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PepperHamilton: COVID-19 Primer for Private Equity Funds

In a very short period of time, private equity groups and their portfolio companies have had to deal with an unprecedented amount of change in response to the novel coronavirus (COVID-19) crisis. Pepper Hamilton is working diligently in response to these events and has developed guidance on many of the issues that you may soon face, or indeed may already be facing. The guidance offered below takes into account developments as of today, but, as the situation continues to develop, the guidance will need to evolve as well. Furthermore, your particular facts may or may not easily fall within the guidance discussed below.

[Each question links to particular guidance from Pepper Hamilton]

It seems inevitable that one of the employees of our firm or one of our portfolio companies will test positive for COVID-19. What do we do? What if the person is still being tested or just exhibiting COVID-19 symptoms?

Do we have to close our offices?

Many or all of our employees are working remotely now. What do we need to be thinking about?

We have one or more signed purchase or sale agreements; they are in the “executory period.” What are the relevant considerations?

Does the COVID-19 crisis and its impact on the stock and other markets constitute a “material adverse effect”?

How is the process of antitrust review of transactions (such as premerger notifications and HSR) being affected by the COVID-19 crisis?

Our transaction is closing soon! Are government offices even open to accept merger or other required charter filings? What other items could be delayed?

When there is an emergency situation such as this one, can the directors of our portfolio companies suspend their fiduciary duties? If not, should directors act differently in order to fulfill these duties?

What if there are no particular health issues at our company, but our business operations are nevertheless interrupted? What considerations should we be thinking about?

Our portfolio company’s revenues are at risk as a result of the COVID-19 crisis. What can we do to protect our interests and ensure there will still be a company when we come out the other side? Should we wait for our lenders to come to us?

What kinds of EBITDA adjustments might we be able to take in relation to the impacts on the company from COVID-19?

Our portfolio company is having difficulty making payments on its debt and wants to restructure the instrument. What are the significant tax consequences to the company?

How will state closures affect UCC financing statement filings and related searches?

Can I start using electronic signatures for loan documents?

We have heard about the U.S. Small Business Administration (SBA) emergency loan program for companies that have been impacted by COVID-19. Are we eligible and how do we apply?

What are the significant tax consequences to the fund of a debt infusion into a portfolio company?

What are the significant tax consequences of an equity infusion into a corporation?

What are the significant tax consequences of an equity infusion into a portfolio company taxed as a partnership?

What are the significant tax consequences if instead of infusing debt or equity into the portfolio company, the fund backstops a loan with an equity commitment or similar credit support?

What are the significant tax consequences to the fund if the fund is a lender in a debt restructuring?

Bruce K. Fenton; Joseph F. Kadlec; Daniel W. McDonough; Donald R. Readlinger

Compliments of Pepper Hamilton LLP – a member of the EACCNY.