As concern over COVID-19, the novel coronavirus, increases and restrictions are being imposed on public gatherings, U.S. public companies have been weighing risks associated with holding in-person annual stockholder meetings. While the vast majority of U.S. public companies continue to hold annual stockholder meetings at a physical location, in light of the COVID-19 outbreak, many corporations are now considering whether to hold the meeting solely by means of remote communication or to hold a hybrid meeting in which stockholders may choose to participate either in person or remotely.  Several states, including Delaware, have adopted emergency legislation designed to facilitate virtual meetings of stockholders, and the Securities and Exchange Commission (the “SEC”) has issued guidance for companies that have already mailed proxy materials to stockholders but, in light of worsening COVID-19 conditions, now wish to modify the schedule or format of their annual meetings.

If a corporation determines that it should hold its annual meeting either entirely by means of remote communication or both in person and remotely, management should carefully consider applicable state law establishing the procedural requirements for holding a virtual or hybrid meeting, as well as the form and timing of the notice that must be sent to stockholders. Special consideration should be given when an annual meeting has already been noticed as a meeting to be held at a physical location and later moved to a virtual location. Considerations for Delaware corporations in connection with the holding of a virtual meeting as well as for corporations incorporated in other states are set forth below in light of recent guidance from the SEC and an emergency order issued by the Governor of the State of Delaware on April 6, 2020 (the “Order”).  The Order allows corporations subject to the reporting requirements of §13(a) or §15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to change the format of a meeting currently noticed for a physical location to a virtual meeting solely by filing a document with the SEC pursuant to  §13, §14 or §15(d) of the Exchange Act and issuing a press release, which release shall be promptly posted on the corporation’s website.

Virtual Meeting Considerations for Delaware Corporations

Procedural Requirements for Holding a Virtual Meeting under Delaware Law

If a corporation’s organizational documents grant the corporation’s board of directors the discretion to determine the place of the meeting or do not otherwise prohibit the holding of a virtual meeting, a corporation’s annual meeting can be held online or telephonically. However, Delaware law requires corporations to implement reasonable measures to ensure that stockholders may meaningfully participate in virtual stockholder meetings through a secure and verifiable process. These measures focus on meeting access and voting as well as access to the stockholder list.

Meeting Access and Voting. In connection with a meeting held solely by means of remote communication, such as a webcast, a Delaware corporation must:

• Implement reasonable measures to verify that each person deemed present and permitted to vote at the virtual meeting is a stockholder or proxyholder; 
• Implement reasonable measures to provide stockholders and proxyholders a reasonable opportunity to participate in the virtual meeting and vote on matters, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and
• Maintain a record of a stockholder or proxyholder’s vote or other action taken at such meeting.

Stockholder List. If an annual meeting of stockholders is held solely by means of remote communication, the list of stockholders entitled to vote at the meeting must be open for examination during the entire meeting on a reasonably accessible electronic network. The information required to access the electronic list of stockholders must be provided with the notice of the annual meeting, and the corporation must take reasonable steps to ensure that the list of stockholders entitled to vote at the meeting is available only to stockholders of the corporation.  The list of stockholders also must be available for inspection by any stockholder during the 10-day period prior to the date of the meeting either at the corporation’s principal place of business or on an electronic network provided that the information required to gain access to such list is included with the notice of meeting.

Corporations which are unable to make the list available for the 10-day period prior to the meeting on a secure electronic network or at their principal place of business should consider making the list available prior to the meeting by e-mail provided that the requesting stockholder submits information, verifying his, her or its status as a stockholder or, in the case of a beneficial holder, submits a legal proxy from a stockholder of record.

Contents and Timing of Notice. Under Delaware law, stockholders must be given between 10 and 60 days’ notice of an annual meeting of stockholders except for meetings held to vote on the adoption of a merger agreement, which require at least 20 days’ notice. Where the meeting is to be held virtually, the notice of meeting must include the date and time of the meeting, as well as:

• The means of remote communication by which stockholders and proxyholders may be deemed present in person and vote at such meeting; 
• Instructions on how to join the meeting, vote, and verify that such participant is a stockholder or proxy holder; and
• Information required to access the list of stockholders entitled to vote at the meeting.

How It Works. Stockholder services companies are able to assist in setting up virtual platforms to accommodate Delaware law requirements and ensure that:

• Stockholders receive meeting invitations and instructions for accessing the virtual meeting in their proxy mailings; 
• Using a control number, stockholders can conveniently sign into the virtual meeting from their home, office, or mobile device; 
• A meeting page delivers streaming audio or video of the meeting, and also allows stockholders to access the list of stockholders, cast votes, enter questions, and view messages; and 
• Meeting pages are also able to include welcome letters, video bios, call-in numbers or links to other stockholder materials. 

Changing from an In-Person Meeting to a Virtual or a Hybrid Meeting

While some corporations may have determined prior to sending a notice of meeting and proxy statement to hold a virtual meeting of stockholders, others that decide to change the format from an in-person to a virtual meeting will be required to distribute an additional notice informing their stockholders of the change of format of the meeting and details on how to participate in the meeting.

• If the corporation has already mailed the notice of meeting, and the corporation has sufficient time to give its stockholders 10 days’ notice of the virtual meeting, a new notice ordinarily must be distributed to stockholders by a physical mailing or by e-mail.[1] However, pursuant to the Order, any Delaware corporation that is subject to the reporting requirements of 13(a) or §15(d) of the Exchange Act may notify stockholders of the change of the format of the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release.  The notice should contain the information required for a notice of a virtual meeting described above. 
• If the corporation has mailed the notice of the annual meeting and there are fewer than 10 days’ before the meeting or it is otherwise impracticable to convene a currently noticed meeting, the meeting could be held but adjourned to another place (i.e., a virtual location).  Ordinarily, notice of an adjourned meeting is not required so long as the date, time and place or means of remote communications by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken and the adjournment is for no more than 30 days.  Pursuant to the Order, a public company also may adjourn the meeting by providing notice of the date and time of the virtual meeting and the means of remote communication by which stockholders may participate in the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release.
• Where there is insufficient time to send out a new notice and/or it is impracticable to adjourn or postpone the meeting, another option for corporations is to simply hold the physical meeting as planned, but to stream the meeting over the internet so that stockholders have the opportunity to hear or view the meeting remotely. Because the meeting is considered a meeting held at a physical place, stockholders, who do not come to the physical meeting but participate in the webcast, must submit their proxies in advance of the meeting according to the instructions set forth in the original proxy materials in order to have their votes count for quorum and voting purposes. 

