DOL, USDOL specifically through the Wage and Hour Division. One umbrella point to make about applying FFCRA for different employers and employees is that this is, I’m talking about legislation at the federal level. There are going to be, in each case, particular state laws that may interplay with the federal regulations that you’re going to have to assess in connection with coming up with the right answer. Just for example, the benefits for paid sick leave under FFCRA will be in addition to the Sick and Vacation Leaves Act one might be entitled to in Puerto Rico under the Minimum Wage Vacation and Sick Leave Act of 1998. So these are all going to have to be examined. And it goes without saying that each scenario has to be evaluated on its own particular fact given the federal and state rules and regulations, and the fact that these changes have been, and will continue to be coming in a fast and furious pace. You can change the slide, please.

Let’s talk for a few moments about the reasons for applying for leave under FCCRA. Generally, generally, and we’re going to talk about some exceptions, employers must provide up to two weeks of paid sick leave for employees who cannot work, or even telework, for the following reasons. First, the employee is subject to a government quarantine or isolation order. And to be clear, this does not refer to the general stay at home orders that you’ve been likely reading about in the papers where the governors will say, let’s have a stay at home situation. I think all but eight states in the US have issued, you know, stay at home orders. This is, instead, an individual directive from the government or, as in number two, from a particular health care provider to the employee to self-quarantine or isolate. Three, employee has symptoms of COVID 19 and has approached a health care provider and is seeking a medical diagnosis or looking for a medical diagnosis. Number four is a little different in that the employee is not ill or subject to anything, necessarily, themselves, but they have to care for an individual who fits into categories one or two. Number five is also somebody who has a childcare issue that’s creating a need to be to be on leave. And six is more of an umbrella catch all for similar circumstances as might be determined by the Secretary of Health and Human Services. Note that the health care provider referred to in number two is as defined by the FMLA, which is really a doctor or anyone else that the Secretary of Labor might appoint—might designate. But we’ll talk about another definition of a health care provider when it comes to an exception. But you basically need a directive from a Doctor of Medicine or, or an osteopath to fall under these conditions for leave. If you could change the slide, please.

And we’re going to look at the different rates of leave pay for the two weeks of paid leave, depending upon the reason, which seem to break down on whether you, yourself, are sick or you’re caring for somebody else. You’ll see there are maximums in the first two lines there for reasons 1, 2, 3. And then again reasons 4 and 6, there are cap for the 10 days to—the 10 day working days within the two weeks for how much you’ll have to pay to those employees on leave. And you’ll see that there are varying ways overtime is dealt with under the EFMLEA and the EPSLA. If you could please change the slide.

And the next thing we’ll address is a little more specifics on which employers will be covered by FFCRA. So private employers, including non-profits with fewer than 500 employees, so up to 499, including 499. That count will exclude employees outside the US and its territories and exclude independent contractors as defined by the FLSA. It will include part time employees and employees on leave, and it will include day laborers from temporary agencies if those day laborers are not themselves independent contractors as defined by the FLSA. Note also that the count of the employees is determined when you’re assessing that particular employees leave. There are companies that may have terminated employees over the recent times, and they may have gone from an employer who has over 500, or 500 employees, to under 500 and would then fall under FFCRA. Public employers are not limited by the number of employees. You can change the slide, please.

I want to talk about one exception to FFCRA. And this is the health care provider exception, that even in the short time this has been out, this has changed. This was—this exception was an attempt to strike the balance between the public’s need to have health care providers out in the world and in hospitals and nursing homes, etcetera, in health care centers to provide health care services with the needs of the health care providers themselves, who have their own health to worry about and their families to take care of. Initially, this exclusion, this this exception that employers did not have to offer a particular health care worker leave under FFCRA was for a health care provider, as defined by the FMLA. As I mentioned before, basically the doctor level, somebody who could prescribe something, etcetera. I gather that it became clear that so much more support was needed for that level of health care provider that there’s now a new definition of health care provider for the purpose of FFCRA, which, as you can see from the quote, is very extensive. The pendulum swung the other way, and these are the people who can be accepted from the leave, and its non-clinical people as well. So there’s a tension between these two competing interests, and right now that’s where the arrow is pointing. We can skip to the next slide, please.

Manuel, you’re doing great.

Perfect.

What is an employer? What is a separate employer? Let’s talk about that for a minute for purposes of calculating whether there are 500 or, or less than 500 employees. Just because the business, this is probably obvious, has different locations or divisions doesn’t mean they’re, they’re two different employers and you could break up the count. They’re going to be considered a single employer. If a corporation owns an interest in another corporation, they’re not necessarily joint. The default is that they’re separate unless they’re deemed joint employers under the FLSA with respect to certain employees. The joint employer analysis under the FLSA revolves around whether an employee does work that, directly or indirectly, is in the interest of that employer in relation to the employee. Economic dependence of the employee on employer is not going to be dispositive as to whether it’s a joint employment situation, and particular business models don’t bear on that either, whether it’s a franchise or brand. Another way—so if two entities or deemed joints employers, the total number of employees are aggregated in connection with whether they’re under 500. They could also conceivably be deemed an integrated employer under the FMLA. An integrated employer under the FMLA revolves around whether there’s a common off—common officers, common management, common control of personnel, the ability to hire and fire, common ownerships and financial control. And if that’s the case, the entities could be aggregated. We could go to the next slide, please.

I want to talk about another exception, and that is for very small businesses that are dependent on particular employees specialized skill, knowledge or responsibilities. In the case that it’s a childcare situation, so if the employee, even in the small business, who has a particular knowledge or skill, is sick, this doesn’t apply. This is if that, that employee is in a childcare problematic situation. If the business viability is jeopardized, then an authorized officer of the company will step forward and, and confirm that one of the three reasons there, that really the business is on the brink and not viable without this employee, then that employee is not going to be—is going to be excepted from the leave requirement. So, with that, I’m going to turn the rest of the employment related presentation over to my partner, Brian Cousin. And thank you everybody for your attention. Brian?

Thanks, Richard. I am Brian Cousin. I am the leader of the International Employment Practice that McDermott. And for the last seven weeks, I’ve been sheltering at home in Larchmont, New York, which is a suburb outside of New York, about 15 miles north of Manhattan. And let me launch into what we’re going to talk about today. In particular with respect to the CARES Act, we’re foc— I’m going to focus on certain aspects of it dealing with the payroll protection program and unemployment compensation benefits. So, just to go over a couple of key themes to keep in mind is that on March 27th, 2020 President Trump signed into law this CARES Act, the Coronavirus Aid, Relief, and Economic Security Act, and established a $367 billion loan and grant program for small businesses. And small businesses, as we’ll see, are defined as businesses less than 500 employees. There is a question, and we’ll talk a little bit about it, is how do you count? How do you figure out whether you’re falling within the 500—less than 500 number of employees? And also the CARES Act expands unemployment benefits to include furloughed employees, gig workers, and freelancers, independent contractors, people with benefits. All of this is increased by $600 per week for a period of four months from the pay period March 29th through July 31st. The federal government is giving all these people, and we’ll talk about who all these people are, which is a lot, $600 a week extra on top of what their states are already giving them for unemployment compensation benefits. Next slide, please.

