Client Alert

Q1 MoFo Insights – U.S. Private Company Investment Impact (Part II)

MoFo PE Briefing Room

28 Apr 2020

EXECUTIVE SUMMARY

In Part I of this article, we discussed some of the most impactful issues, trends, and opportunities that our attorneys are seeing right now in their work with private equity (PE) clients and that we anticipate being relevant in the near term, focusing on considerations for raising funds, managing investors, supporting portfolio company liquidity, and completing new transactions.

In Part II of this article, we will discuss some important issues that portfolio company boards are dealing with right now, along with some special issues and opportunities for portfolio companies in the healthcare, technology, and government spaces.

PART II – PORTFOLIO COMPANY CONSIDERATIONS

Labor and Employment – Andrew R. Turnbull

The COVID-19 outbreak has dominated employment issues for most portfolio companies of PE firms since early March 2020.

Furloughs and layoffs. Many companies are furloughing or laying off employees due to the economic impact on their business from the COVID-19 outbreak. Portfolio companies needing to furlough or lay off staff should take necessary actions to minimize the risk of claims, including:

  • Complying with the WARN Act or similar state laws if triggered;
  • Paying final wages, including accrued, unused vacation if required by state law, company policy, or agreements with employees;
  • Avoiding wage-and-hour violations, particularly for exempt employees; and
  • Determining whether companies with unionized workers must bargain with their union over the decision to furlough or layoff or just bargain the effects.

For additional information, see our articles on Layoff and Furlough Considerations During the COVID-19 Pandemic and Avoiding Labor Violations when Responding to the COVID-19 Pandemic.

Returning to the worksite. With some states starting to lift their shelter-in-place orders, it is important for portfolio companies to have plans in place for safely bringing workers back onsite. This may include:

  • Lawfully conducting temperature checks for employees;
  • Putting social distancing measures in place;
  • Enhancing office hygiene practices;
  • Considering requiring masks in the workplace;
  • Requiring releases to work from medical providers for employees who had COVID-19 or had family members with COVID-19;
  • Ensuring confidentiality of medical information for employees who report having COVID-19;
  • Implementing measures to reduce nonessential work-related travel; and
  • Considering providing hazard pay.

For additional information, see our articles on EEOC Issues “Return to Work” Covid-19 Guidelines for Employers and Should Employers Require Employees to Wear Facemasks.

Requiring employees to work onsite. Portfolio companies that need workers onsite are also facing an increased number of employees refusing to report to the worksite for fear of contracting COVID-19 or being unable to work because of lack of childcare or the need to care for ill family members. Before taking adverse action against those employees, employers should proceed cautiously to avoid potential liabilities. For more on this topic, see our article on Practical Considerations When Requiring Employees to Report to Work During the COVID-19 Pandemic.

Navigating telework challenges. Many companies are working through the logistical challenges of having their businesses go remote, including reimbursing employees for expenses associated with using their own equipment for work; off-the-clock issues, if the employees are non-exempt; protecting confidential information of the company and its clients; and maintaining productivity.

Understanding new paid leave entitlements. Companies with fewer than 500 employees need to comply with the new Families First Coronavirus Response Act (FFCRA), which provides paid family leave for employees who must care for a minor child due to a school or caregiver closure related to COVID-19 and paid sick leave for self-care or family care in response to the outbreak. Employers receive a reimbursable tax credit for the leave. See our article on FFCRA leave for additional guidance.

  • Many states and localities are also issuing their own paid sick leave laws to fill the gaps of the federal response. For example, New York issued a new law requiring all New York employers to provide sick leave to employees who are subject to mandatory or precautionary isolation orders related to COVID-19, and San Francisco issued its own paid leave guidance that covers all employees working in San Francisco. PE firms with portfolio companies that are multijurisdictional employers are having to work their way through this patchwork of new paid leave laws.