Other Considerations. In addition to concerns about notice, corporations should carefully consider when moving the location of a meeting for which proxy materials have already been mailed whether the original proxy cards sent to stockholders grant the proxyholders sufficient agency to vote the proxy at the corporation’s annual meeting irrespective of its location. Often proxy cards reference a physical location, but the proxyholder’s discretionary authority is broad enough to allow the proxies to vote at a virtual meeting.  If a corporation intends to use the original proxy cards at the virtual meeting, the supplemental materials should expressly inform the stockholders of the corporation’s intention to do so.

Another concern is whether the record date for the annual meeting may be maintained when a meeting is adjourned or postponed to a later date.  A Delaware corporation is not required to set a new record date for an adjournment under Section 213 of the General Corporation Law of the State of Delaware. 

Other States

Corporations organized in jurisdictions other than Delaware must review relevant state law to determine whether virtual or hybrid meetings are permissible. According to a 2018 white paper published by the Best Practices Committee for Shareowner Participation in Virtual Annual Meetings:

• Virtual-only meetings are allowed in 30 states, including Massachusetts, Minnesota, Ohio, Pennsylvania, Texas, Virginia and Washington (although certain states impose conditions on virtual-only meetings that make them impractical or unrealistic);
• Forty-two states in total, including New Jersey, North Carolina and Connecticut, as well as the District of Columbia, permit remote participation in stockholder meetings (i.e., hybrid meetings); and 
• The remaining fewer than 10 states preclude virtual or hybrid stockholder meetings and require in-person meetings.

While there is variance from state to state, most states that permit virtual stockholder meetings require that the corporation:

• Verify each person deemed present and permitted to vote at the virtual stockholder meeting is a stockholder or proxyholder;
• Maintain a record of the vote or other action taken at the stockholder meeting; and
• Implement reasonable measures to provide a stockholder participating virtually with the ability to:
  • Participate in the meeting and vote on matters submitted at the meeting;
  • Maintain a record of the vote or other action taken at the stockholder meeting; and
  • Communicate with the other participants of the meeting contemporaneously.

In addition, corporations that conduct virtual stockholder meetings in these other states generally must make their stockholders lists available for examination by stockholders during the meeting. In response to COVID-19, states such as Connecticut, Georgia, New Jersey, New York and North Carolina have taken steps to remove barriers to virtual annual meetings under existing state law.

Recent SEC Guidance

On March 13, 2020, the SEC issued guidance describing certain accommodations for public companies that have already mailed proxy materials to stockholders but, in light of worsening COVID-19 conditions, now wish to modify the schedule or format of their annual meetings. Specifically, those public companies may change the date, time, or location of their meeting—or change from an in-person meeting to a hybrid or virtual meeting—without mailing additional materials to stockholders if they (1) issue a press release announcing the change, (2) file the announcement as definitive additional soliciting material (i.e., a DEFA14A) on EDGAR, and (3) take reasonable steps to inform other intermediaries in the proxy process and other relevant market participants (such as securities exchanges) of the change. These actions are to be taken “promptly” after a decision to change is made, but no specific deadlines are imposed.

Public companies must of course also continue to comply with state law requirements regarding the timing, content, and manner of delivery of proxy solicitation materials, including notices of meetings, as well as state law restrictions on whether meetings may be held virtually. For Delaware corporations, the SEC’s new guidance, when considered together with the Order, allow a Delaware corporation to change the format of a stockholders meeting from an in-person meeting to a hybrid or virtual meeting by the filing with the SEC of a supplemental notice and a press release and the prompt posting of the press release on the corporation’s website. The corporation must also take reasonable steps to inform other intermediaries in the proxy process and other relevant market participants of the change in format of the meeting.

The SEC encourages public companies that have not yet mailed proxy materials to consider including disclosures regarding the possibility that the date, time, or location of their annual meetings will change due to COVID-19.

The SEC guidance acknowledges challenges that may be faced by stockholder proponents that need to attend a meeting in order to present a proposal, as required by Rule 14-8(h) of the Exchange Act. Public companies are encouraged, to the extent feasible under state law, to provide stockholders with alternative means, such as telephone conferencing, by which to present their proposals. If COVID-19 complications preclude a stockholder proponent from attending an annual meeting, the SEC will consider this to be “good cause” should a public company assert Rule 14a-8(h)(3) as a basis to exclude a proposal made by the stockholder proponent for any meeting held in the next two calendar years.

[1] Delaware generally permits the sending of notices by electronic mail. However, U.S. publicly-traded corporations will also need to comply with the rules of the SEC relating to the distribution of proxy materials.

Disagreements between parties over the purchase price in an acquisition often can be driven by their differing views of the selling company’s future performance and cash flows. To get to “yes,” parties may bridge their valuation differences by agreeing to an earnout, meaning they set agreed-upon metrics regarding the company’s post-closing performance and measure those metrics after closing. The seller then “earns” additional payments if the post-closing performance validates its valuation position. Parties must carefully define the details of how they will measure the earnout payment. The 2019 ABA Private Target Mergers and Acquisitions Deal Points Study (which examined 151 deals valued between $30 million and $750 million from 2018 and the first quarter of 2019) found that approximately 27 percent of those deals included earnout provisions.

The well-documented problem is that the earnout bridge the parties take to close their valuation differences often leads to litigation over whether the earnout was met or why it was not met.[1] Two recent decisions from the Complex Commercial Litigation Division of the Delaware Superior Court demonstrate how careful drafting affects the resultant litigation risk.

Collab9, LLC v. En Pointe Techs. Sales, LLC

In Collab9, LLC v. En Pointe Techs. Sales, LLC,[2] a seller argued that the implied covenant of good faith and fair dealing required the purchaser to maximize an earnout provision in an asset purchase agreement (APA). The seller alleged the purchaser breached the duty of good faith and fair dealing by “maintaining financial records in a way that made it impracticable to accurately determine the correct amounts of Earn-Out payments; creating a sham entity to move revenue off [its] books; and renewing certain contracts or transferring sales persons or accounts as a means of minimizing Adjusted Gross Profit.”[3]

The APA provided, however, that the “Purchaser shall have sole discretion with regard to all matters relating to the operation of the Business. Purchaser shall have no express or implied obligation to the Seller, . . . to seek to maximize the Earn Out payment . . . .”[4]

The purchaser moved to dismiss, pointing to the “sole discretion” provision it bargained for as defeating any implied covenant claim. The court agreed and dismissed the claim. Such “comprehensive and explicit” terms “demonstrate that the parties contemplated that a dispute might arise concerning the operation of the business post-closing, specifically whether the purchaser was acting in a manner that maximized the Earn Out.”[5] The terms that “granted broad rights to the purchaser to operate the business as it sees fit” meant the implied covenant could not give the seller rights it had “failed to secure for themselves at the bargaining table.”[6]

Merrit Quarum v. Mitchell International, Inc.

