Litigating COVID

Our law firm keeps an index of litigation involving COVID. Today it is 306 pages long. I calculate that each business day since the start of the pandemic there are filed in the United States about 128 separate lawsuits.

The variety of lawsuit claims is as stunning as the number of them; some claims are expectable, some bordering on frivolity (perhaps not to the plaintiffs), some rooted in great pain or in our Constitution.

Forgive this over-long post. Below is a list of some of the lawsuits filed just in the last two weeks:

Suits claiming: defective hand sanitizers, gloves, breathalizers, wipes; illegal sales taxation of masks; disabled people with greater vulnerabilities to COVID suffered website discrimination impeding access to safety products; cruise ships failed to provide COVID testing; among very many employee suits, that people were fired or mistreated because they insisted on personal safety accommodations or, in one case, on safety accommodations to prisoners; failure to provide time off under the Family Medical Leave Act; failure to make reasonable workplace accommodations for disability; failure to accommodate attacks of panic breathlessness triggered by COVID anxiety; failure to refund monies paid for a whole season of access to amusement parks or colleges where attendance was cancelled due to COVID.

The Civil Liberties Union (ACLU) sued the Federal Bureau of Prisons for failure to release COVID statistics. The US Chamber of Commerce sued Homeland Security for using COVID as a pretense to completely change the existing law on admitting highly skilled immigrants to the US, imperiling the economy. Parents sued a Board of Education for ordering children to attend school during the pandemic.

Many tenants sued for wrongful eviction and many owners sued for wrongful foreclosure in violation of local or State laws barring same. Many theaters and houses of worship sued to permit group attendance. One person sued based on curfews being unconstitutional.

Seems that many plaintiffs believe that wearing masks is itself a health hazard, denying breathers access to oxygen. Some suits claim masks are unconstitutional as they deprive people of free speech that can be understood.

A public service organization sued the United States seeking details of the expenditrue of two billion dollars for R&D for fighting COVID and for ordering millions of doses of as-yet-unapproved vaccines.

All that said, I must confess that my favorite suit of the last two weeks was brought by the owners of an adult entertainment venue, denied the right to hold out-of-doors strip shows and lap dances. I have no comments to make on this last-mentioned law-suit, except to say that in America I guess everything is worthy of being litigated in the name of freedom.

Finders: Details

First time in the seven or so years of blogging I have posted on the same matter twice in one day but SEC commissioners have commented (expectedly) on the proposals and the Commission itself has issued a detailed press release.

The proposal first: Two tiers of exemption. Tier One: Once a year a pure finder can turn over one name to one company. Finder has no contact with investor. Purist possible model. No other rules or things to say or do. Presumably finder can be compensated. Tier Two: no finder registration. Need written agreement with company. Finder must tell investors about his deal and compensation. Can offer only to accredited investors. Company must be privately held (not reporting). Here the finder can identify and screen investors, distribute offering materials, discuss same, and can arrange and sit in on issuer-investor meetings. Finder cannot: structure or negotiate the terms of the offering (not sure why that is; typically comes up); handle the money; prepare sales materials; perform independent deal analysis or do diligence; arrange investor financing; advise as to valuation or advisability to invest.

The actions allowed the finder are quite broad, but the conceptual limitation in preparing the offering materials, for example, seems strange. Indeed, many finders have justified their function in part by serving as consultants to help structure the deal and package the disclosure. The SEC seems to draw a line between facilitation of discussion and advocacy.

Reaction: not surprisingly the pro-regulation two-person Democratic SEC members opposed the new regulation as too broad and dangerous in a market-place which is opaque, risky and prone to unsubstantiated valuation assumptions. Since accredited investors are allowed to process these issues when they are offerees in Regulation D transactions, why the introduction of an intermediary would make investment risk less apparent to an accredited investor is hard to fathom.

Warnings: first, there will be a 30 day comment after publication in the Federal Register that is sure to raise very many issues, and at best take time for the SEC to process; second, while a majority of the Commission now is in favor of this proposal, they can change their mind; third, this is not a total carte blanche as finders cannot generally solicit interest; fourth, as mentioned previously at this time the proposal does not negate typically stringent State regulation under State laws which typically parallel the ’34 Act.

A great first step for capital formation and logic, but it’s still a long row to hoe.

SEC Exemption for Financial Finders?

Today the SEC is holding a hearing prior to the release of a proposed exemption permitting financial finders to raise money for small businesses without violating the Federal law which classifies such finders as unregistered broker dealers.

Offer would be restricted to accredited investors and anti-fraud rules would still apply.

This relief has been sought for decades. As of now, a no-action SEC letter exempts finders in M&A transactions from broker status, subject to very detailed guidelines, but that exemption (not binding on private litigants or States) expressly excludes financial finders.

One issue seems to be that the proposed exemption will not eliminate State regulation and States have been, at least theoretically, very strict on defining finders as brokers. Whether they will follow the Federal lead, or whether ultimately the SEC will attempt to over-rule State law in this area, are important open questions.

