COVID-19: Practice guide of significant commercial and ... · or event amounts to inside...

COVID-19: Practice guide of significant commercial and legal issues

March 2020

1 COVID-19: Practice guide of significant commercial and legal issues

Contents


The outbreak of the novel coronavirus (the “COVID-19-Outbreak” and “COVID-19” respectively) is continuing to cause disruption across an increasing number of countries worldwide, in particular within greater China and the Asia region, with potentially global implications. In connection with this, governments in the region and worldwide have imposed a series of containment measures, including lockdown of certain cities in the People’s Republic of China Mainland (“Mainland China”), extension of public holidays, closure of public services (e.g. courts), unprecedented “work from home” arrangements, as well as international travel restrictions or quarantine measures imposed by certain countries on travellers to and from regions affected by the COVID-19-Outbreak.

COVID-19: Practice guide of significant commercial and legal issues

To assist businesses and their legal teams in tackling the challenges presented by the COVID-19-Outbreak, we have prepared this guide, organised in accordance with practice areas, to highlight some of the main issues that businesses should be thinking about in light of the current environment, as well as some practical tips to be considered. The principles and requirements discussed in this guide refer primarily to Japan (unless expressly noted otherwise); however, many of the issues discussed will similarly apply to businesses operating in other jurisdictions.

Please refer to the contact details of the relevant experts for each practice area if you have any questions on the matters highlighted in this guide.


Crisis management


As the COVID-19-Outbreak continues to spread, the likelihood of your organisation being directly impacted (e.g., an infected customer, employee, etc.) also increases.

Each organisation should ensure it has in place a crisis management policy that addresses the following, and review existing policies to ensure that key employees and management are familiar with their operation:

(i) What has happened and how can the organisation gather the facts in a timely fashion?

(ii) What are the organisation’s immediate priorities?

(iii) What steps are being taken to contain the impact of the crisis?

(iv) Who are the key stakeholders – both internal and external – that you need to communicate to and with? Develop a consistent and controlled communication strategy.

(v) What expertise/advice is required to address the crisis?

(vi) Who has authority to make immediate decisions with respect to the crisis?

Please refer to the graph below for guidance on how a situation like the COVID-19-Outbreak may be approached from a crisis management perspective.

Crisis management

Your contacts in crisis management:

Mamiko NagaiManaging Associate, TokyoTel: +81 3 6212 [email protected]

Sarah MartinCounsel, TokyoTel: +81 3 6212 [email protected]

Hiroya YamazakiPartner, TokyoTel: +81 3 6212 [email protected]

Matthew BlandPartner, TokyoTel: +81 3 6212 [email protected]

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The General Principles

Looking forward

> Ensure record is kept of “lessons learned”

> Consider need for changes or training to address issues that materialised during the crisis

> Implement systemic and cultural changes to prevent recurrence and verify change (if applicable)

Mobilise

> Establish or activate existing crisis management “Steering Group”

> Instruct external advisers e.g. legal, PR, forensic accountants if relevant/appropriate

> Allocate responsibilities and establish governance model: crisis sub-

committee?

Plan and survey any required notifications

> Scope next steps, including any investigations

> Establish first 72-hour goals > Agree any necessary immediate measures

> Establish a system for reporting and

update mechanisms

Communicate regularly and accurately and manage the challenge of doing so with incomplete facts

Take decisions advised by a multi-disciplinary team

Address any damage caused promptly and fully

Protect the company; respect individuals’ rights to fair and consistent treatment

Manage communications to achieve control, credibility and succinctness

Don’t live in crisis mode – normal business must also get done

Immediate actions

> Recognise the issue and, if possible, identify the problem and skill sets required to respond

> Issue necessary internal and external communications

> Take advice on and fulfil any immediately applicable legal obligations

> Consider impact on employees and how to mitigate

Take stock

> Maintain regular meetings and revisit whether arrangements are working satisfactorily

> Ensure effective information flow and provide regular updates on the crisis internally and to stakeholders

> At the end of the crisis, review impact and report to all necessary stakeholders in sufficient detail

Launch the medium term strategy

> Reassess events/data from first 72 hours and readjust, if necessary > Decide medium term strategic goals and steps to achieve them > Map key internal and external stakeholders and influencers and develop an engagement plan

Respond Regroup Re-orientate

Global Crisis Management

Support

> Hold Steering Group meetings with appropriate levels of frequency

> Ensure that reports to the Steering Group, senior management and Board are delivered at appropriate junctures

> Regularly assess teams to

meet demands

Stakeholders

> Circulate external communications guidelines and monitor compliance

> Consider and manage brand “contagion” risks and regulatory creep

> Regularly monitor and address any concerns from

the market

Employees

> Consider level of information to be provided to employees

> Deal with employee concerns promptly

> Consider measures to ensure employees well-being

> Consider what (if any) additional measures need to be implemented to enable employees to remain productive e.g. additional IT support for teams working remotely


Corporate and equities


The COVID-19-Outbreak may impact companies in a number of ways and may give rise to operational issues. We set out below a list of topics that legal teams should be alert to during these times.

DISCLOSURE OF INSIDE INFORMATION AND FINANCIAL RESULTS UNDER THE TSE LISTING RULESFor a company listed on the Tokyo Stock Exchange, Inc. (the “TSE”), its key obligations include the making of timely and accurate disclosure of material information relating to the operation, business or assets of the listed company or its listed stock which would have a significant influence on an investor’s investment decision (“inside information”). A listed company is under a continuous obligation to immediately disclose to the market via TDnet (the online information disclosure service maintained by the TSE) upon knowledge of any inside information under the TSE listing rules. The TSE has a right to impose sanctions on the listed company (including disclosure of the company’s name together with the fact that it has failed to comply with the disclosure obligation, making an order to submit a report detailing the background of the failure and an improvement plan, imposing a fine and delisting from the TSE) in relation to the failure to disclose inside information. The TSE guidelines also stipulate that even if a listed company is not obliged to make the disclosure under the TSE rules, they should consider whether to make a voluntary disclosure in order to provide a timely and appropriate disclosure of corporate information.