In Merrit Quarum v. Mitchell International, Inc.,[7] specific contractual language imposing post-closing obligations on the purchaser led to a different outcome. At issue was an earnout agreement, entered into by the parties in connection with a stock purchase agreement, that contained three provisions addressing the post-closing obligations of the purchaser. First, although it had “the power to direct the management, strategy, and decisions” post-closing, the purchaser agreed it would “act in good faith and in a commercially reasonable manner to avoid taking actions that would reasonably be expected to materially reduce the” earnout.[8] Second, the purchaser agreed to “act in good faith and use commercially reasonable efforts to present and promote the [acquired company’s products] to customers that could reasonably be expected to utilize” them.[9] And third, the purchaser agreed to upgrade or build a bridge between the companies’ systems, within six months of closing, to allow the purchasers to sell the acquired products to its existing customers and to assist in calculating the earnout.[10]

In an action asserting, among other things, noncompliance with the earnout agreement, the seller asserted breach of contract, not implied covenant, claims. Unlike Collab9, the court denied the purchaser’s motion to dismiss for some of the seller’s earnout allegations, focusing on the first and third obligations in the earnout agreement.

As to the first obligation in the earnout agreement, the court viewed the provision as a negative covenant requiring the purchaser to refrain from “positive action[s]” that reasonably could be expected to reduce the earnout or impede calculating the earnout. That obligation did not extend, however, to “avoiding inaction” because extending that obligation would “place the power to manage the company in” the hands of the seller.[11] In analyzing the complaint’s specific allegations, the court found that many fell short of asserting positive action. Those allegations focused on “decisions and strategies [the purchaser] could have pursued but did not,” such as consulting with the seller on marketing.[12] The claims that survived the motion to dismiss focused on positive actions such as “routinely cancel[ing] regularly scheduled calls to prevent [the seller] from promoting and selling” the products, and improper accounting decisions concerning minimum thresholds for bills, and diverting revenue to different products to avoid paying the earnout.[13]

With respect to the third obligation in the earnout agreement, the purchaser argued the seller could not plead damages resulting from the purchaser’s decision to build an alternative bridge between the parties’ systems. Relying primarily on Delaware’s minimal pleading standard for damages—which does not require pleading “damages with precision or specificity”—the court concluded it was reasonable to infer from the agreement that a specific solution was necessary to provide services to customers and calculate the earnout amount, and failing to build that solution could constitute damages.[14]

Takeaways

These decisions reflect how Delaware courts understand the incentives underlying, and details of, earnout provisions and hold parties to their bargain. Concessions today might get the deal done, but purchasers must be aware that they may be agreeing to significant restrictions on how they run the business post-closing, and as Merrit Quarum demonstrates, concomitant litigation risk if the earnout is not met. That holds true for sellers, who have the opposite incentives, and could give away their ability to hold the purchasers accountable post-closing. Said differently, through the lens of analyzing future litigation (especially at the pleading stage), purchasers face more risk (and sellers have stronger leverage) from having to comply with specific earnout provisions that impose post-closing obligations on the purchaser. In analyzing earnout provisions that do not require specific obligations and grant the purchaser significant discretion to operate the business, implied covenant claims are an uphill climb because Delaware courts refuse to use the covenant to give parties “contractual protections that they failed to secure for themselves at the bargaining table.”[15]

The 2019 ABA Private Target Mergers and Acquisitions Deal Points Study indicates that, at least in the available data, purchasers are “winning” these negotiations when they occur. Of the subset of deals containing earnouts, only about 30 percent include a covenant to run the business consistent with past practice or to maximize the earnout.

[1] Aveta Inc. v. Bengoa, 986 A.2d 1166, 1173 (Del. Ch. 2009 (“Earn outs frequently give rise to disputes, and prudent parties contract for mechanisms to resolve those disputes efficiently and effectively.”).

[2] 2019 WL 4454412 (Del. Super. Ct. Sept. 17, 2019).

[3] Id. at *1.

[4] Id. at *2.

[5] Id. at *2.

[6] Id. at *3 (quoting Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004)).

[7] 2020 WL 351291 (Del. Super. Ct. Jan. 21, 2020).

[8] Id. at *2.

[9] Id.

[10] Id.

[11] Id. at *5.

[12] Id.

[13] Id.

[14] Id. at *7.

[15] Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004), aff’d, 861 A.2d 1251 (Del. 2004).

I. INTRODUCTION

COVID-19 is having a dramatic effect on everyone’s lives. Our thoughts go out to all those who have been infected and their loved ones. While health has to be the first priority for everyone, this situation also raises significant economic and business issues. Businesses are seeing interruptions in supply, and many contracts can no longer be performed. Businesses are trying to decide whether and how to “push the pause button.” Others are unable to perform their contractual obligations and are trying to determine their legal rights. This article discusses some of the legal issues that inform the decision-making process.

II. Governmental Actions Are Restricting Business Activity

A. State of Emergency

As of March 20, 2020, there have been state of emergency declarations from the federal government in all 50 states and in all populated American territories because of the COVID-19 pandemic. Many of these emergency declarations have closed schools, limited public gatherings, and limited restaurant activities to takeout or delivery.

B. Shelter-in-Place Orders

Many states, including California, New York and Illinois, have also initiated shelter-in-place orders.  Hundreds of cities and counties have also entered such orders. In the event of a shelter-in-place order or a state’s COVID-19 mitigation initiative, the distinction between “essential” and “nonessential” is crucial in assessing whether a business may have to reduce operations (to a state known as “minimum basic operations”) or close for a period of time.

There is uncertainty as to what is a “nonessential” business state-to-state, and authorities may not approach this consistently. California has referenced the Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response from the US Department of Homeland Security, Cybersecurity & Infrastructure Security Agency (CISA). CISA identifies 16 sectors considered to be “essential,” and is part of the National Infrastructure Protection Plan (NIPP). This listing is advisory by CISA, but the California Order implements it as is in its listing of “essential businesses.”

However, some orders have listed different definitions of “essential business”—for example, the Alameda County order that affected San Francisco differs from the state-wide California Order. Pennsylvania and New York have each taken different paths on defining “essential business,” so there will be no “one size fits all” solution. Determining whether a particular business is required to close requires case-by-case analysis.