No doubt the proposal will be subject to a public comment period. We await details. I will post periodically on the progress of this long-awaited SEC initiative. Kudos to Chairman Clayton for finally addressing this knotty issue.

Trade Secrets:Working from Home?

How does a company maintain protection of trade secrets when its workforce is remote? It is hard enough when you are in the office; then, you can police the flow of paper, lock things in cabinets with sign-outs, keep all information on company IP systems, maintain morale to decrease temptation.

Although the level of remote work today in unprecedented, people have been working remotely for many years. So there is court guidance on what a company program should look like to make sure that your trade secrets remain protected and cannot be legally used by others.

You can: have a written “work from home” agreement or policy reminding that trade secrets are to be maintained; do on-line training; reiterate extant trade secret and noncomp agreements; require use only of company IT systems; prohibit screen shots; protect business matters from others in the household; while proprietary information now will likely be disseminated simultaneously to several people, use IT to establish a log-in and delete protocol with a ban on copying; establish an identified executive with authority to control access when there is a question; continue to avoid publication; continue to require third parties (customers and vendors) with necessary access to sign a trade secret agreement or clause; make clear by agreement or policy that working from home or permitted or accidental use of non-company computer hardware( or systems or sites) does not result in a loss of trade secret status; do not abandon exit interviews to remind people of their secrecy obligations.

And since maintenance of trade secrets is much a matter of procedures to enforce intent, companies should document these efforts. Indeed, today is a good time to review, update and reiterate trade secret policies across your company. Your lawyers and HR people should be prompted to attend to the issue of trade secret maintenance in light of changing work patterns.

Mid-Market M&A

Has COVID killed mid-market private company M&A? Well, about 60% of it. And it has changed the other 40% in certain ways. As to the future? See below for Q-3 report and expected trends, per GF Data:

Deal volume was down c. 60% in Q-2 and continued to lag. The best deals got done. Quality meant a decline in need for warranty insurance, a likely trend with temporarily falling cost from those insurers still active; increase in claims may halt price declines, increase retainage.

Although some deals relied on earn-outs for price protections both ways, the bigger trend was to roll-overs (principal sellers putting between 10% and 35% of proceeds back in as forward investment). This gave buyers confidence, and also cut down on subdebt and senior debt (which were harder to get), those strips being filled by seller investment. Further, since the better deals got sold, price multiples remained strong.

What had leeway in terms of investor metrics? Deals got done where revenues were maintained; allowance was given for increased expense on the supposition that COVID was not permanent.

Family offices were thought to be slow to act, and the good deals went down fast, so not a major season for family shops.

The future? As running a company has become less fun these days, sell-side brokers note an increase in companies coming forward for sale. For deals already in the pipeline, fear of upwardly revised cap gains tax rates for 2021 (if Biden prevails) may increase seller pressure for a 2020 close (query will it also thus soften seller pressure on price and deal terms)?

SEC Deregulation Continues

First, in August the SEC widened the definition of “accredited investor” to permit a broader range of investors to fall under the Regulation D exemption which permits companies to issue shares without registering them with the SEC. While the changes are technical, generally they exempt sales to holders of various securities licenses, employees of private investment funds, most advisers on investments, family members and clients of family offices with $5M or more under management, Indian Tribes and labor unions. Upon ultimate publication in the Federal Register, these changes take effect in sixty days.

On Wednesday, the SEC made it harder for investors in public companies to demand inclusion of shareholder proposals in proxies of public companies. The changes, again technical in nature, fundamentally require that a shareholder is entitled to add a proxy question only if that person held more shares for a longer period than under present law. These new rules are subject to various phase-in periods for meetings held after January 1, 2022. The new standards for proxy inclusion were praised by business groups and condemned by labor and investor advocates.

These, and other changes noted in prior posts here, reflect views of the 3-2 majority of SEC commissioners named by the President. The SEC has been loosening controls that exclude investors from participating in stock offerings and strengthening the ability of public companies to avoid interference from existing investors. I note that, in most cases of “deregulation,” there exists rational arguments on the side of the majority, and the fundamental structure of SEC oversight has not been materially weakened. Nonetheless, “liberal” observers have objected continually to these developments, both during the period that proposals are open for public comment and after those proposals have been codified.

SEC Changes OTC Rules

Yesterday, the SEC made significant changes to the standards brokers must meet in order to quote stock OTC.

These changes are detailed by amending SEC Rule 15c2-11; here are the important take-aways, bottom-line: more information is needed before a broker is allowed to deal in OTC stock (those securities not benefited by the disclosures required by listing on the recognized trading platforms); many OTC stocks have not provided this kind of information for a long time; some may not have the resources or the interest in complying.

These changes may thus make it impossible for investors to purchase OTC securities in certain companies. But those potentially most impacted are the current owners of OTC shares which now the brokers cannot list. Owners may be stuck as investors unless they can sell their shares on a negotiated one-off with a known buyer.

To soften the blow: there is a nine-month phase-in; companies can apply to the SEC for relief (not clear what the criteria are); the SEC may permit establishment of a so-called expert market where OTC shares without requisite filed information under 15c2-11 may be traded by (undefined) sophisticated or professional traders.