There may be certain developments or events relating to the COVID-19-Outbreak which may amount to inside information, or in relation to which it may be advisable to make a voluntary disclosure, for example:

(i) a company has material operations in, or has a heavy reliance on, supply chains situated in areas severely affected by the COVID-19-Outbreak, which has resulted in, or is likely to result in, material disruption to the company’s business;

(ii) a company’s business performance or outlook has been, or is likely to be, materially impacted – for example, due to a reduction in customer demand or the offering of cancellations/refunds following the COVID-19-Outbreak;

(iii) a material change in the company’s strategy or business plan in response to the COVID-19-Outbreak; or

(iv) a pending transaction which has been or is likely to be delayed or cancelled as a result of the COVID-19-Outbreak.

Corporate and equities

Inside information and financial results Businesses to be

mindful of the need (i) to identify, manage, and (if necessary) disclose

inside information arising as a result of disruptions; and (ii) to consider any

impact on financial results announcements.

Continuous filings obligations Coordinate with regulators if there is any concern on potential delay in filings.


It will be a question of judgment for the directors of the company as to whether or not the relevant development or event amounts to inside information. Although the TSE guidelines set out some examples of mandatory disclosure events (e.g. where (i) a prospective increase or decrease of consolidated sales revenue due to the event amounts to 10% or more of the consolidated sales revenue of the previous financial year; or (ii) a prospective increase or decrease of consolidated ordinary profit due to the event amounts to 30% or more of the consolidated ordinary profit of the previous financial year), these are solely examples and a listed company is obliged to make a disclosure if the event would have a significant influence on an investor’s investment decision.

Once the directors of the company have determined that the relevant development or event amounts to inside information, the company will need to control dissemination of the information internally and to publicly announce it immediately.

Each listed company is reminded to review its inside information identification and escalation processes to ensure that all parts of its business are actively monitoring and identifying potential inside information and escalating this to the directors for assessment.

Apart from the disclosure of inside information, a listed company is required to make annual and quarterly financial results announcements within 45 days of the end of each quarterly period. In principal, the announcement needs to disclose the company’s earnings forecast.

The TSE has announced guidance in terms of the practical treatment of the disclosure requirements in light of the COVID-19-Outbreak1. In summary, these are as follows:

(i) Disclosure of impact of the COVID-19-Outbreak on the business: If the COVID-19-Outbreak affects a company’s business or financial results, that could also impact an investor’s investment decision and the company’s stock price. As such, a company should consider making prompt and proactive disclosure of any impact on their business or financial results when it is practically possible to: (i) avoid any effect on stock price based on inaccurate or unclear information; and (ii) facilitate an investor’s appropriate investment decision.

(ii) Annual/quarterly financial results announcements: The deadline of disclosure within 45 days of the financial year/quarterly end will not apply to a company which faces delay of account closing procedures due to the COVID-19-Outbreak, and such company may make the relevant announcement as soon as they complete the account closing procedures regardless of the 45 days deadline.

(iii) Disclosure of earnings forecast: If a company faces difficulties in calculating reasonable earnings forecast for disclosure in its annual/quarterly financial results announcement due to the COVID-19-Outbreak, it is advisable to describe that effect in the relevant announcement and to update the disclosure when a reasonable earnings forecast is available.

As of 3 March 2020, 29 Japanese listed companies made a disclosure via TDnet with respect to impacts of the COVID-19-Outbreak on their business or financial results.

CONTINUOUS FILINGS UNDER THE FIEA If a company is listed on the TSE or has made a public offering in Japan, it is subject to certain filing obligations (the “Continuous Filings Obligations”) including Japanese annual reports, Japanese quarterly reports (in the case of a non-Japanese company, semi-annual reports) and Japanese extraordinary reports under the Financial Instruments and Exchange Act of Japan (the “FIEA”). For example, a Japanese listed company with its financial year end on 31 March 2020 that is subject to the Continuous Filings Obligations must file a Japanese annual report by 30 June 2020 and a non-Japanese company with its financial year end on 31 December 2019 that is subject to the Continuous Filings Obligations must file a Japanese annual report by 30 June 2020.

The Japanese Financial Services Agency (the “JFSA”) has announced that a company that is subject to the Continuous Filings Obligations but faces difficulties in complying with the relevant filing deadline due to the COVID-19-Outbreak may extend the filing deadline by obtaining a prior approval of the director-general of the competent local finance bureau. It is advisable for such company to consult with the competent local finance bureau.

1 Please see https://www.jpx.co.jp/news/1023/20200210-01.html (only in Japanese)

https://www.jpx.co.jp/news/1023/20200210-01.html


IMPACT ON TRANSACTIONSImpact on the execution of transactions should be taken into account. In particular, do the travel and other restrictions impact the ability to carry out physical due diligence? Do travel restrictions prevent physical meetings from taking place? These factors should be taken into account when devising a transaction timetable; and where a transaction is between signing and closing, being alert to any long-stop dates will be important.

The COVID-19-Outbreak could also impact on the commerciality of a transaction. In such circumstances, where relevant, consider whether a “material adverse change” condition precedent or termination right can be triggered. Where no such provisions apply, consider whether a “force majeure” argument is available to terminate a transaction (see “Dispute resolution – Commercial contracts” below).