III. Contractual Defenses

It is basic contract law that a party that fails to perform is liable to pay damages for breach of contract. “Non-performance of a valid contract is a breach thereof … unless the person charged … shows some valid reason which may excuse the non-performance…” Cater v. Barker, 172 N.C. App. 441, 447, 617 S.E.2d 113, 117 (2005); see also Tejas Power Corp. v. Amerada Hess Corp., No. 14-98-00346-CV, 1999 WL 605550, at *2 (Tex. App.-Houston [14th Dist.], Aug. 12, 1999) (noting that while “a seller is bound to deliver the thing to the buyer… and, as a necessary consequence of this obligation, to do so at his own expense…” but also noting “extraordinary circumstances…may excuse the seller’s breach”); In re Appraisal of Metromedia Intern. Group, Inc., 971 A.2d 893, 900 (Del. Ch. 2009) (noting that a valid contract will be enforced “unless a party’s non-performance is excused.”)

Contractual defenses fall into three primary categories: (a) impossibility/impracticality; (b) frustration of purpose; and (c) force majeure.

 A. Impossibility/Impracticability

The common law often recognizes a defense of impossibility. A party should not be held liable for breaching a contract that they could not perform. For example, laryngitis may make a singer’s concert performance impossible. Death and disability make personal service contracts impossible.

Some of the government orders surrounding COVID-19 may in fact render performance impossible. A contract committing to put on a theater show on March 30 is now impossible in locations where theaters have been ordered to shut down.

Some courts also recognize a defense of impracticability. Here, a party must show that performance has been made excessively burdensome by a supervening event. Generally, the supervening event must be: 1) unforeseeable (but not inconceivable); 2) not the fault of the excused party’s; 3) inconsistent with the basic assumption of the parties at the time of contract; and 4) something that a reasonable party would not have guarded against in the contract.

B. Frustration of Purpose

Some courts also recognize a separate doctrine called “frustration of purpose,” which is similar to the impracticality defense. Under this doctrine, performance is excused when a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. Unlike the other defenses, this doctrine has nothing to do with inability to perform. For example, if a contract called for cleaning a theater after a performance, the cancellation of the performance frustrated the purpose of the contract. The contract can still be performed (i.e., the cleaning personnel are available and the theater is available for cleaning), but the purpose (cleaning up after a performance) has been frustrated, making cleaning a wasted effort.

IV. Force Majeure Clauses

Unlike the preceding defenses, which arise under common law and potentially apply without regard to the language of the contract, the defense of force majeure is based on a contractual provision. Accordingly, companies should check their contracts, and those with their suppliers, for force majeure clauses. The clauses generally take two forms. The most general form excuses performance under the contract when it is due to any circumstance outside the party’s control, which presumably would include performances prevented by coronavirus. The second type of force majeure clause lists specific events that trigger the clause.

In most cases, force majeure events are contemplated to cover acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism, or the imposition of an embargo. It is less common to see force majeure clauses that expressly contemplate a global health emergency, pandemic, or epidemic as a force majeure event.

In addition to the force majeure event, many courts also require that the party shows an attempt to perform the contract regardless of the triggering event (here the epidemic), perhaps by finding an alternative source of supply.^[1]

A. Practical Considerations

Contracting parties must be cautious in declaring a force majeure event on the basis of the recent coronavirus outbreak and ceasing performance of their obligations. Incorrectly declaring a force majeure event may result in a contracting party repudiating the contract; it may also provide the other party with a right to damages.

The China Council for the Promotion of International Trade has apparently already issued over 3,000 force majeure certificates. However, these certificates are not dispositive. Instead companies, and ultimately arbitrators and courts, will have to examine each contract and the specific circumstances to determine if a force majeure clause applies and performance under the contract is excused.

Some states in the U.S. have specific rules regarding notice of force majeure claims, including when notice must be given. Companies should check with counsel about the proper timing and format of the notice, based on the jurisdiction, choice of law provisions in the contract, and specific notice language in the contract.

Finally, companies asserting these defenses, suffering damages from breach, or generally impacted by COVID-19, should keep good records regarding the factual circumstances and damages incurred because these documents will be central to any later legal proceedings. Counsel should also consider whether litigation is “reasonably foreseeable” such that it triggers an obligation to implement a litigation hold.

V. Insurance Coverage Issues

A. Business Interruption Insurance

Business interruption insurance can be purchased as part of a commercial property insurance policy or as a stand-alone policy or provided through a captive insurer. General business interruption insurance is intended to protect a business against profits that are lost as a result of unintended interruptions to the business or its supply chain. Typically, business interruption policies are triggered when the company suffers some sort of direct physical damage, and that physical damage leads to the interruption of its business operations.

If your policy contains a requirement of physical damage, as most do, a determination will have to be made regarding whether the COVID-19 virus is deemed to be physical damage. However, some policies do not have a requirement of physical damage if the loss arises from certain diseases. A determination will have to be made whether the virus rendered a facility totally or partially unusable or required additional costs such as testing or cleaning. COVID-19 is not a disease that has ever been mentioned in any policies.

Other policies contain contingent business interruption coverage. Rather than requiring the policyholder to suffer a direct physical loss, contingent business interruption coverage responds to some losses that impact a company’s supply chain. To the extent that a supply chain is impacted by slow-downs or stoppages in the United States, China, Europe, or within the NAFTA free trade area, a company may see more benefit from contingent business interruption coverage than from traditional business interruption coverage. However, this coverage ordinarily requires physical damages to a supplier or customer’s property by a peril covered under the company’s policy.

Another type of business interruption insurance which may have broader applicability is civil authority coverage. The coverage applies when you are unable to operate your business due to the order of local, state, or federal authorities. Several months ago, some insurers began writing limited and optional coverage for COVID-19, particularly for “civil authority” orders, where governments or health officials issue orders restricting the use of businesses or properties. If you purchased this coverage, it is likely to have certain sub-limits (which may be relatively low), but it will need to be closely reviewed. This supplemental coverage may also apply without the physical presence of COVID-19 on your premises.

B. Commercial General Liability/Professional Liability

A company’s commercial general liability (“CGL”) insurance is typically the first thought when people ask general questions about insurance. CGL coverage responds to claims that the policyholder acted in a way that caused personal injury or bodily harm to a claimant. The typical example is a slip and fall of a patron in a public building, a products liability claim, or other physical injury caused by the policyholder that resulted in injury to another.

If businesses are sued by customers or patrons for causing, spreading, or failing to take adequate steps to prevent COVID-19 transmission, the CGL policy will be the first line of defense. However, many CGL policies contain exclusions for viral and bacterial-related bodily injury. On the other hand, CGL policies for certain industries that are more susceptible to contagious disease outbreaks (including restaurants, event centers, and hotels) are more likely to be sold with optional coverage that may include bacterial and viral infection, as these industries have historically demanded optional coverage for contagious disease.

C. Workers’ Compensation

Workers’ compensation insurance is required of most employers; either explicitly by statute or implicitly by business contracts. Workers’ compensation insurance generally covers jobsite injuries, as well as occupational diseases that are peculiar to a trade, occupation, or employment. For example, the hallmark occupational diseases include asbestosis and mesothelioma for those who worked with asbestos and black lung disease for underground coal miners.