The CARES Act breaks down into a number of sections. First, Title I of the CARES Act attaches certain employment-specific conditions to loans that are being made available. Title II of the CARES Act expands unemployment insurance benefits, as we’ll talk about. Title II also affects employer social security taxes. Title III of the CARES Act revisits the Families First Coronavirus Response Act, which is what Richard was talking about. And Title IV of the act attaches employment-specific conditions to available loans as well. So, different types of loans than Title I, but also specific conditions for those. Next slide, please.

Now delving—diving into the Paycheck Protection Program aspect of the CARES Act. What this does is, under the act, it appropriates $349 billion to support small businesses and non-profits to maintain their payroll and overhead expenses through the period of the pandemic. It applies to any business under 500 employees or under the Small Business Administration standard. You could have a more than 500 employees, but you have to also be certified as qualifying under the Small Business Administration standards. Or, under 500 employees per physical location for all food service and accommodation businesses. You can also receive small business interruption loans if you qualify, if you’re one of these types of employers, for up to 2.5 times the average monthly payroll up to a maximum of $10 million. Next slide, please.

So the CARES Act, focusing on the pandemic unemployment insurance aspect of it, extends unemployment benefits to those who would otherwise not qualify if their loss of work is related to COVID 19 pandemic issues. Including, this includes all kinds of people who would not typically be covered by unemployment compensation benefits. Contractors, including independent contractors, of course. Self-employed individuals. People who did not put in enough time of work in order to, you know, basically qualify otherwise, under normal rules. People who are seeking part-time employment or only working part time would be eligible. And people whose, whose benefits would otherwise be exhausted under the typical limit. But now, they’re being extended under the CARES Act for unemployment periods going beyond. Next slide, please.

So with respect to the unemployment insurance aspect in particular, a little more detail. And as I said before, almost everybody can qualify for this unless you are able to work, continue your job either working normally or remotely online. If you’re one of those people, you’re not going to qualify. Or, if you’re already being paid sick leave or other leave benefits during the work interruption. But aside from those people, pretty much everybody else is entitled to these unemployment compensation benefits. It also, unlike the law before, before the CARES Act came out, there’s usually a waiting period of one week before you can qualify for unemployment benefits. The CARES Act says, we’re going to get rid of that, and we’re going to allow people to get benefits even during the first week of their unemployment. The CARES Act, also, as I mentioned before, allowed for $600 extra on top of what the state already provides in unemployment benefits. So the federal government is funding each and every person who qualifies this extra $600 per week through the end of July 2020. It also, the CARES Act established a pandemic emergency unemployment compensation program, which allows workers who have exhausted their unemployment compensation benefits to receive 13 more weeks of benefits if they’re able to work. And, as I said before, it extends benefits to self-employed people, freelancers, and independent contractors. Next slide.

With respect to the loans, there’s $349 billion in SBA loans at 1% interest available to small businesses and non-profits. Well, that’s what the act said, but as of, I think last night, those loans are already used up. So, there’s nothing more available at this point in time. If, if I were to go and apply for one of the small business loans under the CARES Act, there’s no more money in the fund right now. So the federal government has to decide whether or not they want to extend this and have, like, a second round of loans being made available. And the loans are all running through qualified banks. So, if you look at the second bullet point, it says loans by SBA certified lenders, those are essentially banks and other lenders who are certified by the Small Business Administration. And, you know, let’s, for the purposes of this discussion, assume that the federal government puts more money into this program, because right now there’s no money left, but let’s assume there’s more money that comes. Under the CARES Act, like I said before, there’s a cap to these loans of $10 million—or the lesser of $10 million or 2.5 times the average monthly payroll. These proceeds must be used for payroll costs. What are payroll costs? Well, payroll cost includes the money that you would typically pay your employees less than a salary of $100,000, but does include benefits and mortgage interest, rent and utilities. But for this group, I think it’s very important to point out that if you’re paying any compensation of an employee whose principal place of residence is outside of the United States, that will not be considered payroll cost for purposes of the CARES Act. So that’s, that’s just not something that you’re going to be able to use the loan money for in order to, to have it qualified for that particular opportunity. Then, if you look towards—the last bullet point says potential 100% loan forgiveness to the extent used for payroll, rent, mortgage interest, and utilities for eight weeks after the origination of the loan. So that says a couple of things. That the—a lot of the people who are borrowing this money, who have went into it with an expectation that they’re going to get 100% loan forgiveness. Well, that’s not necessarily the case. And there’s a lot of literature, articles, and discussion being done now about what’s going to happen, whether or not loan forgiveness is really going to be available to all these borrowers or not. And, you know, it says at the bottom of the slide, it is anticipated that non-payroll costs will only be allowed to account for up to 25% of the forgivable amount. That’s just, you know, what we think might be the outcome. It’s not clear from the statute. It’s not clear from regulations or commentary from the government at this point in time exactly how that’s going to work. And it’s been left largely to the banks. So I, I read a story that said that one of the banks basically said, look, if you’re using more than 25% of the loan amount to pay non-payroll costs, you’re not going to be able to get forgivable amounts at all. We’re not going to forgive any of the loan. So I think that’s an extreme response by one of the lenders. But I think there’s going to be some litigation, as Richard will get to in a moment, about different types of litigation that all of this situation with COVID 19 may lead to. I think there’s going to be a substantial amount of litigation trying to deal with what happens in the relationship between the borrowers in the lenders about the forgivability of the amount that’s been borrowed. So, Richard, you want to go over some of the litigation points?

Sure. I’ll just mention, and I think we can go to the next slide.

Yeah, it’s there.

