Moving past the pandemic

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The pandemic has thrown up challenges for maintaining productivity, honouring contracts and keeping workers employed. Mansha Shukla writes about the key considerations for in-house counsel

COVID-19 is preying on thousands of lives and has battered the world economy. The devastating employment rates, slowing economic growth, decline in consumer spending and surge in protectionist investment policies have brought Indian and global companies in travel, aviation, hospitality, automobile and retail to a complete standstill. Others that are surviving are facing widespread challenges including work cancellations, liquidity crises, workplace health and safety issues, and a general decline in valuation.

pandemic
Mansha Shukla

The Indian media and entertainment (M&E) industry is grappling with its unique set of challenges. All production activities and live sports events have come to a screeching halt. While viewer ratings have skyrocketed due to the lockdown, television channels are struggling to broadcast fresh premieres.

As companies in other industries have scaled down their media marketing spends, the M&E sector is seeing a massive decline in advertising revenue – a mainstay of this sector. The circulation of print publications was suspended until the second phase of the lockdown, during which time they have been reduced to publishing electronic versions of the daily news.

Cinema halls and theatres are also battling for survival. How does one prepare for an unprecedented pandemic that has the world staring at a global recession? No one has a definitive solution to navigate the uncharted territory that we are in today.

Maintaining continuity

Companies are struggling to continue business operations amid the nationwide lockdown and strict social distancing measures. For the M&E industry, in particular, one of the biggest roadblocks is resuming production and post-production work, which is nearly impossible to achieve remotely.

Even though the government’s identifies media and broadcasting services within the category of essential services, most media companies will resume with less than 25% of their workforce. Under these circumstances, business resilience will depend on implementation of robust health and safety protocols.

One aspect of resolving the business continuity crisis is to consistently engage with government and regulatory authorities through industry associations, and recommend necessary measures for revival. These may include: (1) granting a moratorium on regulatory interventions; (2) strict implementation of contactless digital payment methods across the board; (3) relaxing registration/licensing processes, fees and related rules to promote ease of doing business; and (4) granting moratoriums or exemptions on GST payments on billed/unpaid receivables during the lockdown.

The Indian Broadcasting Foundation (IBF) has written to the Ministry of Information and Broadcasting (MIB) seeking relief and a rehabilitation package for their sector. The IBF has also submitted – with the MIB, Niti Aayog (a government policy thinktank) and the Prime Minister’s Office – a standard operating procedure on safety protocols to enable a resumption of business operations in the broadcasting space amid the pandemic.

Many companies are experiencing an existential crisis due to the outbreak and must adopt alternate revenue streams to survive. We are already witnessing the poster boys of food delivery, e-commerce and taxi aggregator space – Zomato, Amazon, Grofers, Uber and Makemytrip – pivoting from their run-of-the-mill businesses to delivery of essential commodities and services.

The time is ripe for more media companies with strained balance sheets to adopt technology-led models to deliver content and engage with consumers.

Defaulting on obligations

The stoppage of work and supply constraints induced by the nationwide lockdown has resulted in widespread defaults on contractual obligations. Indian companies across industries are invoking force majeure clauses under existing commercial contracts or, in the absence of such, navigating ways to take refuge under the doctrine of frustration.

Given that a pandemic of this magnitude was largely unforeseeable, there may be several commercial contracts that do not explicitly include pandemic/lockdown as a force majeure event. However, Indian courts are known to have given a wider import to the term force majeure where the intent is to excuse an obliged party from performing contractual obligations when faced with a black swan event.

Naturally, contracts lacking explicit inclusion of a pandemic/global health crisis or a lockdown as a force majeure event, but which are broadly worded, must be evaluated on a case-to-case basis. Parties will need to determine whether the performance of contractual obligations was beyond the control of the performing party.

Delhi High Court has, on 20 March 2020, already granted an interim injunction against the invocation of a performance bank guarantee, observing that the pandemic-induced nationwide lockdown is prima facie a force majeure event.

Without the reference of a force majeure provision in a contract, a contracting party may invoke the doctrine of frustration to absolve itself from performing a contract. This will entail the contracting party to demonstrate that the pandemic and the ensuing lockdown have shattered the foundation for performance of the contract.

Historically, Indian courts have been reluctant in allowing frustration of contracts merely because an obligation has become onerous. Recently, the Bombay High Court denied interim relief to several steel importers who had pleaded termination of their agreement because of frustration, impossibility, and impracticability resulting from COVID-19-related lockdown.