Individual state law will control whether an “ordinary disease”—i.e., one which the general public is exposed to outside of employment—will be covered by workers’ compensation. Typically, an employee who contracts an “ordinary disease” will not be covered under worker’s compensation insurance. Some states apply the “peculiar risk” approach to determine whether the risk was increased because it was related to the employment. To the extent that your employees are hospital workers, nursing home workers, or other front-line healthcare workers who may be exposed to COVID-19 on a heightened basis, your business workers’ compensation insurance may cover those employees. Law enforcement, firefighters, and other emergency responders may also have similar claims.  Employees of grocery stores, or those providing childcare to medical professionals would potentially be covered, but they would be a step further down the chain.  The farther your particular employees are from the “peculiar risk” of being exposed to COVID-19 in the workplace, the less likely it would fall within your workers’ compensation insurance. Employees bringing workers compensation claims for COVID-19 will also have to prove that they were exposed at the workplace, rather than as members of the general public, which could be difficult in areas where community spread is apparent.

D. Directors & Officers Liability Insurance

Directors & Officers (“D&O”) liability insurance almost always contains exclusions for bodily injury. However, as the COVID-19 pandemic begins to negatively impact financial markets, credit markets, and share prices, shareholders may bring claims that a company’s executive leadership grossly mismanaged the company. Against the background of the turmoil currently roiling the financial markets, these claims may be specious at best, but the D&O policy may respond to such claims that are based on the drop of a public company’s stock prices.

Regardless of what you see, hear, or read about insurance coverage for COVID-19, you still need to have your policy read by an attorney experienced in the area of insurance coverage. And if you believe you have a claim, you need to notify all of your insurance companies as soon as possible.

VI. CONCLUSION

Due to the broad impact, companies need to evaluate whether their contractual performance, or that of their suppliers, has been impacted by COVID-19 and the governmental response to the pandemic. If the parties cannot negotiate a mutually acceptable “pause button” postponing performance, then companies should evaluate whether there are defenses to performance which will reduce or eliminate liability for breach.

[1] See, e.g. Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983)

This question—how COVID-19, the novel coronavirus, will impact Chapter 11 cases going forward—is still to be determined, but this author believes it may turn the Chapter 11 process into what it was originally intended to be: a reorganization.

Today, and for more than the past decade, most Chapter 11 cases (other than prepackaged plan cases) have resulted in Section 363 sales of all the assets of the debtor to the highest bidder (the term Section 363 sale means a sale pursuant to Section 363 of the Bankruptcy Code), and sometimes that 363 sale comes within months of the filing of the case. Chapter 11 sales of all assets bring more value to the creditors than foreclosure sales, and, of course, “more value to the creditors” almost always means more value for the first priority secured lender of the debtor. After the 363 sale, the Chapter 11 case is typically over for all practical purposes. What happens next is one of two things: Either (a) the Chapter 11 case is converted to a Chapter 7 case, which is a liquidation of any remaining assets by a trustee who is appointed by the U.S. Trustee; or (b) a plan is confirmed in the Chapter 11 case pursuant to which all remaining assets are transferred to a Liquidating Trust and its Liquidating Trustee who then proceeds to liquidate all of the remaining assets. Same difference almost, albeit with some technical differences and advantages to each. In either situation, the “remaining assets” are typically lawsuits which the trustee is empowered to pursue, including, for example, claims for preferential transfers to creditors, claims for fraudulent conveyances against others, claims for breach of fiduciary duty against officers and directors, and anything else, including antitrust or securities fraud claims. It usually takes years of litigation before the unsecured creditors receive anything from the process, which is typically just pennies on the dollar. It is rare that any meaningful distribution is made to the unsecured creditors.

The Chapter 11 process, described above in very general terms, has been condoned by most bankruptcy judges and attorneys involved in the process, because it is the best thing for our economy in that it preserves operating companies intact, which benefits its employees who need the jobs (and buyers typically want to continue to operate the business) and its customers who rely on its product or services. Additionally, it brings the most value to the creditors, including a continuing market for the trade creditors who supply goods or services to the debtor (and who may lose some amounts due to them by the debtor but who preserve their past and future profits). It is difficult to argue against this rationale. Of course, the attorneys who represent each of the different constituencies (the debtor, the lender, the creditors committee, and the creditors) all get paid for their time and effort too, as well they should.

This author believes COVID-19 may change the process going forward, as it may disrupt domestic economies. How will judges, secured lenders, unsecured creditors, and others evaluate a situation if the major disruption of everything becomes the new normal? Who will consider buying a bankrupt company through a Chapter 11 363 sale amid so much uncertainty? Would the value of the bankrupt entity, assuming it has some, be preserved in a “fire sale” price to a third party? Would the secured lender and the debtor even be interested in trying to find out for themselves? It may be that there is a better alternative in Chapter 11 for both a debtor and its secured and unsecured creditors, and for the judges who must face this potential new normal caused by COVID-19.

The better alternative may well be a true corporate reorganization through the more traditional Chapter 11 plan process—that is, instead of selling the debtor’s assets pursuant to a 363 sale as has been the norm for more than a decade, the debtor may want to file and seek to confirm a true Chapter 11 plan which reorganizes the debtor for the mutual benefit of all the constituencies.

The secured lender (or lenders) are usually the most controlling constituency in this process (let’s start calling the different constituencies “players”). For the secured lender, it may make more business sense for it to do two things—reduce the interest rate being charged to the debtor, and convert some portion of its debt to equity (an ownership interest) in the debtor—rather than trying to cash out its unpaid loan through a 363 sale. The rationale for the sale and “cash out” of its loan has been that it can quickly make a new loan with that cash and at least earn interest on it. That rationale may not be readily attainable in a new normal. It may make more business sense for the lender to stick with its current debtor by reducing its interest charges and even by converting some of its debt to equity under the expectation that equity will have value in the future. These are the difficult business decisions that secured lenders may face if this new state of affairs persists for months or years.

The unsecured creditors will also have to face the new normal reality and take a reduction of the amounts owed to them for past due product or services. In Chapter 11 cases, persuading unsecured creditors or forcing them to take less is much easier than it is to force the secured lender to take less. Basically, a vote of a majority in number of unsecured creditors and of two-thirds of the amounts owed to them is enough to force them to take less (or a “haircut” as it is often called). Usually that vote is not difficult to obtain, especially if an official Creditors Committee has been formed and has negotiated the deal with the debtor and recommends it to the unsecured creditors. Typically, if the secured lender has agreed to take its own haircut in some form, then it will insist that the unsecured creditors do the same for two reasons—namely, it is the fair thing overall, and a reduction of the unsecured debt increases the value of the equity interests being obtained by the secured lender. Indeed, as part of any deal with the unsecured creditors, they may be given some amount of the existing equity ownership of the debtor as a group.