Thank you very much. We’re monitoring very closely the different types, and I’m speaking specifically about employment litigation, we’re monitoring very carefully the different types of employment related litigation that the COVID situation appears to be throwing off. We’ve got retaliation cases for people who are complaining about not having PPE. There’s a Trader Joe’s lawsuit involving that. We have a Chicago nurse who was terminated for complaining about the poor quality of PPE, the personal protection equipment that people need, and that was in a health care scenario. We have already first wrong—it’s not really employment related, but wrongful death lawsuit, it was involving a former employee of Walmart. Also not necessarily employment related are union claims, hazard pay cases brought now by prison guards in the jails, which is a very difficult situation. And, you know, you’re going to have the injection of the Coronavirus issue into your typical discrimination case with pretext and whistle blowers and denial of care to people who, you know, are discriminated against. So, of all the things that, that are fluid and changing at all times, the litigation that’s starting to spring from this situation is probably the best example of that. So, just wanted to touch on those things a little bit. Give people an idea of what to start thinking about looking forward. And if, you know, we have a taskforce dealing with this, and there’s going to be more discussion of dispute resolution later on in this program, any questions we’ll be happy to work with you in particular scenarios that you might be coming up against. Thanks very much.

So thank you, both Richard and Brian for that thorough review of the labor and employment issues surrounding COVID 19 in the US. At this point, I’d like to turn it over to my partners David Grimes and Jeff Reisner, and we’re going to talk a little bit about some of the corporate issues and restructuring issues around the current situation. David, Jeff?

Sure. This is David. I’ll just go ahead and start because Jeff’s got a very slide specific presentation. Mine’s going to be a little bit old school. I’m going to talk very briefly about five subjects, and I’ll just outline them for you, and then we’ll go into them. The first one will be force majeure provisions in commercial contracts. The second one will be MAE or MAC clauses in, basically, M&A situations. The next two are very practical. I’ll give you an idea of what we’re seeing in the market for a renegotiation of leases. I’ll also give you an idea of what we’re seeing in the, in the debt renegotiation marketplace. And then finally, just a very brief Latin American specific view on the PPP program that Brian was talking about.

So let’s go ahead and start. On force majeure, I guess the thing to emphasize here is that each force majeure contract provision is unique and specific, and the laws of each of the 50 United States vary on how they’re interpreted. So this is one of these very detailed facts and circumstances analyses you have to go through. I can say, in general, that, the—most states provide that the event, which is in this case, the COVID 19 event, has to be outside the reasonable control of a party. And you pretty much are always going to satisfy that in this circumstance. That it was not reasonably foreseeable by the parties, again, for existing …, you probably will satisfy that question whether, since March 1, you could say that wasn’t really foreseeable that the event really impacts the ability of the parties to perform the contract. And then, finally, that you take reasonable steps to avoid or mitigate. Now that, the big commercial take away that you should have here is, and this is something I’ve encountered with clients, if you have a notice provision in your contract, you want to make sure that—you’ve got to figure out what type of notice you’re going to give. If you’re going to, if you’re going to give notice of your potential inability to perform or whether you simply cannot perform. Because if you have a contract, it’s in the money that’s basically going to benefit you, you probably don’t want to give that notice that you’re terminating your performance. You want to give a softer, sort of, protective notice. Those are the issues that we’re seeing in, around force majeure. But obviously, again, to the extent you’ve got specific questions we would have to take a look at the contract and have to figure out what the governing law was.

The next topic, MAE or MAC clauses. These are causes that are, so called material adverse change or material adverse effect clauses. And they’re often found in purchase agreements. And the, the issue will be if a buyer has signed an agreement to buy a business and you have the intervening COVID 19 impact of it, does this constitute a material adverse change that would permit the buyer to walk away from the contract? Most of these contracts, at least under a US law, are going to be governed by either New York or Delaware law. A lot of the … prudence is in Delaware on MAE. In general, it’s very difficult to prove an MAE because the impact has to be lasting and of a great duration. And I’ve actually discussed a couple ongoing situations with our, our litigators. And I think the current prevailing view is that it’s unlikely that a COVID 19, that the impact of it is going to be an MAE. Primarily for the reason that, even though it may last 2-3 months, maybe throughout the rest of 2020, it doesn’t really satisfy the durational impact requirement. And, moreover, particularly in Delaware, the courts, I think, are afraid of being inundated with lawsuits. I know that there have been several that have been filed already, and I think the prevailing view is that the judges in Delaware will probably strike them down pretty quickly because they don’t want to encourage this kind of litigation. So that’s an overview of MAE. Now onto the practical topics. So, what we’re seeing with many of our commercial clients who are tenants is that come April 1st when they’re, when they’re monthly rent was due, many have been successful in getting either a deferral of April rent or even an outright waiver of April rent. Now the, the situation depends on who the landlord is. Landlords that are small landlords who are using rent payments to finance their mortgages have a harder time doing this. Institutional landlords, who have other sources of income seem to have been a little bit easier on tenants trying to, trying to obtain lease waivers or lease deferrals. So the good news is, I think, that, that a lot of people are obtaining deferrals and/or waivers in this environment, and you should not hesitate to ask for them. Similarly, with existing financing debt, we have a number of clients of ours, both on lending side and on the borrowing side, who have, depending upon the situation, either outright offered as lenders or requested and received about any negotiation deferrals of interest payments. We’re not yet seeing deferrals of principal payments, but we’re seeing the banks pretty willing to defer interest payments, and even for a several month period. And I’m sure Jeff will talk more about which impacted industries, in particular oil and gas, are going to see this. And then finally, just to put a fine point on what Brian talked about in connection with the Payment Protection Program, something that’s going to be of relevance to any non-US company. So the maximum number of employees that, that work, that qualify is 500. The thing to focus on is that if you have a, let’s say you have a Uruguayan company or a Mexican company, and you have a US subsidiary. So long as you have 500 employees whose principal residence is in United States, they’re the only ones that count against the 500-person cap. So you may have 1000 workers in Mexico. They will not count and they, and therefore, you still will be qualified to get it. So that’s something to, to keep in mind and emphasize when you’re going through that analysis. I agree with Brian the, the full amount’s already been requested. I think people, in general, are anticipating that will be another multibillion-dollar allocation by the federal government, and you should get in line and submit your applications. I have several clients who have submitted, a couple have even gotten money already, and it’s, it could be a very beneficial thing. So that’s what I’ve got. I’m going to go ahead and pass it off to Jeff, and he can take it from here. Next slide, please.