While these are challenging times for managing a workforce, as 2020 progresses, PE portfolio companies that are in a position to hire may be able to take advantage of the glut of talent in the market. The labor market has been very tight the last few years, and with the huge numbers of employees being furloughed or laid off (or having hours or pay reduced), companies that need to staff up may be poised to take advantage.

For an orientation on timely employment trends unrelated to COVID-19, see our blog post, Employment Law Trends to Watch in 2020.

Privacy and Data Security – Julie O’Neill

The COVID-19 outbreak has caused employers to face new questions about employee privacy, specifically with respect to the collection, use, and disclosure of sensitive employee health data. PE portfolio companies, and other employers, should only consider asking employees to provide health data in line with the companies’ usual compliance practices, as a method of last resort, or where there are specific concerns (e.g., where an employee who was previously diagnosed with COVID-19, or was in close contact with an infected person, wishes to return to work).

Data security is another area of focus right now, with heightened concerns about scammers and cybersecurity attacks amidst the social disruption and increased remote working. PE firms and their portfolio companies should stay especially vigilant toward their own systems and data during this time. Please see our related client alert, Cybersecurity Tips in the Age of Remote-Work Arrangements.

Beyond the special issues raised by the COVID-19 outbreak, we are seeing many clients focused on the upcoming July 1, 2020 enforcement date of the California Consumer Privacy Act, which imposes various notice and individual rights obligations on covered businesses.

  • In particular, the rules determining when a business has to offer California consumers a way to opt out of a sale of their personal information are not always clear, in light of the CCPA’s broad definition of a “sale.”
  • Businesses will also need to keep a close eye on whether and how the CCPA’s temporary exceptions (from most requirements) for human resources data and data collected in connection with a business-to-business relationship are amended.

More generally, we continue to work with our PE clients and their portfolio companies to identify opportunities to use (and potentially monetize) the data they collect and process, while staying in compliance with quickly evolving privacy laws in the U.S. and around the world.

Healthcare Compliance and FDA Regulatory – Bethany J. Hills

Our FDA compliance team has seen a number of trends in our ongoing engagements with clients and industry partners that may be of interest to PE firms active in this area:

  • Telemedicine is having what one expert referred to as a “pivot point.” Providers are able to deliver real value through remote engagements and, at least temporarily, regulatory barriers are being addressed to encourage and aid in that arrangement.
  • There is an increased focus on diagnostic testing access. Industry-wide, providers are expanding the universe of options for physical sites and methods of testing. These shifts aim to provide better care to patients and assist decision-makers as they develop economic and public-health policies, like eventual workforce re-entry.
  • Many drug and device companies continue to operate as essential businesses and are striving to meet the challenges of COVID-19 with new product innovation. Unfortunately for a number of them, clinical trials have been significantly impacted, slowing or even halting, due to risks associated with COVID-19 exposure or resource constraints within the healthcare system.

In addition to those noted above, we are working on a number of other developing engagement types related to COVID-19, for example:

  • We’re counseling clients on obtaining Emergency Use Authorization approvals for diagnostic tests and new ventilator systems.
  • We’re advising clients on personal protective equipment design, manufacturing, and distribution.
  • We’re analyzing the long-term impacts of products designed specifically for the COVID-19 crisis, such as limits on approvals and requirements for product destruction or return at the end of the emergency period.

Our FDA regulatory team sees some interesting opportunities based on these recent trends, such as new and expanded use of remote patient monitoring systems. Likewise, telemedicine and home use diagnostics have a greater regulatory access under the current circumstances – and we expect at least some of that expansion to become permanent.

Please see our related client alerts:

Intellectual Property – Michael R. Ward

When the slowdown ends and business picks up, we expect competition to be fierce, with market share being even more important than in the past, and companies cutting prices in the fight for market share. Businesses in IP-heavy industries have another powerful tool available to them: strategic enforcement of IP. It may be possible to leverage patent and trademark rights to block third-party products that would compete with the business. And, if a competitor is already infringing on a company’s patents, enforcement of IP rights could even represent a new source of revenue.