Lastly, the existing equity ownership of the debtor will also have to make major concessions. First, as the last to be paid anything in terms of priority of rights, it is the fair thing to do if the secured lender and unsecured creditors will be taking haircuts of their own. Secondly, the existing equity interests may have no real value without the reorganization of the debtor, and the argument is why should the existing equity retain anything. The answer has a practical side to it of course: If management owns equity and if they continue to operate the debtor, they probably deserve some equity, however small. They may also be asked to take reductions in their compensation.

In short, all of the different players in the process will be required to take haircuts of some sort in order to save the debtor from destruction for the mutual benefit of the group. While the American way may be to look out for number 1 almost exclusively, this dire situation (if it occurs) will necessitate a balance between the different players which is mutually beneficial overall. The players will each have their own attorneys representing them, and bankruptcy attorneys will likely be familiar with the necessities of the situation. The Bankruptcy Code itself also has mechanisms built into the system to allow for each player to exert pressure on the other players to cooperate, and the bankruptcy judge sometimes is called on to intervene to help the players or their attorneys to be more reasonable in their positions. For example, the debtor can threaten a cramdown plan of reorganization on the secured lender (that is, a plan without its consent); the secured lender can threaten the unsecured creditors with a 363 sale or a liquidation whereby the unsecured creditors and the equity interests will recoup nothing at all; or the existing equity can tell them all to “go fly a kite” or worse—say here are the keys (and good luck) or threaten them with endless litigation. Everyone knows how the game can be played as required and also knows that trying to reach a consensual deal is preferable.

We live in interesting times indeed, if not somewhat scary ones even for we Americans.  We all hope for the best of course, but for those of us who experienced the worst of Hurricane Katrina we have learned to try to be prepared to the extent possible.

 Overview

In a ground-breaking decision, the Ontario Securities Commission (OSC) overturned the decision of the acting director of the Investment Funds and Structured Products Branch of the OSC (IFSP) to refuse to issue a receipt for the establishment of the Bitcoin Fund (the Fund), which is a proposed investment fund based on the cryptocurrency bitcoin.

3iQ Corp. is the investment fund manager and had been working on the Fund for three years with the goal of allowing retail investors the benefits of investing in bitcoin through a regulated, listed fund. Following multiple discussions with the IFSP, the acting director of the IFSP refused to issue a receipt for the Fund’s prospectus. In declining to issue a receipt, the director questioned the suitability of cryptocurrency as an investment, citing the lack of regulation for cryptocurrencies and the various associated risks.

Original Refusal

By way of background, the proposed Fund is a nonredeemable investment fund (NRIF) established as a trust. The objectives of the Fund are to provide investors with exposure to bitcoin and the opportunity for long-term capital appreciation.

On February 15, 2019, the acting director for the IFSP refused to issue a receipt for the Fund’s prospectus because it was not in the public interest to do so (see Securities Act, RSO 1990, ch. S.5, § 61(1)) and the Fund’s prospectus did not comply in a substantial respect with a requirement of the Securities Act (see § 61(2)(a)(i)).

In arriving at this decision, the acting director put forward the Fund’s shortfalls:

1. The lack of the Fund’s ability to accurately value its assets due to the “fragmented and unregulated environment in which bitcoin generally trades”;
2. The risk associated with safeguarding the Fund’s assets and the ability of the subcustodian to provide Customary SOC Reports;
3. The risk of the Fund not being able to file audited annual financial statements in accordance with National Instrument (NI) 81-106;
4. The operational risks associated with the lack of established regulation in the bitcoin market; and
5. Bitcoin being an illiquid asset, and the Fund not complying in a substantial respect with the restriction NI 81-102 against the holding of illiquid assets.

OSC Panel Decision

In establishing and structuring the Fund, 3iQ engaged industry participants and the regulators. 3iQ requested to be heard before a panel of the OSC in which it submitted that a regulated Fund is a necessity given the recent collapses of various other platforms globally whereby individuals invest in crypto-assets without regulatory oversight.

Upon review, the OSC panel found that the Fund was structurally different in nature than certain Exchange Traded Funds (ETFs) related to cryptocurrencies that have been rejected by the U.S. Securities and Exchange Commission. This was due to the Fund placing restrictions by monthly reporting and only allowing redemptions annually by using the NRIF structure, which would significantly reduce the impact of market manipulation by daily trading. The Fund would also be using MVIBTC (as defined below) as the index and would only be purchasing bitcoin from dealers that hold a license or are otherwise regulated. All of these considerations distinguished the Fund from an ETF, which requires constant trading and is more vulnerable to market manipulation.

In arriving at its decision, the OSC panel also looked at the reasoning of the acting director as well as arguments put forth by staff:

1. Illiquidity. Staff argued that bitcoin is illiquid because it is not currently traded on market facilities comparable to the Toronto Stock Exchange, and there is no central source for trading data concerning bitcoin. The OSC panel found that there is sufficient evidence of real volume and real trading in bitcoin on registered exchanges in large dollar size. Furthermore, the regulation does not define the term “market facility” that is found in the definition of “illiquid asset,” and the term should not be narrowly construed to imply some form of established and mature trading facility or network.
2. Valuation and Market Manipulation. The OSC panel stated that under NI 81-106, the Fund would be required to calculate its net asset value using the fair value of its assets and liabilities. 3iQ proposed to value the Fund’s bitcoin by reference to an index called the MVIS CryptoCompare Institutional Bitcoin Index (MVIBTC), which is regulated by the German Federal Financial Supervisory Authority. MVIBTC uses transaction data from 22 trading platforms to calculate the value of bitcoin and complies with the European Union benchmark regulations and the International Organization of Securities Commissions regulations. As such, the OSC panel was not satisfied by the staff’s argument that valuation would not be possible. The OSC panel further noted that the issue with market manipulation having an impact would also be minimal because the fund (i) will only invest in bitcoin; (ii) would pursue a buy and hold strategy; and (iii) only buy and sell bitcoin on regulated exchanges.
3. Safeguarding of the Fund’s Assets. The Fund would use Cidel Trust Company, which is regulated by the federal Office of the Superintendent of Financial Institutions, as a custodian and use Gemini Trust Company, LLC as a subcustodian, which is regulated by New York State, as a qualified custodian under NI 81-102. Staff made two arguments: (1) risk of loss; and (2) lack of insurance. The OSC panel commented that bitcoin can be lost or stolen like any valuable commodity, but staff did not provide sufficient evidence that Gemini, a regulated crypto-asset custodian, has suffered losses of customer assets.
4. Auditability of the Fund’s Financial Statements. Staff submitted that it would be against the public interest to issue a receipt due to concerns over the Fund’s ability to file audited annual financial statements. In making this argument, staff pointed to the lack of Gemini’s SOC 2 type 2 report and the fact that Gemini may deny the auditor for the Fund access to test the operating effectiveness of Gemini’s controls. However, the OSC panel relied on the Fund’s submission that a qualified auditor can conduct the audit even without the report and still comply with generally accepted auditing standards.