Okay. Good morning, afternoon, evening, everyone. This is Jeff Reisner. I’m the global co-chair of the Restructuring Group at McDermott Will & Emery. And, very happy to chat with you today. We thought …to go through some of the industries we thought would be most affected, and most obviously affected by COVID 19 crisis and would present opportunities for potential acquisition for a long-term player, or opportunities to go and restructure balance sheets and create platforms. I have several clients of now who are looking at core businesses that they view as good long-term businesses and looking to build platforms around them. So let’s start. So travel. Obviously, if you are in the airline business, you’re in the cruise business, you are having serious doubts, but it goes further than that. It’s everybody related to travel. So it’s also hotels. It’s also certain restaurants. That catered to that kind of business. And those folks are in trouble. And the question you have to ask yourself is, when will people start getting back on airplanes? When will that happen? We’ve all learned now how to use remote technology. Will we stay there? Will we revert? To what degree will we revert? The CEO of American Airlines went on television this morning and was talking about how they are retiring the older planes in the fleet. That’s what they’re doing with this opportunity. Haven’t cancelled the orders with Boeing, but they’re reducing the older inventory. What’s the impact of that? Mechanics, parts suppliers. It goes down, down the road. Food and beverage, restaurants. Obviously, you can’t live on takeout, and that’s affecting many restaurants. Some will not come back. The moms and pops probably are gone. In many instances the larger chains probably will do a little better, but also the suppliers. Coke and Pepsi aren’t going to go anywhere, but there are many, many local distributors and suppliers that are hurting. Entertainment. Everything from movie tickets to professional sports. You know, the XFL just filed a Chapter 11 proceeding. Vince McMahon’s tried twice now to get that going. He’s the owner of World Wrestling Entertainment. All of those are shut down. And the, you know, while there is a serious consideration about how to go forward in professional sports, there’s a real impact from having nobody in the stadiums. If that’s how it goes, that includes selling hotdogs, maintaining the stands, running the restaurants over there, and just working at the facility. Real estate is interesting. People are focused very much on commercial space, where tenants are ceasing rent payments in many instances, with or without the consent of the landlord. But the single-family real estate market is also hit. You can’t get anyone in to take a picture of your home. You can’t have an open house. You can’t get property records for any homes that are older, that you need to get title insurance because the records are in electronic format. So there’s significant fallout in single family residential as well as, as well as commercial. And that’s going to be impactful for a very long time as the market falls also in real estate, which was predicted anyway. In transportation and shipment, you know, the truckers are still out there, but the planes and the, and the ships are, are dropping in their frequency of delivery. Partially because of an uncertainty in workforce, partially because of an uncertainty in payment. And so that’s all slowed down quite a bit. E-commerce goes the other way, right? Look at the stock for Amazon right now or Alibaba. But it depends on what your selling. Necessities will work, but you’re not going anywhere. You know, does your, does your girlfriend or wife need, you know, that, that new dress? Probably not. Do you need a new suit? Probably not. You’re not going anywhere or doing anything. That will change in a while, but the question to ask yourself with respect to affected industries is, who anticipated a complete loss of revenue? What you heard previously about the CARES Act and all these other government programs is really important because no one anticipated, even if you were out there and saying that there was going to be a recession, who forecasted a complete loss of revenue in many industries? That’s what’s so profound in this turn down. Telecommunications. There will be winners and losers. Oil and gas and power. As if it weren’t bad enough in the oil wars, now you have a drop-in demand and you have the insolvencies already starting, starting to have the, lots of inbound phone calls on those. And again, patient money will benefit from all this. Retail. Already in trouble, may never come back. Macy’s is already talking to restructuring advisers, they’ll try to negotiate, or renegotiate, leases where they can. They’ll reject many locations, but will they ever come back? Have we learned to get along without stores? Pharmaceuticals are interesting. There’s been a major, major change in what these companies are doing right now. Everyone’s trying to come out with COVID 19 and their COVID 19 solution in part or in whole. And that has caused a shortage in investment in other areas of pharmaceutical care. So that’s, that’s an impacted industry too. We’re going to have to wait to see how that one really turns out. Manufacturing is kind of obvious. Sale—car sales, for example, or down. People aren’t buying autos. Are they buying the parts? Probably not. GM is making face masks and ventilators. So it tells you what’s going on there. And health care is an interesting area. There are people that predict a very good surge in health care and those that predict it to go the other way. If you are a health care provider that depended on elective surgery, you’re in trouble right now. If you are a heavily capitated provider, which means you have locked in contracts to care for individuals, you’re a loser right now. If, on the other hand, you aren’t capitated, you may have a very big opportunity because all of a sudden, your local hospital is filled with COVID 19 patients. How long does that last? We don’t know. But the general point here is people are conflating the issue of the medical solution with the financial solution. They will not be the same. That walks us into the question of what, what are the mechanisms for dealing with this in the United States? Next slide, please.

So one thing that everyone’s asked about is bankruptcy. How that works, we obviously don’t have enough time to go into bankruptcy in detail, but the Bankruptcy Code, and this is important, is a federal, federal provision. So there’s two types of filings that are relevant here. There’s many types, but only two that really matter here for corporations. A Chapter 11 reorganization and a Chapter 7 liquidation. Now that, you can have, and I apologize for the confusion of the law, you can have a liquidating Chapter 11. You, you never get a reorganizing Chapter 7, but a Chapter 11 is mainly for businesses and previously very well-off individuals seeking to restructure their debts and reorganize their finances to stay in business. These days, it’s also the mechanism for doing what’s called a 363 sale, which is an auction in a bankruptcy context. And the reason people like bankruptcy is bankruptcy gives you the cleanest form of title you can get. So very often you find a company that you are interested in or a set of assets. It’s surrounded by a terrible debt structure or some other impediment, a government issue, a tax issue, and you have a Chapter 11 for the purpose of extracting for a buyer or for a lender looking to bid their secure debt. You extract these assets free and clear of liens, claims, and encumbrances. Very important to know also, that the expansion of what you can sell free and clear of has been dramatic. I just bought a hospital out of bankruptcy literally last week, and we were able to not only get a free and clear of liens, which is relatively common, but we got it free and clear of set off on recoupment rights under accounts receivable that we purchased. We also got a free of attorney general conditions, potentially, the government, the government took the position that these were necessities and were able to be imposed on a buyer. And the judge took a position that this was an interest, that those license requirements were an interest that the debtor could sell free and clear of. We’ll see how that goes as it goes higher up in the and the appellant line of courts in the United States. But that’s a very significant development. Another thing to think about is that Chapter 7, you get a trustee. Now the trustee is some, is a lawyer usually, who is on a panel and who, as, you know, for every five cases that pay them, they have 50 that don’t. So when they get ahold of a case that has a, a likelihood of some money or a good target or, you know, a D&O policy, they work those cases fairly hard. They’re charged with liquidating a case relatively quickly and distributing assets. But they also can, through the bankruptcy sale process, confer upon a buyer a very, very good set of findings out of the court, that include the ones I’ve discussed and also a, a lack of successful liability. So very, very effective ways to buy things. Always, or almost always subject to overbid, so to public process. But they’re out there. And just for the sake of completion, you know, as you see on the bottom of your screen, there are some other provisions. If you come across them, call us. But you’re unlikely to, other than Chapter 15 which is for foreign proceedings to be recognized in the United States. Next slide, please.