Your contacts in corporate and equities:

Motoyasu FujitaPartner, TokyoTel: +81 3 6212 [email protected]

Kosuke MiyashitaManaging Associate, TokyoTel: +81 3 6212 [email protected]



Matthew BlandPartner, TokyoTel: +81 3 6212 [email protected]

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Capital markets and loan financing


Termination and force majeure

Market participants should consider: (i) the termination, force majeure, material adverse effect, and market disruption clauses in an underwriting agreement or loan agreement; (ii) whether there is a need to make changes to reflect the current risks, and in what circumstances parties would elect to exercise any termination or walk-away rights. In addition, to the extent that any back-to-back swap or hedging is being put in place in connection with the proposed issue of securities or loan, parties should also consider any termination and force majeure clauses in the related swap or hedging for potential mismatches (see “Dispute resolution – Commercial contracts” below).

Due diligence and disclosure

> Due diligence – any logistical issues on the due diligence process should be discussed at the outset of a proposed transaction – e.g. practical difficulties with meetings, due diligence investigations, filings, etc. Enhanced due diligence requirements (if any) also need to be addressed – e.g. to assess the impact on, or the disruption to, a company’s business or those of its suppliers and/or customers, etc.

> Disclosure – the outcome of these due diligence issues may in turn impact the disclosure and risk factors included in the offering circular. It is common for offering circulars to include a general risk factor on outbreaks of health epidemics and contagious diseases. Market participants should consider whether such risk factor needs to be enhanced in light of recent developments.

Issuers or underwriters working on international offerings of securities and agents or lenders on loan financings would benefit from considering certain commercial, practical, and legal issues that may arise from the COVID-19-Outbreak. Market volatility, economic outlook, and investor sentiment are no doubt important factors, but the following issues should also be considered by market participants.

Capital markets and loan financing

Diligence/disclosure issues Expect additional diligence and

disclosure requirements (and possibly delays) relating to business impacts of

the COVID-19-Outbreak.

Consents, approval, and termination Carefully monitor termination or default provisions to ensure strict compliance in light of the unprecedented events; do not

assume “business as usual”.

Derivatives Market disruption and possible unscheduled

holidays may impact settlement dates and/or impact transactions in other ways.

Parties should make sure to be familiar with the specific terms of their chosen master

instrument, especially around market disruption provisions.


Timing of results announcements

The traditional fiscal year end for many companies in Japan is the end of March. Companies will need to consider whether they anticipate a delay in the collection of information (either domestically or in respect of overseas subsidiaries), and preparation of both the stock exchange earnings release and the audited financial statements. The TSE has announced the possibility of an extension to the deadline for financial results announcements by listed companies in Japan. In addition, the JFSA has announced an extension to the deadline for Japanese annual reports, Japanese quarterly reports (in the case of a non-Japanese company, semi-annual reports) and Japanese extraordinary reports – see “Corporate and equities” above. This is consistent with the approach taken in other jurisdictions. For example, in Hong Kong SAR, the Securities and Futures Commission and the Stock Exchange of Hong Kong have relaxed rules on how companies must publish their annual results in light of the disruption caused by the COVID-19-Outbreak.

Roadshows

Any logistical issues with roadshows should be considered and workarounds agreed upfront if possible – e.g. net roadshows and investor conference calls. In addition, underwriters should re-examine their existing deal roadshow guidelines given the increased interactions with potential investors through net roadshows and investor conference calls.

Settlement and closing

Physical signing and closing are rare these days on issues of securities and loan financings. However, if one is contemplated, then market participants should consider the need for any potential workarounds – e.g. signing and closing by email or the use of e-signing platforms, etc. Issuers and borrowers may also consider appointing a power of attorney prior to a signing, to ensure availability of an authorised signatory in the relevant jurisdiction. In addition, the logistics for the delivery of originals of any transaction document should also be discussed and agreed upfront before signing and closing. To the extent there is any related swap or hedging as mentioned above, market participants should also consider any business day convention or definition to ensure that there is no mismatch on settlement dates.

Post-issuance/financing obligations

It is common on issues of securities and loan financings to require issuers and borrowers to comply with certain post-settlement obligations – e.g. registration of security, delivery of financials, etc. Market participants should review such post-settlement obligations in light of recent developments – e.g. notice period requirements, definition of business days, closure of government registry offices, etc.

Interest payments, etc.

Market participants may wish to revisit clauses relating to funding requirements – e.g. definition of business days in the context of funding an interest payment or relevant grace period before a default scenario kicks in for non-payment, etc., to deal with any ad hoc or extension of public holidays in the relevant jurisdiction.


Derivatives

While the Japanese market has not experienced the same level of disruption as that in Mainland China and Hong Kong SAR2, as the situation relating to the COVID-19-Outbreak in Japan continues to evolve3 market disruption may occur as a result.

Currency and interest rate derivatives

Where Tokyo is a relevant financial centre for the purposes of any applicable business day convention, the occurrence of an unscheduled holiday4 may affect the timing of payment dates which fall on such unscheduled holiday (or within a period of scheduled and/or unscheduled holidays).5

While a theoretical issue at present, where the relevant business day convention is the preceding business day convention, an unscheduled holiday occurring on a relevant payment date (or, in the case of the modified following business day, unscheduled holiday(s) occurring on the final day(s) of a calendar month) may require that the relevant payment be made on a date that is earlier than expected (or, if an enactment is passed immediately prior to the relevant unscheduled holiday, on a date that has already passed).