  • In our recent work, we have seen an increased focus on realignment of IP strategies in order to better align them with business strategy. Because many business strategies are based on increasing or maintaining market share, a review of competitors’ products and a review of existing IP are important steps in this process of alignment. Companies should be looking at what products infringe which patents.
  • Over the last month or two we have also seen companies filing patent applications on new inventions. With the slowdown in lab and field work, companies actually have more time to turn their attention to inventions that have been made over the last few years but have been on the back burner because they did not previously have time to dedicate to write up the invention disclosure and work with their patent attorneys to draft the patent application.
  • Looking forward to the next few quarters, we expect to see struggling companies looking to sell IP to raise capital. This will present opportunities for buyers to purchase valuable IP. Those IP purchases, in turn, can be used to increase licensing revenue and market share.
Technology, Outsourcing, and Licensing Transactions – Matt Karlyn and Matt Blum

In the commercial technology transactions, outsourcing, and licensing areas, since the start of the COVID-19 outbreak we have seen an increased focus on the impact that COVID-19 has had on the ability of parties to contractual arrangements to perform obligations in the manner and within the time periods as contractually required. We are spending time addressing force majeure and other critical contractual provisions, analyzing the language used in existing contracts to assess its scope and impact. We have also seen a tailoring and expanding of other boilerplate contractual language to either expressly capture (or exclude) pandemic/disease/national emergency events. We are working extensively with clients to draft contractual language addressing work-from-home protocols, and the associated performance, intellectual property, licensing, privacy, data security, information management, and business continuity issues.

Moving into the next few quarters, we are anticipating increased investment, commercial activity, and development in several areas of the technology industry:

  • Business continuity/disaster recovery services will likely become more ubiquitous. In addition to an outsourcing of service providers and hardware/software providers, we expect to see a bevy of new best practices, standard operating procedures, and products and services.
  • Telework service providers are likely here to stay in both the software and hardware spaces. The lessons learned during the forced adoption of Zoom, Microsoft Teams, and other video call applications will likely be leveraged into enhanced capabilities and improved efficiencies. Issues with respect to data security, privacy, and information management are arising and will likely continue to require attention in contractual relationships.
  • Likewise, we expect that many of the recent changes in education, including use of remote learning platforms/services, may become normalized moving forward. Remote classes and lectures, and digital provision of study materials and testing, are likely here to stay.
  • Best practices in the other Internet/data/telecom service provider services will likely necessitate a modernization of services. The need to handle increased bandwidth and provide greater flexibility and options in anticipation of the next wave of work-from-home crises will push the industry into new territories.
  • There is also a clear trend toward an expansion of digital global health. That expansion will likely include a greater use of online/web-based platforms for diagnoses, prescriptions, and patient self-help. For example, we expect rapidly modernizing regulations to embrace the completion of regular check-ups/appointments via video/teleconference platforms.
  • While online shopping platforms have enjoyed widespread use for years, we expect that many people who did not regularly utilize e-commerce will have started to do so during the social distancing and lockdown measures and will be more comfortable with those platforms moving forward.
Government Contracts – Damien C. Specht

Our clients who primarily serve government customers have, in general, continued work during the COVID-19 outbreak. Although it is not quite business as usual for companies in this space, we have not seen interruptions in payment. We do anticipate that there may be cost claims in the future to compensate contractors for any extra expenses occurred as a result of closed government facilities or modified schedules.

Transactions in the government space that were in confirmatory diligence before COVID-19 related interruptions are continuing to close once impacts from the outbreak and related disruption can be evaluated. However, as with M&A generally, many transaction processes that were pre-launch or in the early stages have stalled until there is more market certainty.

Please see our related webinar, COVID-19/Coronavirus Webinar Series: Concerns for Government Contractors, and client alert, Top Ten Things Government Contractors Should Know Regarding the Coronavirus.

The current disruption also makes this an especially important time for government contractors to remain vigilant regarding data security and potential cyberattacks. Please see our related blog post, Cyber Preparedness for Government Contractors: Opportunistic Hackers and the COVID-19 Pandemic.

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