Okay, so why do people file bankruptcy? It’s a very good way to calm everything down in the beginning. Think of it as an injunction that arises the second you file that bankruptcy. It stops foreclosures. It stops collection actions. It stops any kind of proceeding against the company that arose before the bankruptcy. So people often file because they’re just about to lose a big judgment, or they’re just about to get foreclosed on, or something bad is happening where they have so many cases. So imagine the asbestos industry back in the day where you had so many cases in so many places. You just file to shut it down and, and stop it so you can consolidate actions. And the automatic stay not only enhances the preservation of asset value, but other provisions—but works with other provisions of the Bankruptcy Code that allow you to consolidate litigation, which also is very effective for the estate. Next slide.

Okay, so these are—this is the slide that talks about the, the asset sale provisions. And we talked about 363 and this is the free and clear language. It could be a public or private sale, but I will tell you, almost always it’s public, and it provides the company for an opportunity to really maximize recovery because you can give such a good title away. But it depends on what business you’re in. If you’re holding an auction of a shirt manufacturer, that’s one thing. If you’re holding an auction of a hospital, that’s another. A hospital that has a lot of elective surgery tends to lose clients when it’s in bankruptcy. People don’t want to go to that hospital. People who don’t have a choice will go, but people that do, often don’t. So it depends on what kind of business you’re in and what you’re doing. It doesn’t mean you can’t do a Chapter 11. It means that you have an exit plan that you announce when you file. So, for example, you put out a press release that says, hey, we’re filing for the purpose of defecting a balance sheet restructuring. We’re not doing anything else. Here’s our new sponsor. Here’s how we’re going to come out. We’ll be in for two weeks, that’s it, public don’t be concerned. And often that’s effective. The alternative to that is what we call the freeform filing, which is pretty bad. That’s if you file, you don’t really have an exit strategy, you don’t have a buyer, you don’t have anything. And in that case, that usually a disastrous outcome. The last point just to be made is you can also sell assets or reorganize in the context of a plan of reorganization. In the PG&E bankruptcy case, for example, that’s going to be a plan of reorganization, and there will be a recapitalization of the company and creditors will be paid through that plan. And that’s how that will work. Next slide, please.

Okay, so these are just some options available into Chapter 11. And the reason we’re going through this is to say to you, if you are an investor, if you have a counterparty that’s involved, if you have a supplier that’s involved in a bankruptcy, there are many, many things you could do within those cases. You can structure payments for debt. You can allow debt to be swapped for equity. You can restructure the secure debt. So, the times, if the loan is completely due and payable, you can extend the period for many, many years, often, and you can impose a market rate of interest. You can reject contracts and leases. We talked before about the entertainment industry. 10 years ago, 15 years ago, when all of the theater companies were filing, they were filing bankruptcies to reject the leases. And the Bankruptcy Code is incredibly effective. It’s got certain provisions that deal simply with lease rejection, and a rejected claim is about 10-15% of the claim it would be outside of a bankruptcy. And movie theaters are going to pick their favorite theatres and they’re going to reject the dogs. And as that happens, you’re going to see more and more bankruptcies to get that done. In a Chapter 11, the debtor gets a discharge, so it can’t be, it can’t be pursued for claims that are dealt with in the Chapter 11. And usually, through certain mechanisms we don’t have time for here, that’s all of the claims that are potentially out there. Next slide.

Now, there are state court remedies that are cheaper and often beneficial in the case of liquidations. So an assignment for the benefit of creditors, which are called an ABC, is like a Chapter 7 liquidation except you literally get to pick the assignee. So let me, kind of, save you the trouble and tell you how this really works, in that if you have a good restructuring lawyer, they help you pick the assignor, I mean excuse me, the assignee. And the assignee understands not to bite the hand that feeds them. So you are essentially getting a party biased in your favor to liquidate the assets. So if you’re a parent company that’s got… you want to consider an ABC. If you’re… because you want someone that isn’t going to sue you for sport or to go after a D&O policy or to go after some sort of liability on a pull through deal or similar strategy. So very effective. Certain states do a lot of them, like California and Delaware. Certain states do none of them, like Texas. Very, very rare in Texas. It does have a statute, almost never done. Next slide.

Okay, so, as I said, it’s faster, less costly, and you can kind of set up a ABC before you get it going. And it’s, it’s usually fairly quiet, but now we’re going to go to the cons on the next slide. It does not give rise that automatics stay we talked about and you can’t, you can’t transfer leases and contracts against the consent of the lessor or contract counterparty. It’s an event of default under almost every commercial agreement. So it does create default rights that are not enforceable in a bankruptcy but are when there’s an ABC involved. And, there is no ability to sell assets free and clear of liens and security interest without consent or full payoff, which is one of the huge benefits of a bankruptcy per se. And, you can have a bankruptcy anyway. It is, it is relatively rare, but it does happen that you commence an ABC and the creditors response, creditors plural, takes three, is to throw you into a bankruptcy. Now, it doesn’t mean you can’t get out of it. We had that issued two weeks ago. We convinced a bankruptcy judge that the ABC was the better vehicle and the bankruptcy judge dismissed the bankruptcy. Next slide.

Receivership is usually used in connection with either federal securities violations or more local real estate situations. There are multiple types of receivers. There’s what’s called the rents issues and profits receiver, usually for real estate. What do they do? They collect the rent. They pay the bills pending disposition. They do that because usually there’s some view that the debtor is unreliable with respect to the money. And, in cases of fraud, it’s a mechanism that’s used under federal statutes and is designed to stabilize proceedings. It’s very, very good for what its, for what it’s good for. The problem with receivership is the receivers generally have very, very little authority unless they’re going to court. So they’re in court all the time. And then you have to ask yourself, if I’m in court all the time anyway, do I want to—do, would I rather have a Chapter 11? Next.

Okay, I guess there’s no more slides. Okay, well, thank you all very much. And we’ll turn it back to Manuel.

Thank you very much, Jeff and David, on that very, very detailed presentation. At this point, I’ll turn it over to my good friend and colleague, Mike Silva, who is going to walk us through some of the tax issues or the tax opportunities, incentives, and benefits, that have been enacted as part of the COVID crisis in the United States. Mike?