In the very extreme circumstance that an unscheduled holiday results in a payment date being a date that has already passed, parties would be unable to act on that basis and so it may be reasonable for the payment to be made on the first day on which payment can be made. Having said this, the approach for period end dates (i.e. the end of an accrual period) if this were to occur can be different and there is some debate in the market as to whether this should continue to follow preceding and/or modified following business day conventions or move with the payment date.

For currency and interest rate derivatives used in the context of a structured note and/or repackaging transaction, market participants should consider the impact that unexpected changes to payment dates may have on the cash flows for that transaction.

Equity derivatives

For transactions referencing equities listed on the TSE or which are cleared through the Japan Securities Depository Center, Inc. (“JASDEC”), market participants should consider whether an unscheduled holiday or any other market disruptions to the TSE, JASDEC and/or other exchanges or settlement infrastructure providers in Japan would constitute a market disruption event, settlement disruption event, or other similar event for the purposes of such transactions.

Commodity derivatives and others

In general, market participants should consider whether unscheduled holidays or other market disruptions would affect payment dates and valuation dates, and whether such event(s) would trigger a disruption event and if so, what the applicable fall-back is.

Force majeure and other potential default events

Market participants should consider whether an unscheduled holiday or any other market disruptions may impact their performance of obligations under documentation such as the International Swaps and Derivatives Association, Inc. (“ISDA”) or other market standard documentation.

2 On Monday 27 January 2020 (itself a public holiday), the government in Mainland China announced that the Lunar New Year holiday was extended to Sunday 2 February 2020 (inclusive). The unscheduled holiday caused a potential impact on derivatives transactions where settlements and valuations were scheduled to be carried out on such date.

3 As at the time of this article, Prime Minister Shinzo Abe has requested that all elementary, junior high and high schools across Japan temporarily close with effect on 2 March 2020 in order to prevent the spread of COVID-19.

4 An enactment is required to declare a new holiday in Japan.5 Japanese law stipulates that a working day falling between two

scheduled holidays automatically becomes a public holiday. In the context of the upcoming scheduled public holidays on Wednesday 29 April 2020 and Monday 4 through Wednesday 6 May 2020, if the Government of Japan were to pass enactment designating Friday 1 May 2020 a public holiday, Thursday 30 April would automatically become a public holiday resulting in an eight-day holiday period.


In order to assess the rights of the parties, two levels of inquiries are typically required to be made:

> first, whether the relevant event (or any consequent non-performance) would constitute an event of default or a termination event under the relevant master agreement; and

> second, whether any particular disruption event which is already provided for in the transaction has been triggered, and if so, whether those provisions will take precedence over the termination provisions in the applicable master agreement6.

6 The “Force Majeure Event” Termination Event under Section 5(b)(ii) of the ISDA 2002 Master Agreement is expressed to apply only after “giving effect to any provision, disruption fallback or remedy” specified in the relevant Agreement (as defined therein).

7 Please see the relevant page of the ISDA website at https://www.isda.org/2020/01/30/market-closure-announcement-chinese-new-year/

8 Please see the relevant page of the TSE website at https://www.jpx.co.jp/english/corporate/news/news-releases/1120/20200219-01.html

9 Please see https://www.fsa.go.jp/ordinary/coronavirus202001/press.html

Differences in market terms

In considering the above, market participants should bear in mind any technical differences in terms for transactions under different documentation. For example, it is possible for uncleared transactions and cleared transactions to have terms which differ, thereby giving rise to different consequences. Similarly, cleared transactions on different clearing services may have different terms. It will be important to consider the detailed provisions of each set of terms in order to analyse the issues above.

Market guidance

While ISDA has not yet produced general market guidance as to the mitigation of market risks and the promotion of orderly and efficient valuation and settlement of positions by market participants in respect of the COVID-19-Outbreak, market participants may refer to the market guidance which ISDA has produced in respect of the unexpected market closures in Mainland China7 as an indication of the approach which ISDA may take as the situation relating to the COVID-19-Outbreak continues to evolve.

At present, neither the TSE nor JASDEC have published guidance in respect of the COVID-19-Outbreak that specifically relates to derivative transactions and/or the considerations in respect thereof, as discussed in this section, although the TSE has announced the cancellation of seminars and events and the temporary closure of visitor facilities8. The JFSA has prepared a special webpage in respect of the COVID-19 Outbreak9 (in Japanese language only) and, while the JFSA has yet to publish information specifically relating to derivative transactions, it may utilise this platform to publish such information in the future.

https://www.isda.org/2020/01/30/market-closure-announcement-chinese-new-year/

https://www.isda.org/2020/01/30/market-closure-announcement-chinese-new-year/


Your contacts in capital markets and loan financing:

Equity and debt markets

Peter FrostPartner, TokyoTel: +81 3 6212 1212peter.frost @linklaters.com

Ricky WongManaging Associate, TokyoTel: +81 3 6212 1215ricky.wong @linklaters.com

Kaoru Kodama Managing Associate, TokyoTel: +81 3 6212 [email protected]

Motoyasu FujitaPartner, TokyoTel: +81 3 6212 1213motoyasu.fujita @linklaters.com

Kei NiinumaManaging Associate, TokyoTel: +81 3 6212 1250kei.niinuma @linklaters.com

Kenneth Lam Partner, Tokyo Tel: +81 3 6212 1246 kenneth.lam @linklaters.com

Tatsuya Ozawa Managing Associate, Tokyo Tel: +81 3 6212 1456 tatsuya.ozawa @linklaters.com

Kosuke Miyashita Managing Associate, Tokyo Tel: +81 3 6212 1178 kosuke.miyashita @linklaters.com

Yosuke Unami Managing Associate, Tokyo Tel: +81 3 6212 1242 yosuke.unami @linklaters.com

Structured finance and derivatives

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Dispute resolution


Any event that leads to public disruption can be a fertile breeding ground for disputes to arise, whether through missed obligations, disruption to services and supply chains, or default arising from financial distress. We set out below a selection of topics that businesses should be alert to during these times.