Interestingly, the SEC has been pushing to democratize access to the initial private sale of company shares by breaking down the two-tier system that permitted the smart and wealthy to buy while excluding the Main Street investors; and now, on the OTC resale side, they are suggesting institution of a two-tier model. How all this sorts out will be something to behold.

D&O Costs Spike

COVID keeps impacting markets in unanticipated ways. Most recent reports are a sharp upwards spike in director D&O insurance premiums. Some brokers report average increases in the US as between 60% and 74%.

Drivers: risk of litigation based on COVID, and increased risk of bankruptcy generally (D&O traditionally has covered directors even when companies are before the Bankruptcy Courts).

Companies which are financially weak may find that their insurers may also alter coverage to exclude claims heard in bankruptcy; the details of this exclusion are not clear to me.

COVID comes on top of other market dynamics which tend to increase risk and thus premiums: increased class action litigation, with new foci such as cyber breach and failures of corporate culture.

Future of Working Remote

Those of you who have ventured into downtown Boston have described the experience as a trip into emptiness; one of my partners remarked that you could hear crickets on the streets. Many people reading this post are working entirely or mostly remotely, and everyone says (vaguely) that this is a permanent thing. But what does that mean?

Enter a current study by Harvard Business School, which tries to put a metric to the generalization. Short answer is they estimate that 16% of the US workforce will work remotely at least two days a week once the “new normal” arrives.

Predictably, the higher the sophistication of the job and thus of the worker, the more likely this result. At present, that cohort is able to work remotely and has found reasonable levels of efficiency– no startling news here. Somehow, I find the Harvard projection very modest, as I would expect a much greater shift away from central offices, but that perception may be colored by personal experience and the currency of the pandemic threat.

Impact on real estate markets is not difficult to guess. Combined with new emphasis on space efficiency in office design (fewer square feet per employee) and reduced need for file storage (going electronic), remote working will mean empty city offices. Theoretically. No doubt there will be industry variables; hard to imagine life sciences being remote without labs for a simple example.

Personal reports from New York, again anecdotal, suggest a major permanent shift. Will executive functions be driven to the home or at least to the suburban areas and out of the urban core due to future concerns about COVID 19 and similar fears? I know of several people moving out of NYC to the “Island” on a permanent basis. I have a client presently looking for office space in Manhattan and per the broker the choice in size, location and price point is staggeringly large. Today, someone told me they bought a house in Maine as a permanent non-Boston work locale.

Lastly, query the impact on a trend for executive employment becoming materially remote on economic disparity. Many lower end jobs support working in the city cores, which are also generally accessible to lower income employees. You can make your own intuitive assumptions about maintenance and cleaning workers, building receptionists and parking garage attendants, waiters and cooks in restaurants, other city-based support trades (think about dry cleaners, hair salons, shoe repairs, eye glass stores to name a few such trades practiced in close proximity to my downtown office). Not so easy to relocate the folks who staff these functions to the Westons and Shaker Heights and Hamptons, even if the base need for these functions remains to some degree.

COVID Goes to Court

As I sit at my computer writing this post, I have at my side a single-spaced 187 page document listing in very brief summary all identified US court cases relating to COVID 19 — 1,522 of them. This data grows daily and is formally updated by our service provider every two weeks.

While intuitively this is not surprising, given the vast impact of COVID on society, business and politics, nonetheless a perusal of this list is elucidating as to the imagination of lawyers and the myriad interests of people and businesses which have been revealed and harmed by the pandemic. Clearly no blog post can give a comprehensive overview, but below are some selective items that provide insight.

Misrepresentations and fraud are alleged about efficacy of hand sanitizers, drugs, testing services, masks and PPE, and stocks touted in companies allegedly possessing anti-virus drugs or devices.

Persons with disability claim discrimination by reason of mask protocols, including for example a class action on behalf of the hearing impaired who cannot shop in stores where masks muffle words and cover lips.

Wrongful death against medical organizations and practitioners, cruise ship lines, nursing homes, and against the Republic of China for causing, failing to control or hiding facts about COVID.

Employment claims for improper firings and unsafe work standards.

Shareholder suits against companies for falsely claiming a COVID cure or for publishing optimistic projections in the face of COVID.

Suits for price gouging, breach of contract wrongfully (based on excuse of force majeure).

Suits against schools over tuition, testing, opening, not opening.

Suits against persons and companies for negligence in spreading COVID.

Suits to collect debts and rents not paid with COVID as the asserted defense.

Claims against insurance companies for failing to pay for losses due to COVID in a myriad of instances.

Constitutional challenges against orders to wear masks on the part of governments, based on impingement of free speech.

As if the above cases were not both expectable and depressing enough, I note that many court systems are running remotely, slowly, even barely. While court backlog and resolution of these cases are not the most pernicious fallouts of the pandemic, you can add these difficulties to the massive list of difficulties that will face the “new abnormal” — oh, excuse me please, the “new normal.”