Thank you, Manuel. Again, this is Mike Silva. I’m based in the Miami, Florida office. I’m focused mostly on cross border investment and I regularly advise clients on setting up the most efficient tax structures for their inbound or US investments. So my background is both as a CPA in the Big Four accounting firms and as an international tax lawyer. I’ve worked with Manuel over the years. And my focus today is to highlight the tax provisions within the larger CARES Act, and as we already know, it’s only three weeks old. It’s part of a larger economic stimulus, and one of the goals of the tax provision is to free up funds for businesses that are struggling to allow for refunds from the IRS and to delay deferred payments of estimated taxes and payroll taxes. It also takes on some ambitious corrections, modifications of the 2018 changes, otherwise known as the Tax Cut Jobs Act, or TCJA. That became effective—signed into law in 17, but became effective mostly in 2018. So in order for me to go into some of the changes in the CARES Act, I just wanted to take five minutes to give a background, not intended to be a tutorial, but just an overview on how US taxation applies to Latin American investors and companies that have grown and expanded into the US market. There’s essentially two ways, as you see broken up on the slide, for a Latin American firm and investors be taxed in the US. And it’s either in the first category, much like a passive investor not operating a business and having active regular activities but being passive in either the financial markets or investing in private companies from a distance. Again, as a passive non-controlling owner, generating dividends, interest, rents, or royalties. And the basis for taxation is generally on a gross basis. The amount of the payment going overseas to Latin America is withheld at the source at 30% or as applicable, the lower treaty rate. For example, the US Mexico treaty would reduce the 30% much—on dividends, interest, rents, and royalties to a much, a number between 5-15%, depending on the case. There’s usually no need to file a tax return. Once the funds are submitted, they are usually nonrefundable and the persons or the funds that are investing, possibly in the US, can avail themselves of certain preferential treatment for certain interest income. If they demonstrate their certificate of foreign status, they can avoid 30% withholding. It can be zero. There’s also an exception for investing in the US securities market, which generate, again, isolated capital gains of zero tax on those capital gains. And if there are rental properties, you usually are motivated to make an election to treat that rental property as a regular business so that you can offset the rental income by the carrying charges, mortgage interest, and other regular costs of maintaining the property, and you’re taxed on the net basis. And then that basis is what you see next, it’s for the active investor or any corporation that has come into the US, either through a branch or forms its own US corporation. It will be generally taxed at 21%. Those rates have been reduced since 2008 from 35%. And it’s important to note that if you do operate directly as a branch in the US of a foreign company, then you’re taxed under a branch profit tax regime. Again, treaties can reduce the branch profit tax regime, but it’s important to look at that. Now individual investors from Latin America, often pulling their investments, for US directed investments, will either use a foreign fund or they’ll set up a local country company, a trust. It might even be an offshore company of the old varieties like the British Virgin Islands and the Caymans. And the legitimate business reason for that is not only pulling the investments of the foreign investors, but to simply have a so called, offshore blocker company. And that’s because individuals who are from Latin America to directly own shares in US companies or US real estate, they would be exposing themselves to the US inheritance type taxes. The US has an estate and gift tax of 40% and for that reason, almost all foreign investors that are individuals use an offshore blocker structure that could be a trust company, a BBI, that formed overseas. And those entities, in turn, will invest in the US. So on the, on this slide, I talk about the type of entities that you can form in the US, and those are some of the obvious ones. In the possibilities you would also include the branch, which is how a foreign company can register to do business and simply start operating. For limited liability, it’s usually not encouraged, and also it can gray up the area between US profits and foreign profits when the branch operates directly in the US and forces a foreign company to file a return in the US. So therefore, people try to reinvent the US tax exposure by using a new special purpose company for the US expansion, which can be in any form from a corp, a partnership. A very popular entity in the last dozen years is the limited liability company, popular because of its flexibility for taxes and also limiting liability for towards, so a contractual liability undertaken by the LLC. And then trusts, which are a variety in trusts depending on the goals of the client. They can be a separate taxpayer, or they can be disregarded or passed through. It’s one important aspect of clients that have formed LLCs that foreign owned single member LLCs, those are US LLCs in Delaware, Florida, and other states because all our corporate laws and statutory company law is governed by state. So while there’s federal taxation of those activities, they’re formed under a state law. And if you have a single member LLC, it needs to file a certain disclosure form, otherwise it’s subject to $25,000 penalty per year. We’ve seen single purpose vehicles, for example, just to hold property, a single asset or something, and someone simplistically forms a LLC to hold it, to be the title holder of the real estate. If that LLC is foreign owned, it must file a disclosure form, a form 5472, or it’s risk some penalties in the disclosures. And there’s some non-tax motives associated with that, that, that implemented that rule a couple of years back.

So before I get into the CARES Act, I want to highlight the TCJA, or the act passed in 2017, at the very end of 17, that generally was effective starting in 18 and it was quite a big deal. It did change the corporate rate from 35 to 21. It did have a number of changes that were rushed, and because they were rushed for congressional approval right before the end of 2017, there was some oversight and some rushed provision. The CARES Act also intends to correct some of those rush provisions and some of the ambiguity. But there was a one-time repatriation tax, so called 965 tax, where US shareholders of a foreign company were required to include in their gross income a share of foreign earnings not previously taxed. That was trying to do away with the perception that the US tax system was being used inappropriately, some argued, to achieve deferral of foreign profits being accumulated overseas by US owners. This is also applicable because, meaning, free immigration-type planning clients that move from Latin America into the US need to monitor these sort of issues. And the participation exemption was also an important change. It allowed dividend being sent up to a US parent company to be zero tax. And foreign tax credits, where the US generally provides a credit, that same dollar of income being reported in the US was subject to a foreign tax. Those credits were limited in 2018 and it brings us now to where we stand today trying to fix some of these limitations. In many ways, the CARES Act tries to liberalize some of these changes, and it’s attempting to go back and free up cash where possible. So that companies struggling under this COVID 19 situation can continue payroll and keep their businesses going. So the next slide.