COMMERCIAL CONTRACTS

Partial performance, non-performance, or disruptions: the following principles may be relevant in circumstances where one party to a contract is seeking to avoid its performance obligations.

> Force majeure – a force majeure clause typically excuses one or both parties from performance of the contract in some way following the occurrence of certain events. The relevant events are often defined as acts, events, or circumstances beyond the reasonable control of the party concerned. In practical terms, the availability and effect of force majeure clauses will primarily depend on what the parties have agreed in the contract. It is therefore essential to: (i) consider the specific wording of the clause to determine whether a qualifying event has occurred; and (ii) establish causation between the event in question and the actual or potential non-performance of (part or all of) the contract.

When there are no force majeure events specified in contracts, a party may still be excused from performing its obligations under the general principles of the Japanese Civil Code. Common law jurisdictions such as Hong Kong SAR, Singapore and the UK do not automatically apply the principle of force majeure and therefore parties must rely on contract terms.

> Hardship – although the concept of hardship as such is not expressly codified in statute in Japan, parties may wish to invoke a comparable concept recognised by court precedents as “the doctrine of change of circumstances” (jijo henkou no gensoku), which is part of the principle of good faith under Article 1 para. 2 of the Civil Code. The requirements to trigger the doctrine are: (i) an unforeseen change of circumstances; (ii) where such change was not attributable to the parties; and (iii) a literal interpretation of a contract would result in an unfair outcome for one party in accordance with the principle of good faith. The threshold for such a claim to succeed is high.

Dispute resolution

Avoidance of contractual obligations

While mechanisms exist to avoid performance of obligations

under certain circumstances, the hurdles are high and the

requirements are fact-specific; seek advice at an early stage.

Preservation of rights Take extra care in

communications with counterparties seeking relief from performance of their

obligations such that no variation or waiver is agreed or offered without being clear as to the

intended scope and legal consequences.


> Frustration – for agreements governed by common law (for example, English, Hong Kong SAR or Singapore), the common law doctrine of frustration could be invoked. A party may wish to set aside a contract altogether arguing that it is frustrated in its entirety (e.g. in respect of time-is-of-the-essence contracts where performance is not considered feasible). The threshold for frustration to succeed is high, and the legal challenges are onerous.

A careful assessment of the facts, the contractual provisions, and the legal principles is required to form a view on whether such arguments might succeed.

Contractual variations/waivers: care must be taken when interacting with counterparties that are reporting difficulties performing their contractual obligations to ensure that you do not make promises or provide assurances that could later be argued to amount to a variation of contract or a waiver of rights. If a variation or waiver is intended, make sure to follow up in writing. The risk may be mitigated if the contract contains an anti-oral variation clause; however, the enforceability of such clauses is fact-sensitive. If the relevant agreement is governed by common law, the clause may be susceptible to equitable challenges such as estoppel. If you are the party struggling to perform, consider whether it is appropriate to negotiate a waiver or variation to the agreement before a default occurs.

Notice requirements: extra care should be given should you be required to give, or are expecting to receive, a notice under your contract. Many standard form contracts do not envisage a situation in which delay in giving notice may be excused. It is also important to check whether the contractual notice period incorporates the concept of business days. This became a relevant issue for agreements relating to Mainland China, where the extension of the Lunar New Year period led to the possibility of additional, unexpected holidays. If the contract requires physical delivery of the notice (rather than via email or fax), be conscious of what travel and other restrictions may be in place, e.g. in relation to mailing delivery arrangements (which are also in place in some jurisdictions).

Insurance contracts: disputes might arise as to whether an insurance policy covers losses suffered during the COVID-19-Outbreak, such as by reason of border control or transport disruption. Some insurance policies exclude losses caused directly or indirectly by an epidemic, but a careful analysis is required to check whether and when an exclusionary clause is indeed triggered. Following the outbreak of SARS in 2003, certain disputes arose as to the interpretation of insurance policies, including e.g. when the disease became a notifiable event for the purpose of insurance coverage, or how one determines the relevant “loss period”.

Practitioner tips

Good faith – for agreements governed by Japanese law, parties should remember that the principle of good faith and the prohibition on abuse of rights apply to commercial contracts under paras 2 and 3 of Article 1 of the Civil Code. In particular, parties should consider these principles during negotiations relating to delay or non-performance, or exercising rights or duties (in particular relating to duties to disclose information, give notice, mitigate damages, or not to terminate without good cause).

Make sure you pay close attention to any deadline or notice period under your contracts. If performance is an issue, review whether the contract contains a force majeure clause. Some contracts expressly seek to limit the application of such provisions. Make sure you are familiar with what discretions exist under your contracts and whether they apply to your situation.


EXISTING LEGAL PROCEEDINGS

While the courts are in general still operating as normal in Japan, some criminal trials with lay judges (saiban-in) originally scheduled to commence in March have been postponed. Closures have been seen in other jurisdictions. For example, in Hong Kong SAR, the courts were closed during February, and all hearings originally scheduled during that period were adjourned. During the adjourned period, the courts did remain available to handle urgent matters, including applications for ex parte injunctions.

Limitation periods: the COVID-19-Outbreak does not stop time from running under the statutory limitation periods. Make sure you have a record of any potential claims that you might wish to pursue, and for which time is about to run out. Should the last day of a limitation period fall on a day on which the court is closed, it is likely that a complaint issued on the first day of the court’s resumption remains valid and would (ordinarily) not be time-barred.