In reaching its decision, the OSC panel commented that denying the Fund a receipt would not promote fair and efficient capital markets and confidence because it would leave investors with no choice but to invest without the protections of a public fund. The OSC panel also found that there was no issue of unfair, improper, or fraudulent practices as far as the structure of the Fund was concerned or the operation of it.

In the end, the OSC panel decided that staff had not demonstrated that bitcoin is an illiquid asset and that the Fund will not be compliant with NI 81-102, or that it was not in the public interest to issue a receipt for the Fund’s prospectus. Accordingly, the panel ordered that the acting director’s decision be set aside, and directed the acting director to issue a receipt for the Fund’s prospectus.

Conclusion

Although the OSC’s findings in this decision are not an endorsement of investment funds based on a cryptocurrency model, they do provide guidelines for the regulation of these funds in Canada. This is an important step in that it will support innovative investment opportunities while also protect investors who will be able to invest in funds with regulatory oversight.

Highly regulated industries like the financial services industry have faced ever increasing regulatory compliance obligations. Technology, such as artificial intelligence (AI), that can be utilized to innovate the manner in which these organizations operate can lead to additional challenges for regulatory compliance, and the regulatory environment can drastically impact innovation in these sectors.

Regulatory compliance is a critical consideration for both start-ups and established organizations seeking to drive innovation in the financial services industry. Developing solutions and business strategies with compliance in mind will reduce the risk of potential fines and penalties and allow for the development of a viable solution.

To assist organizations in meeting these ever-growing compliance obligations, RegTech solutions are being developed that can be utilized to provide transparent, faster, and more efficient methods of reporting and ensuring compliance. This article will focus on the potential benefits of RegTech solutions for highly regulated industries, particularly the financial services industry.

What Is RegTech?

RegTech is a general term for new and innovative technologies designed to enable businesses to more easily meet their regulatory compliance obligations. Some of the benefits of the application of RegTech include: (1) the ability to efficiently navigate complex regulatory burdens and process enormous amounts of dense data, and (2) the reduction of risk flowing from human errors that could result in severe administrative fines.

RegTech has flourished due to a developing body of complex national and international regulations that often require the monitoring, evaluating, and reporting of vast amounts of information.

The Legal Landscape

Industries such as insurance, food and drug, oil and gas, mining, securities, telecommunications, energy, fisheries and forestry, and financial services (among many others) operate within a highly regulated environment that can be complex to navigate. Governments establish regulations with the intention of protecting the public from potential risk. This is particularly evident in the financial services industry where we have seen an increase in regulations impacting this industry in reaction to the 2008 financial crisis. However, overregulation can stifle innovation and create barriers to entry for emerging companies, such as FinTech organizations, due to the crippling expense required to comply with these regulations.

The adoption of disruptive technologies like AI in the financial services industry has led to the need for governments to develop new regulations to address the impact of these technologies.

Jurisdictions have diverged on how to address changes in the industry, including those driven by technology. This divergence creates significant obstacles for cross-border products and services or organizations that look to enter new markets. For example, organizations have differing compliance obligations with respect to data protection laws in Canada versus the European Union. Therefore, organizations must ensure that their compliance programs meet the relevant requirements of each jurisdiction in which they operate. RegTech solutions can be utilized to assist in the development of jurisdictional compliance frameworks.

Although some financial services companies have pre-emptively invested in technology to help keep up with the bourgeoning field of regulations, many don’t have the time or extra resources to focus on technology that would help them address the new regulatory burdens, so they have instead turned to using manual processes to address the frequency and volume of the new reporting requirements. This approach can be onerous and causes valuable human resources to be expended unnecessarily. Manual processing is also typically less accurate than RegTech processing.

RegTech Applications

Although there are numerous opportunities for RegTech to assist with compliance, five of the most promising applications of RegTech include the following:

• Compliance. RegTech that can be used to review all relevant regulations and report on the potential impact of such regulations to the user, including jurisdictional data privacy laws.
• Risk Management. RegTech solutions that conduct scenario analysis and risk monitoring on internal business operations through the use of big data analytics to identify and evaluate these risks.
• Identity Management and Control. RegTech that has been developed in response to Anti-Money Laundering (AML) and the Know Your Customer (KYC) obligations regarding client identity authentication. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has also established various other obligations requiring regulated entities to conduct analysis and provide seamless reporting. RegTech can be used to efficiently conduct customer onboarding and monitoring activities and will allow for greater transparency.
• Regulatory Reporting. RegTech that is utilized to assist in the generation and distribution of reports and information required by regulators. RegTech solutions can assist in data sharing between regulated entities and regulators and enable faster processing of vast amounts of data required to prepare these reports.
• Transaction Monitoring. RegTech that monitors financial transactions for suspicious activity quickly and with a high degree of accuracy by leveraging the benefits of distributed ledger through blockchain technology and cryptocurrency. This type of RegTech also aids with much of the required FINTRAC compliance obligations.

The operational benefits gained from RegTech will depend on the specific solution. RegTech that creates reports through automation of the processes required to generate these reports (e.g., data collection, aggregation, and report generation) could lead to a significant reduction in expenses and time required to prepare these reports. In addition, if this information is available in real time, organizations can react to any issues sooner than if the reports were to be generated at a later stage.

Barriers to RegTech Adoption

Despite the promise, certain RegTech solutions are in their infancy; thus, issues related to its adoption still exist. One such issue is pricing. For certain applications, it is unclear what the true cost savings are or what value is generated by the RegTech solution. Therefore, developers may have difficulty in communicating the value of the solution or selecting the appropriate pricing model (e.g., a fee per record generated versus a monthly subscription fee). In addition, the cost of developing a tool to meet the ever-changing regulatory landscape may mean that developers will have difficulty in recouping the ongoing maintenance fees associated with building and maintaining the RegTech solution.

Another concern is the potential for large-scale errors caused by minor issues with RegTech solutions, especially a solution that is one-size-fits-all and used widely in the marketplace. For example, if a RegTech solution fails to address a change in reporting requirements, this could lead to its customers failing to meet their regulatory requirements. If this same problem is replicated multiple times in the same customer, or widespread across multiple customers, then the losses could be significant. RegTech providers and customers must consider these risks when negotiating the terms of the agreement and ensure that these risks are addressed through the apportionment of liability between the parties, indemnities, and requirements for insurance.