I really have overlooked a lot of the headline provisions in the CARES Act that deal with taxes like rebates for individuals, some of the charitable deductions for individuals, and some of more basic items. What I’m focusing on here, in other words, it’s not an exhaustive list of the tax changes in the CARES Act, is the ones most applicable to foreign investors that have a US subsidiary or have active business operations in the US, as opposed to passive investments. So the first one that I, I highlight there is the net operating loss deduction, which has always been a big mainstay of the US tax system under the notion that if a company pays in a very profitable year and then the subsequent year is a loss, it would be unfair, economically, to pay zero in the loss year, and then you pay the full rate in the profitable year because when you average the two years, the owner of the company has only the average income reduced, yet he paid the maximum rate in year one, and he got zero benefit in year two for the loss. So the carryover concept is where you can move your net operating loss in a particular year, and overtime there’s been flexibility to either move those net operating losses in a particular fiscal calendar year of the taxpayer, either forward or backwards. So either a carryforward or a carryback. So in 2018 there are some limitations on how much of the net operating loss you could apply, and what the CARES Act does is temporarily, up until years after 2021, it limits—it removes the limitation that we had in 2018 on NOLs and it permits, instead of only allowing for the carryforward in 2018, it now permits an NOL carryback for up to five years. Many clients, and my observation is that many clients that do have a strong balance sheet, they have a line of credit. They know that 2020 is going to be a loss year, but they paid enormous amount of taxes in prior years because they were successful, including in years before 2018 when the corporate rate was 35% at the federal level on top of state and local taxes. They are put in the position that they’re thinking whether they should acquire equipment for depreciation purposes or accelerate other expenses. If the opportunity exists to generate a large taxable net operating loss, and if that loss is generated in 2020, they’d be able to carry it back into years in which they paid high rates. So that by early 2021, or the middle of 2021, they’d be able to get a refund from the IRS by carrying back the net operating losses. So there’s a significant number of corporate taxpayers that are expecting to avail themselves to this benefit under the CARES Act. These are usually benefits reserved for C corporations, or so called large regular corporations. So think of these as the C corporation subsidiary with a Latin American parent or a multinational company that operates in the US through a C corporation. And the carryback provision for the prior five years, where you carry it back to the first of the five years, normally, and then if there’s still a loss four years back and then three years back, you can claim a refund. And, you can also readjust your estimated payments, because the IRS likes C corporations to pay as you go during the calendar year based on estimates of how profitable you will be. And the estimate of payments can also be reduced if the company wants to hold onto cash. Nonetheless, they’re accelerating expenses where possible or acquiring new investments and property, generating deductions to create a larger NOL where possible, and to move it back for a refund in a prior year. There, there’s no election that’s required for a carry back on NOLs. As I mentioned the NOL is carried back to the earliest of the five-year period. There’s no change in the CARES Act. I’ve looked for it, but there’s no change in the current rule when you have a corporate capital loss. So if you sold a big capital asset, a factory or some other real estate corporate office building, and sold it out of loss, there’s no change to the rule that the corporate losses are carried back three years. And, and then, if there’s excess carrybacks, carried forward five years, that’s still the same rule. And if you’re an upstart company, if your client started in the US just last year and, you know, bad timing, they may have a loss in 2020, but they may elect waive the entire five-year carryback because there’s really no prior year losses and carry them forward. So if they do that, if they waive the NOL carryback period, there is an election form that they need to file by the due date that the tax return. Something to keep mindful for the tax preparer. So my observations are that corps should review with their tax advisers the estimated payments reduced those more appropriately. There’s even the opportunity for a so-called quickie refund, where you promptly file as soon as your 2020 tax year closes to get a refund right away, freeing up cash and continuing to cover payroll and other business means. This was clearly a policy driven change, where they were trying to help C corporations to free up cash by allowing credit through the NOL provision to be carried back. And if you’re a foreign corporation and you represent that client that engaged in a merger and acquisition in the US in 2018 or after, then the target of that company that likely became a member of the buyer corporation on a consolidated tax basis. And if there’s an NOL on that target company, you should consider the tax planning associated with that, as well as whether the target seller wants to review the sales agreement to determine whether it was entitled to any pre-closing tax refunds. So you may receive such a letter.

Moving forward quickly, I highlighted some of the other important provisions in the CARES Act. The NOL will likely be the big dollar item. There’s also bonus depreciation. I think there the goal, and what the important aspect is to think about is access in cash flow. There was a need to correct some of the errors in 2018 and make sure that all the investment property that you’re acquiring gets the appropriate 15-year amortization and depreciation period. The other provisions here, the next three, are an attempt to continue payroll. And we’ve discussed the Payroll Protection Program, or the Paycheck Protection Program. I won’t talk much about that other than say that it’s not limited to US owners of US businesses. In other words, your foreign client that owns a US employer can avail themselves to this program. And the two items above that talk about the deferral or postponement or forgiveness of the payroll taxes. The other items, if you have a client in a situation with a minimum tax credit in the prior years, there’s some opportunities for a refund. And then these last two have to do with interest deductions and relief payments. The interest deduction was limited in 2018 with a cap of 30% of the taxable income. That’s now been liberalized for a leveraged company to deduct up to 50% of the taxable income in 19 because those tax returns haven’t been filed yet for corporations, and in 2020. So that, again, creates a refund. And then the last one is something that shouldn’t be overlooked because it’s so powerful. It allows an employer to have a deduction when making a qualified disaster payment. So think of it as payment after a hurricane. This provision was actually enacted after 9/11 when you needed to make certain payments that were of personal nature or living expenses to your workers and employees so that they could continue to service clients and operate. This is now applicable in our COVID situation. And why it’s so powerful is it’s not only deductible of the employer, but the qualified payment is tax free to the employee. So these are all changes in the CARES Act. It’s not exhaustive, but I wanted the highlight the ones that might be most applicable. And with that, I want to hand it back to my partner Manuel.

Thank you very much, Mike. I appreciate the thoroughness of your presentation. And, obviously, there’s a tremendous amount of opportunity there to—for US taxpayers, and again, US taxpayers would be the US subsidiary of a foreign company, to be able to increase their cash position by some of the strategies that you discussed. Thank you very much, Mike. So last, last but not least, I’d like to turnover to our partner Lisa Richman, who is going to talk to us about some of the issues related to dispute resolutions in this time of COVID. So, Lisa, please take it away.

Thank you very much, Manuel. If you could go to the next slide, please. I am Lisa Richmond. I’m the co-chair of McDermott’s Global International Arbitration in Dispute Resolution Practice area. I find myself at the moment at my home in Washington, DC. Under normal circumstances, I would be somewhere around the world, but as it is, I been here for some time now, which my family really enjoys, and, and which has been nice. But it has been a bit of a challenge. So, David already gave us a nice introduction to force majeure, and so I won’t, sort of, beat that dead horse much more than saying and acknowledging that, you know, COVID 19 has caused many businesses to confront, for the first time in their corporate history for some of them, circumstances that may excuse or delay their obligations to perform under existing contracts. And that may be due to the occurrence of a force majeure event or through other mechanisms. And for point of reference, force majeure comes from the French for superior force. Technically speaking, in order to satisfy being a force majeure event, an event needs to satisfy three conditions. First, it has to be outside the party’s reasonable control. Second, the event was not reasonably foreseeable by the parties, and the effects, therefore, could not be avoided by them. And third, the event materially effects performance or the ability to perform contractual obligations. So, this first slide is intended to provide a little bit of a depiction, in particular for folks who are maybe from a civil law country, because unlike in civil law countries, or at least some of them, the US does not have a statutory application of force majeure. What does that mean? That means if you don’t have a force majeure provision in your contract, it is highly unlikely, absent some exception in the US, that force majeure will apply. However, that does not mean that you’re out of luck in the US. In terms of seeking to excuse your performance, there are certain common law principles that are set forth by state law, as David already pointed out, and each state differs slightly there. There are common law principles that we’ll talk about in just a moment, including impossibility, impracticability, frustration of purpose, commercial frustration. Different states identify them slightly differently, but they have similarities. And, and I’ll talk about that a little bit later. Next slide, please.