Filing deadlines: if you are to be affected by court closures in any jurisdiction and have a specific filing date that falls within the adjourned period, such deadline will, in general, likely be postponed automatically to the first day the court re-opens. However, where the specific filing date is stipulated in a manner that gives a period of seven days or less, it is likely that the period during which hearings have been adjourned would be excluded from the computation of the filing deadline.

Service of documents: in some jurisdictions, COVID-19 is affecting postal services. For example, the Japan Post announced on 27 February 2020 that international delivery to Mainland China will be significantly delayed. In Hong Kong SAR, mail delivery was only provided on alternate days for a certain period, and mail delivery services between certain affected areas have been suspended (for example, certain areas in Italy and South Korea). Parties should be aware of the practical implications on service by post, such as when the date of service should be deemed effective. If in doubt, parties are advised to clarify and agree on service deadlines with the relevant counterparties, and keep a written record of any agreement reached and/or seek an appropriate undertaking.

Arbitrations administered by institutions in Mainland China: certain arbitration institutions in Mainland China, including the China International Economic and Trade Arbitration Commission (“CIETAC”) have postponed arbitration hearings. CIETAC announced that notices of arbitration can still be filed (although e-filings are preferred) and parties who are unable to file materials or attend hearings due to the COVID-19-Outbreak or travel restrictions, etc. should apply for a time extension.

Arbitrations administrated by the JCAA, HKIAC and SIAC: none of the Japan Commercial Arbitration Association (“JCAA”), the Hong Kong SAR International Arbitration Centre (“HKIAC”) nor the Singapore International Arbitration Centre (“SIAC”) have as yet announced any alternative operation arrangements during the COVID-19-Outbreak. We note that the opening ceremony of the Japan International Dispute Resolution Centre’s Tokyo hearing venue, which was scheduled for 12 March 2020, has been postponed.


If you have an upcoming hearing, you should keep in close contact with the relevant institution and assess whether any persons required to attend the hearing can travel to the hearing venue in light of any travel restrictions currently in place. Where it is not possible or unsafe to do so, the party should, in the first instance, liaise with the other party(ies) and the relevant administering institution to agree on an adjournment of the hearing or alternative arrangements, e.g. conducting the hearing via video link. We note that certain hearing venues are already making provision for virtual ADR hearings.

Your contacts in dispute resolution:

Sarah MartinCounsel, TokyoTel: +81 3 6212 [email protected]

Eriko KadotaAssociate, TokyoTel: +81 3 6212 [email protected]


mailto:sarah.martin%40linklaters.com?subject=

mailto:eriko.kadota%40linklaters.com?subject=



Employment


Employers owe a statutory duty to ensure that reasonable care is taken to safeguard the safety and health of employees at work. Below is a high-level overview of the major relevant employers’ duties that you should consider in light of the COVID-19-Outbreak.

WORKPLACE HEALTH AND SAFETY OBLIGATIONS

General obligation

Under Article 5 of the Labour Contract Act of Japan, an employer must give necessary consideration to ensure employees’ physical safety while they work. In addition, under Article 3 para. 1 of the Industrial Safety and Health Act, employers must (i) ensure an employee’s safety and health at their workplace, by providing a comfortable work environment and working conditions, and (ii) cooperate with the government’s measures to prevent workplace accidents. Non-compliance may result in employers facing claims in relation to breaches of employment contracts, in tort, or offences under relevant legislation.

Workers’ compensation in case of a workplace accident

If an employee contracts COVID-19 as an “accident” arising out of or in the course of employment, you should check reporting requirements to the local labour authority, and potential liabilities under any applicable workers’ compensation scheme. It is unclear whether an epidemic can ever be classified as a workplace “accident”. However, if an employee is suspected to have contracted COVID-19 due to their employment (e.g. if an employee is infected after contact with a colleague who contracted the virus), then it would be prudent for an employer to consider potential contractual and/or statutory obligations and review staff health insurance coverage arrangements.

Employment

Workplace health and safety Particular care should be

given to an employer’s usual obligations to ensure

workplace health and safety in the current environment; consider statutory reporting

and record-keeping obligations in the event an

employee becomes sick, but attention should be given to ensure that data privacy

obligations are complied with.

Remote working Issues related to work

visas, local tax/permanent establishment, licensing, and others arise where employees are working

from a location other than their usual workplace; care

should be given to how such arrangements interact with

employment benefits.


Notification requirements to authorities and isolation/quarantine arrangements

COVID-19 was designated by the Japanese government as a “Designated Infectious Disease” as of 1 February 2020. As a result, under the Act on the Prevention of Infectious Diseases and Medical Care for Patients with Infectious Diseases, doctors are required to report to the health authorities when they diagnose infected patients, and a prefectural governor may restrict infected persons from working or recommend hospitalisation. On the other hand, there is no legislation or any regulatory guidelines in Japan which impose obligations on employers to inform the relevant health and/or immigration authorities of high-risk employees (e.g. those who have (i) visited a high-risk country/region within the 14-day incubation period, or (ii) been in close contact with anyone who visited such country/region) and/or report suspected or actual cases of infectious diseases in the workplace, or impose isolation/quarantine obligations.

EMPLOYMENT LAW AND DISCRIMINATORY RISKS

Review employee management policies

You should review and assess what changes may be necessary or appropriate for your HR policies in relation to, for example, absenteeism, leave, flexible work, and overseas travel.

