Three years ago, when we faced a potential avian flu pandemic, many companies invested substantial resources determining how they would handle an epidemic or pandemic. Organizations recognized that a substantial flu outbreak would affect companies and organizations on at least three levels: humanitarian, legal and reputational. Given the current outbreak of swine flu, we thought it helpful to identify some of the considerations and actions you might address if you have not already done so.
For brevity's sake, we focus on five core areas that would likely be affected by an epidemic or pandemic: employment relationships, corporate transactions, securities filings, insurance and communications. For each area, we provide a sampling of potential issues.
I. Employment Relationships
If a swine flu outbreak or pandemic were to occur, employers would need to review existing personnel and travel policies, and corporate leaders would have to wrestle with a number of issues. Thus, we recommend that you review existing policies and where necessary design contingent policies in at least the following areas:
- Employee safety and health in the workplace;
- Sick leave and other paid time off policies including furloughs of exposed employees;
- Health insurance;
- Employee travel;
- Possible discrimination in the workplace against classes of persons who are ill, perceived to be ill or are likely to be infected;
- Privacy issues regarding employee health; and
- Privacy issues regarding cross border transfer of employee data.
II. Corporate Law
The onset of a public health hazard would generate a variety of issues and problems in M&A and other transactional agreements. You should consider now whether the potential epidemic or pandemic should affect your transactions in at least the following ways:
- M&A due diligence, such as requiring analysis of a target company’s procedures and contingency planning;
- The extent to which your contractual partners could have legal exposure from an outbreak's effects;
- Whether any contracts or other legal relationships created opportunities for liability if you failed to do any contingency planning in advance of an epidemic or pandemic or to take steps to mitigate harm from it; and
- Whether to include representations, covenants, defaults, and other clauses that could mitigate any damage done by an epidemic's or pandemic's onset.
III. Securities Law
The federal securities laws prohibit registered entities from making material misstatements or omissions of fact in their SEC filings, press releases, and other public communications. Companies could violate the federal securities laws if they make false or misleading statements concerning – or if they fail to disclose – the impact or lack of impact of a potential outbreak on their financial results. Accordingly, public companies should consider at least the following:
- The likelihood of a swine flu epidemic or pandemic, and its potential impact on financial results;
- Companies finding material effects from an epidemic or pandemic might have a duty to disclose this information in connection with other earning guidance; and
- Certain industries, like pharmaceuticals, might need to employ special accounting rules and SEC guidance for sales of their products.
IV. Insurance
Both the risk of a pandemic, and the impact on business and travel, as well as any actual illness or death, raise a host of insurance issues:
- Victims will look for deep pockets to pay for their injuries and may sue any company that allegedly helped to spread the virus or failed to contain it, potentially including airlines, hotels, catering companies, ventilation companies, hospitals, etc. General liability insurance may be available to pay such third party claims;
- First party insurance, which provides protection for both property damage and business interruption, may also provide coverage where there is impact on the supply chain or closure of facilities (including third party facilities) at the direction of civil authorities; and
- Securities class actions may be filed against the directors and officers of companies on grounds of nondisclosure or misstatement of risks, triggering D&O coverage.
Because insurance touches nearly all business activities, the possibilities for claims that trigger coverage are wide ranging. At the outset it is imperative to simply acknowledge the potential that pandemic exposures may be covered by insurance, to consider the potential policies that may apply and to give timely notice and cooperate with applicable insurers.
V. Communications
It is critical for companies and organizations to demonstrate corporate responsibility and accountability to their stakeholders through transparent actions and communications. Most importantly, companies and organizations must assure these stakeholders now that they could respond to any potential outbreak from a humanitarian perspective and anticipate legal and public challenges. Thus, your contingency planning should minimally include reaching out to the following audiences:
- Employees;
- Customers;
- Suppliers;
- Shareholders;
- Local, state, and federal regulators and legislators; and
- Communities in which you have facilities or do business.
Orrick has a multi-disciplined team ready to help if you would like additional information or analysis with respect to your company or organization. For further information, please contact your relationship partner at Orrick, or Adam Goldberg at (202) 339-8464.
© Copyright 2009 by Orrick, Herrington & Sutcliffe LLP. All rights reserved. Reprinted with permission.