So the really important thing is, one, what does your contract say? And your contract may include something other than a force majeure provision that might be able to provide some relief. So for instance, the termination clause or the cancellation clause may have something in there. David also spoke about the material adverse, different material adverse clauses that may provide some relief. Then, the applicable laws. And why do I say laws here? Occasionally, you have the laws of multiple jurisdictions that may apply. And so, looking at those, very important. And in every circumstance, the facts and circumstances will be important. Again, David mentioned notice provisions following those. Sometimes even if you don’t have a notice provision in your contract, it may be required by law. Sometimes, for example, even though you don’t have a mitigation provision in your contract, that may also be required by law. What do I mean with that? You may have to demonstrate that you have diligently sought to perform notwithstanding the event that is impeding your performance. You may have to demonstrate that you diligently sought to reduce the damage that might occur. And the counterparty for whom—who is not claiming an event of force majeure may have also its own obligations to demonstrate that it sought to avoid or to mitigate damage when a force majeure even has been notified. Next slide, please.

So we’re going to speak about this only very, very quickly because I want to get a little bit more granular on the impossibility, impracticability and those sorts of issues. But so if you have received, or rather, if you have determined you’re going to be unable to perform under your contract governed by US law because of COVID 19, some high-level steps you’ll want to consider. Looking at your contract, figuring out what the different options are. Looking at the law to determine what the different options are. Gathering and documenting the facts and actions. So, making sure that you comply with any requirement of diligence. Making sure you comply with any obligation to mitigate or avoid. Considering your options. And this is, this is one thing that we should chat about very briefly. In our experience in working with companies on both sides of things, meaning both those that have been providing notices of force majeure and those that have been receiving them, the best results that we have seen for our clients is where they have discussed the issue with their counterparties. Instead of, yes, they’ve taken whatever their formal obligations are, if there’s a formal obligation to provide notice within a week, providing that notice and providing sufficient detail, but also engaging in conversations about how can we resolve this issue in a way that works for both of us? So just to give you an example, where we have had clients who are planning big events and they are contracting with large event providers and they know already folks are not going to be able to get to this event that’s occurring in June, this just isn’t going to be feasible. Having a discussion with that event provider that well, yes, we’ve provided notice of a force majeure event. However, from a business perspective, we think we should be able to hold three events in the future, in 2021, that we would be able to host at your place instead of hosting them somewhere else. Let’s come to a business resolution that benefits both of us and reduces the pain on both of our sides. Manny, could you go to the next slide, please?

So let’s spend two minutes talking about the other potential options. Impossibility, impracticability, frustration of purpose. You know, a party’s non-performance typically will not be excused where the event preventing performance was expected or was a foreseeable risk at the time that the contract was executed. So even if the event was unforeseeable, however, courts will still assess whether the non-occurrence of that event was a basic assumption on which the contract was made. So it is, for example, assumed that the subject of the contract will not be destroyed. It is not, however, considered a basic assumption that existing market conditions or the financial situation of the parties will not be disturbed. What does that mean? That means that mere market shifts or financial inability to perform, generally, do not constitute unforeseen events, the non-occurrence of which was a basic assumption of the contract. So as a general principle, because parties assume the risk of their own subjective incapacity to perform their contractual duties, unless the contract has something in it that, that provides otherwise, courts will typically provide a, you know, apply an objective assessment of whether the performance sought to be excused is impossible or impractical. And whether the performance is beyond a party’s subjectively viewed capacity is not really relevant to that analysis. Now, some jurisdictions including, for example, New York, excuse performance only where it is truly impossible, rather than nearly impracticable, which generally requires a showing that the destruction of the subject matter of the contract or the means of contractual performance make the satisfaction of obligations impossible. Other jurisdictions, for example, California excuse performance where it’s impracticable such that it would require excessive or unreasonable expense. We expect that the COVID 19 pandemic will involve courts taking another look at these issues and will include making some new law. Just very briefly on frustration of purpose. This principle functions similarly to impracticability and impossibility but focuses on whether the event at issue has really obviated the purpose of the contract, rather than whether it has made a party’s contractual performance unviable. Manny, would you go to the next slide?

And one last thing from that, the last slide, we didn’t talk about the UCC. UCC Section 2-615 may be an option for contracts relating to goods and services and excusing performance under those. So what should you do if a party with whom you have contracted in the US claims they will be unable to perform because of COVID 19? The analysis is very similar to the one that we talked about when you’re determining whether to provide notice. Looking at your contract and being aware of the fact that your contract may include certain obligations on your part to either seek additional information, to mitigate your own damages, to seek, for example, alternative supply mechanisms if, if that’s, if that is something that is feasible. And in any event, making sure that you obtain from your counter party as much information as you can and assessing how it has an impact on downstream contracts is critical. I think we, unfortunately, have run out of time, but happy to answer questions on any of this whether now or offline.

Thank you. Thank you very much, Lisa. Before I open it up for any questions from, from, from, from, from the audience, that for those of you seeking CLE/CPE credit in the state of New York, the code is APPLE and the number 16. The word APPLE16. All one phrase. Again, it’s APPLE16. With that, if there’s any questions, please, I remind you to please use the Q&A button at the top. So if you have, anybody has any questions at this point for our panelists please, please feel free to share them with us. We’ll, we’ll give it a couple of minutes. Also, if you have a question, everybody is unmuted so you can go ahead and just ask your question. Thank you very much to J. Barbara for the compliments to all the panelists saying that they don’t have any questions but wants to say that it was a very, very well-done process. So, with seeing that there’s no further questions, I ‘d like to take an opportunity to thank a few people. Angie, Abby, our—from our firm, thank you very much for your support. I want to thank my co-panelists today. Lisa, David, Jeff, Brian, Richard, and Mike for, for your presentations. And, of course, all of you for joining us and for being part of this. And again, we will remain at your service. And if you or your clients have any, any needs for further guidance on any of these issues, please feel free to reach out and please continue to stay safe and healthy. Thank you very much everybody.

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