Work from home

In line with the employer’s general duties highlighted above, you should consider whether to request high-risk employees to work from home to comply with your duty to provide a safe working environment. On 26 February 2020, the Japanese government requested the three major business organisations (the Japan Business Federation (Keidanren), the Japan Chamber of Commerce and Industry, and the Japan Association of Corporate Executives (Keizai Doyukai)) and Japanese Trade Union Confederation to promote work from home and staggered working hours.

Remote-working and immigration considerations

When you consider a remote-working request from an employee to work from an overseas location, the potential tax or permanent establishment implications, as well as work visa requirements and licensing (for those in a regulated profession/industry) should be taken into account. You may also need to check that employee emergency contact numbers are up-to-date in your HR records.


Suspension from employment/leave of absence

Your power to suspend an employee without pay or to request employees to take no-pay leave may be limited (e.g. it is unlikely to be permissible in Japan, Hong Kong SAR or Singapore). Doing so without the employees’ express consent may lead to risks of claims. Contractual sick pay considerations should be borne in mind depending on the circumstances of your employee’s absence from work. The Ministry of Health, Labour and Welfare published its views that the employer does not need to pay leave allowance to employees who are infected with COVID-19 and ordered by a local government not to work, while those employees may be entitled to sick allowance under social insurance. Note that the employer is required to pay at least 60% of salary if suspension from employment is due to the company’s reason.

Discriminatory risks

If you terminate, suspend, or treat an employee less favourably due to certain protected characteristics (e.g. suspending an employee without pay because the employee has a family member who has contracted COVID-19), this may expose you to claims for breaches of the employment contract or a tort claim. While there may be available defences for discriminatory actions to protect public health in the case of an infectious disease, such defences would likely have their limits (e.g. a decision to terminate the employment of an employee who comes from a city with widespread COVID-19-Outbreak would unlikely be justifiable).

DATA PRIVACY/CONFIDENTIALITY ISSUES

Record-keeping

While you are obliged to keep proper sick leave records, such records should only be accessed by employees on a need-to-know basis and particular care should be taken to comply with data privacy obligations given the sensitive nature of health-related data. You should also avoid disclosing information in a way that would identify particular employees in any internal or external communications (i.e. which makes such information “personal data”), unless there is a legal basis or requirement to do so (e.g. the employees’ consent or for legal compliance reasons).

Your contacts in employment:






Financial regulatory


Serious communicable diseases such as COVID-19 may lead to potential disruption to financial institutions’ operations as a result of travel restrictions, quarantine measures, and/or staff members’ infection. The JFSA has previously issued guidance in relation to precautions that should be taken in relation to the occurrence of an emergency, including outbreaks of serious communicable diseases, which focuses on business continuity planning (“BCP”)10. Effective BCP appropriate to the scale of business and contingency measures should be in place to ensure that the operation of the relevant entity is not affected and to minimise potential damage to clients. Below we set out a list of topics that regulatory/compliance teams of licensed banks, insurance companies, and registered financial instruments business operators (each a “Regulated Entity”) should be alert to during these times.

This summary focuses on Japanese regulatory issues, but similar issues might arise in relation to regulated businesses in other jurisdictions as well.

DELAYS TO “BUSINESS AS USUAL”The JFSA issued a press release on 10 February 202011 acknowledging that there may be delays to “business as usual” operations due to the impact of the COVID-19-Outbreak. In certain circumstances, including but not limited to, where a listed company has found it difficult to carry out auditing activities at their subsidiaries in Mainland China, the JFSA will allow listed companies to delay submitting mandatory disclosure reports if they cannot meet the deadline due to the COVID-19-Outbreak in Mainland China.

The JFSA generally expects Regulated Entities to take all reasonable efforts to maintain “business as usual” in relation to that Regulated Entity’s regulatory obligations, including all regulatory filing, reporting, and other deadlines. If delays are expected they should be communicated promptly to the usual contact points at the relevant local finance bureau.

The TSE also plans to allow affected companies to postpone the announcement of their yearly and quarterly earnings reports. However, according to the TSE, they will ask listed companies to disclose potential damage to their businesses due to the COVID-19-Outbreak, as that is important information for investors (see “Capital markets and loan financing – Timing of results announcements” above).

Financial regulatory

Business continuity planning Where regulators have provided guidance on their expectations for regulated businesses, close attention to these requirements and the involvement of senior

management is critical.

Notification and record-keeping Where there are strict

requirements regarding notification of certain events,

the keeping of records, and the conduct of businesses from

approved premises, given the “work from home” and remote working practices in place, care should be taken to comply with

these obligations.

10 III-2-9-1-2 of the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. 11 https://www.fsa.go.jp/news/r1/sonota/20200210.html.

https://www.fsa.go.jp/common/law/guide/kinyushohin/guideline_eng_201804.pdf

https://www.fsa.go.jp/news/r1/sonota/20200210.html


TREATING CUSTOMERS FAIRLYIn circumstances where their client base may be experiencing periods of difficulty as a result of the impact of the COVID-19-Outbreak, the Regulated Entity should be mindful of their obligations to treat customers fairly.

On 7 February 2020, certain ministries and agencies (namely the Cabinet Office, the Ministry of Finance, Ministry of Economy, Trade and Industry, the Ministry of Health, Labour and Welfare, the Ministry of Agriculture, Forestry and Fisheries and the Small and Medium Enterprise Agency) jointly requested that governmental financial institutions and other organizations consider providing businesses with sufficient support tailored to their current situation in light of the financing conditions as a result of the COVID-19-Outbreak, including providing timely and appropriate loans and changing the terms and conditions of the existing debt (including concessions on repayment). In particular, these ministries and agencies additionally requested that the Japan Finance Corporation and the Okinawa Development Finance Corporation make use of the system of safety-net loans.