Pay cuts and furloughs

The Ministry of Labour & Employment issued an advisory, on 20 March 2020, cautioning employers from terminating employees and contractual workers. The Ministry of Home Affairs (MHA), by its order dated 29 March 2020, also directed employers to ensure timely payment of wages to workers, with no deductions for the lockdown period. Several state governments later jumped on the bandwagon and issued similar advisories.

Indian companies are struggling to make payment of wages to their workers/employees. Amid extreme uncertainty and no adequate assistance from the government, companies are resorting to a downward revision of wages, adopting mandatory furloughs, short-time compensation schemes, and non-renewal of workers’ contracts.

A manufacturing company, Nagreeka Exports, had approached the Supreme Court challenging the validity of the MHA’s 29 March order. The Supreme Court on 15 May asked the centre and state to take no coercive action against any private company/factory that is unable to pay wages to their employees/workers. The MHA subsequently withdrew its 29 March order. While the trade unions have slammed this withdrawal, employers welcomed the decision.

While companies need to evolve consciousness and embrace short-term socialism to consider the impact of business decisions on workers’ families, the government, too, should roll out adequate packages to stimulate demand and support ailing businesses. A human-centred approach can evolve in companies with necessary governmental support.

Interestingly, the lockdown and mandatory work-from-home policies are forcing prominent companies to upgrade their employment policies. In-house lawyers and HR professionals are involved in framing appropriate company policies on working from home amid a lockdown, standardizing their approach on supporting COVID-19-positive employees, safety of their workplaces, and mental wellbeing of their employees during these troubled times.

Slowdown in M&A

There has been a significant slowdown of M&A activity across sectors. We are seeing buyers re-evaluating their risks and resorting to purchase price adjustment mechanisms in ongoing M&A transactions. The material adverse effect (MAE) clauses in transaction documents are frequently being invoked to abort transactions, or to force a seller to accept valuation/purchase price adjustments.

In the M&E sector, buyers are re-evaluating seller warranties, as the sector is heavily regulated and faces business continuity issues such as cancellation/postponement of live sports, and delay/stoppage of production of original content due to the lockdown. The approach to diligence by buyers is now focused on granular operational details such as evaluating supply chain disruptions and insurance adequacies.

There has been an upswing of investment activity in the digital media/technology sectors in India in the past month. The most prominent example of this is investments by both strategic and private equity investors into Jio Platforms. As businesses and consumers prepare to adapt to the new normal, the technology and the internet-based sector is expected to grow at a rapid rate.

The Department of Promotion of Industry and Internal Trade has issued press note No. 3 of 2020, bringing all foreign direct investment (including M&A and fundraisings) from entities incorporated, or citizens residing, in countries that share a direct land border with India under the government approval route.

This step is targeted mainly against acquisitions/investments and hostile takeovers by Chinese entities of Indian companies affected by the outbreak. Ongoing foreign direct investment (FDI) transactions involving a direct or indirect Chinese investor (who is a beneficial owner) will prospectively require governmental approval.

This will impact the Sino-Indian trade relationship including entry strategy, greenfield investments and FDI in Indian subsidiaries of Chinese entities. Similarly, the transfer of shares to Chinese shareholders, and the exercise of pre-emptive rights under existing shareholder agreements, may also require government approval.

With this move, India has joined the bandwagon with other countries like Australia, France, Spain, Italy, Germany and the US, which have already tightened their FDI norms against opportunistic investment. However, this may have a material impact on the number and value of FDI deals emanating from China.

What’s the future hold?

The crushing impact of COVID-19 on the Indian economy is being felt far and wide, but, as they say, adversity fuels innovation. The pandemic will have an enduring effect on the country’s cultural and social life, causing a shift in consumer behaviour. People, on the other side of this pandemic, are unlikely to return to their pre-lockdown habits entirely.

We will see the rapid rise of specific sectors, including new-age businesses such as technology-led healthcare (telemedicine), digital streaming platforms, insurance, medical devices, and artificial intelligence-led companies. Traditional media companies will have to reshape themselves to meet changing consumer demands.

While there is hope that this current turmoil is temporary, the consequent disruption caused may last longer. In-house legal teams will need to review their existing contracts, including governance documents and policies to assess risks and evaluate frequent amendments and new legislation, to help their management and boards navigate through the new era of the pandemic.

Mansha Shukla is director, legal affairs, South Asia, at Discovery. The views expressed in this article are those of the author and have been written in a personal capacity.