Due to the potential sensitivity of the data collected and processed, it is critical to ensure the adequate protection of the data. The potential risk of a data breach can be significant for both the customer and RegTech provider. Customers should therefore conduct the appropriate due diligence on both the solution and provider to ensure that this risk is mitigated. RegTech providers should also ensure that they have the appropriate cybersecurity policies and procedures in place to protect themselves from both financial and reputational risk.

Conclusion

RegTech offers many benefits to organizations operating in regulated industries. Although we have addressed some barriers to adoption, the opportunities offered by adoption of innovative technologies that can assist in meeting an organization’s regulatory requirements are significant.

The manner in which RegTech is supported and integrated into the current regulatory structure will play an important role in navigating both the developmental and implementation stages.

Developers of RegTech solutions should look to engage regulators directly and take advantage of regulatory sandboxes to assist in ensuring compliance. With cautious and thoughtful integration into the current regulatory environment, RegTech shows major promise in reshaping the way that companies interact with the growing body of regulatory oversight.

On February 13, 2020, the Canadian Competition Bureau struck another blow against so-called “drip-pricing” ticket selling tactics when it slammed the deceptive online advertising, marketing, and selling practices of StubHub Canada Ltd. and StubHub Inc. (collectively “StubHub”) for failing to display the real price of the entertainment and sporting events tickets they sold upfront, instead augmenting prices through the addition of quasi-hidden mandatory fees.

The companies ultimately agreed to pay a $1.3 million administrative monetary penalty to the Canadian Commissioner of Competition as part of a Consent Agreement (“Agreement”) following the Bureau’s investigation and the determination by the Commissioner of Competition/Competition Tribunal that the companies had made representations to the public that were false and misleading in a material respect and that they had engaged in conduct reviewable under the Competition Act (Canada).

As described in The Commissioner of Competition v. StubHub Inc., Stubhub Canada Ltd. (CT-2020-002) (decided February 13, 2020), the Commissioner reviewed StubHub’s pricing for tickets advertised on its public websites and mobile applications, as well as in promotional emails. The Commissioner concluded that StubHub promoted prices for tickets that were not actually attainable and that consumers could not actually buy tickets at the advertised prices because StubHub charged consumers so-called “non-optional” fees in addition to the prices advertised. These fees included so-called “service fees,” “transactional fees,” “fulfillment fees,” “delivery fees,” “additional fees,” and just plain “fees” that were added to the prices described on checkout pages before the consumers actually purchased tickets. In fact, the prices shown on the checkout pages were often 28% higher than the advertised price because of these fees.

Interestingly, while StubHub had given consumers an option to click or tap to “show prices with estimated fees” toggle on the pages containing the advertised price, the Commissioner found that even when consumers choose to see these fees by turning the toggle on, they sometimes were still required to pay more than the price represented as inclusive of all estimated fees.

Significantly, the Commissioner concluded that even if StubHub had disclosed the amount of the “non-optional” fees later in the purchasing process (i.e. on the checkout page), such action did not mitigate StubHub’s earlier practices nor prevent the sellers from engaging in “reviewable conduct” under the Competition Act.  Overall, StubHub’s practices were found to be in contravention of paragraph 74.01(1)(a) of the Act, which states that a person engages in reviewable conduct if they, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, including making a representation to the public that is false or misleading in a material .

StubHub was also found to have used email to engage in reviewable conduct, contrary to Section 74.011 of the Act, as they sent misleading promotional email messages to consumers to promote their ticket sales, including (i) a false or misleading representation in the sender information or subject matter information of an electronic message; and (ii) a representation that is false or misleading in a material . It should be noted that the Act does not care whether the electronic address to which an electronic message is sent exists or whether an electronic message reaches its intended destination—it’s the fact that StubHub sent them that counted.

StubHub ultimately cooperated with the Commissioner and did not contest the Bureau’s findings (explicitly in exchange for more favorable terms). They agreed to execute a Consent Agreement which once registered has the same force and effect as an order of the Competition Tribunal. In the Consent Agreement, StubHub agreed to make all necessary changes with their Canadian websites, mobile applications, and emails to ensure that consumers were shown complete prices inclusive of all mandatory fees the first time that they were shown a price. StubHub was also required to intercept users identifiable as Canadians and require them at the outset to make an express choice to be redirected to Canadian stubhub.ca websites when searching for tickets on stubhub.com.

Additionally, StubHub was also required to establish a compliance program and implement new procedures to comply with the law and prevent advertising issues in the future within ninety (90) days of its execution of the Consent Agreement. Senior management of both companies, including the Chief Executive Officer, Chief Operating Officer, Chief Administrative Officer, Chief Financial Officer, Managing Directors, with responsibility for advertising and marketing tickets, must acknowledge a commitment to the compliance program by signing commitment letters. All current and future employees who are materially involved or responsible for developing, implementing, or overseeing ticket advertising or marketing will be given copies of this Agreement and are expected to sign statements acknowledging their compliance with its terms. StubHub has ten (10) days to notify the Commissioner of any breach or possible breach of any of the terms of the Consent Agreement, providing details sufficient to describe the nature, date, and effect (actual and anticipated) of the breach or possible breach, and the steps StubHub has taken to correct the breach or possible breach. The Consent Agreement is binding on StubHub for a period of 10 years following its registration.

This investigation and decision are consistent with recent Competition Bureau activity to resolve consumer concerns relating to the advertisement of unattainable online prices. As the Bureau’s website noted, various Canadian companies, including Ticketmaster and several car rental agencies, have paid a total of $11.25 million in penalties since 2016 in connection with hidden fees. On July 4, 2017 the Bureau expressly issued a warning to all ticket vendors to be upfront about the true cost of tickets available for purchase and make all necessary corrections to their existing business practices to be frank regarding any mandatory fees.

This decision serves as a costly reminder to all U.S. vendors that conduct business with Canadians online that not only is pricing transparency the hallmark of good business practice, it is also a legal requirement for doing business with Canadian consumers regardless of the media channel.  Deceptive marketing practices, including false or misleading drip pricing, will not be tolerated. As evidenced in the StubHub Consent Agreement, it also appears that the Bureau expects pricing transparency to exist throughout the purchasing experience; as discussed above, StubHub was not saved from findings of false or misleading practices or reviewable conduct by disclosing the non-optional fees at later stages of the purchasing process, including on the check-out page. U.S. vendors selling goods and services to Canadian consumers online would do well to review their marketing practices in light of this decision and take all necessary steps to bring themselves in compliance lest they risk significant penalties.

Lisa R. Lifshitz