NOTIFICATION OBLIGATIONSYou are advised to consider whether any regulatory notification requirement arises as a result of any impact on or changes to your operation or as a result of the COVID-19-Outbreak itself. By way of example, in similar circumstances in other jurisdictions, regulators have required relevant entities to immediately notify the regulator if any staff members were either suspected of having or were diagnosed as having a serious communicable disease. This was the case during the time of SARS and Human Swine Influenza in Hong Kong SAR. Further, a Regulated Entity should consider whether any changes resulting from the COVID-19-Outbreak will trigger notification requirements to the JFSA.

The JFSA has begun conducting an emergency survey on domestic financial institutions with business operations in Mainland China to gauge how the COVID-19-Outbreak could affect credit costs. In the survey that started on 7 February 2020, the JFSA asked megabanks and regional lenders to report on their operations in Mainland China.

REMOTE WORKING ARRANGEMENTSIf employees who are usually resident in Japan are working remotely overseas, Regulated Entities should also consider whether their activities overseas give rise to any local licensing and work visa issues in these jurisdictions. In addition, a Regulated Entity will need to be mindful of taxation issues which may arise as a result of employees working from overseas, such as accidentally establishing an overseas presence for tax purposes, as well as the potential for triggering an individual income tax liability.

RECORD-KEEPINGWhere alternative working arrangements are in place, such as remote working in Japan or overseas, or alternative/back-up office sites, a Regulated Entity should be mindful of their obligations to ensure that regulatory records are kept. Where employees are not working in approved premises, they should be reminded to produce and save documents only in accordance with secure procedures set out by the Regulated Entity to ensure compliance with relevant statutory and regulatory requirements. Particular care should be taken around the preservation and security of any hard copy material.

BCP

BCP policies and procedures

Ensure BCPs are adequate to prevent material disruption to your operation in the event of travel restrictions, quarantine measures, and/or staff infection. The areas that the BCP should address include:

> Oversight and monitoring:

> establishing a crisis management structure for information sharing, corporate decision-making, and revising arrangements in accordance with changing circumstances.


> Staff arrangement:

> establishing appropriate contingency measures with a view to ensuring that at least bare minimum services can continue to be provided to clients in a worst-case scenario, such as:

> making split team arrangements;

> establishing an alternative site office;

> enabling staff to work from home;

> assessing the impact of high absentee and loss of key staff and setting up back-up arrangement for all key staff;

> putting in place a clear emergency contact arrangement to cover all key staff members, and ensuring that contact details are kept up-to-date;

> following the guidance issued by the authorities in maintaining a clean and healthy working environment; and

> encouraging staff to maintain good personal hygiene.

> Service providers or other third parties:

> arranging with counterparts or exchanges on contingency closing-out of positions, clearing, and settlement matters;

> for operations outsourced to third parties, ensuring that the service providers have appropriate contingency plans in place; and

> checking that your critical suppliers and service providers are equally prepared.

> Client services:

> encouraging clients to use telephone or online facilities in place of physical visits;

> ensuring reliability of telephone recording systems and sufficiency of back-up discs/tapes, etc.; and

> establishing client notification procedures upon staff infection and advising clients on the relevant contingency measures.

> Infrastructure capacity:

> reviewing system capacity to cater for potential upsurge in transaction volume in the event of clients massively switching to using electronic channels;

> ensuring adequate back-up facilities, mobile computing/communication devices, and network bandwidth;

> arranging for rehearsal and testing of contingency plans, systems, and equipment; and

> implementing back-up plans of your critical business and transaction data and measures to ensure the back-up data can be available for use in your back-up computer system within a reasonable timeframe.

> Other issues:

> assessing the likelihood of any potential claims from clients if the firm cannot provide the same level of service to them and assessing the adequacy of existing insurance coverage.

Senior member of staff in charge of BCP

Regulated Entities should ensure that there is a senior member of staff in charge of the planning and implementation of BCP, as well as a clear command structure to facilitate decision-making and communication to all levels of the business.


Eriko SakataPartner, TokyoTel: +81 3 6212 [email protected]

SENIOR MANAGEMENTSenior management of the Regulated Entity (such as directors, responsible/executive officers, important employees including a manager, etc.) need to be kept informed of developments that could affect the operations of the business as a result of the disruption which serious communicable diseases can cause, in particular, in relation to the area of the business for which they are responsible. Effective communication lines are therefore vital, including steps such as:

> ensuring that senior management is receiving frequent updates on the progress of the disease, government measures, travel restrictions, etc.; and

> the person in charge of BCP ensuring that information on BCP arrangements and implementation are circulated to senior management (and the Regulated Entity’s staff).

Your contacts in financial regulatory:

Hiroto NakayamaManaging Associate, TokyoTel: +81 3 6212 [email protected]

mailto:eriko.sakata%40linklaters.com?subject=

mailto:hiroto.nakayama%40linklaters.com?subject=


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This report features research and insights by Linklaters LLP.This publication (the “Publication”) is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice, and its contents should not be relied upon as legal advice, either generally or in relation to any specific transaction. Although the contents of the Publication are current as at the date of the Publication, the subjects covered constantly change and develop, and neither Linklaters LLP nor its partner or associated firms undertakes to update them in respect of information provided to it after that date, or to notify any person of such information. Linklaters LLP and its partner or associated firms accepts no responsibility for any loss which may arise from reliance on the information contained in the Publication. Should you have any questions on issues presented here or on other areas of law, please contact one of your regular contacts. Please also refer to specific disclaimers in the Publication. LIN.LAT.1973.20

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