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Law360 (March 27, 2020, 5:39 PM EDT) --
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| Mark Kurtenbach |
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| Michael Kuh |
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| Tao Leung |
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| Christopher Weigand |
Based on our discussions with our sports and entertainment clients over the last few weeks, we have distilled the macro level topics that we have heard about most frequently. This is by no means an exhaustive list, but by sharing this information, we hope we can all find solutions and support each other throughout this global crisis.
Commercial Arrangements as Long-Term Relationships
All events are canceled or postponed. Could there be a bigger commercial impact to an industry? The silver lining is that leagues, teams and promoters are actively planning to reschedule events as much as possible, as soon as possible. That will, of course, depend on how long the COVID-19 pandemic lasts.
Just like other industries, sports and entertainment companies are actively analyzing force majeure clauses and early termination rights in order to assess their options in the event it becomes (or is already) impossible to fulfill commercial obligations in connection with canceled or postponed live events.
However, even where these rights may exist, we are seeing sports and entertainment commercial parties taking a collaborative approach to address commercial impracticalities or impossibilities. That probably should not come as a surprise. The sports and entertainment industries rely, perhaps more than others, on long-term relationships, joint ventures, positive branding and reputation.
Sponsors and media partners are generally aligned with leagues and teams for years to come. The same goes for venue owners, venue managers, ticketing partners and concessionaires. The strength of these relationships is of paramount importance as the industry deals with this pandemic.
Fan Engagement and Ticketing Matters
Naturally, sports and entertainment companies are experiencing extremely high volumes of inbound communication from holders of tickets to suspended or canceled events. Despite remote working and other employment challenges presented by the COVID-19 pandemic, we are seeing companies dedicate additional personnel and information technology resources to engage with concerned ticket holders.
For rescheduled events, presold and season ticket purchases will, in most cases, be applied as a credit for replacement dates. That should help to minimize the cash flow impact of broad-scale ticket refunds, while allowing fans the opportunity to enjoy the rescheduled event. But for canceled events, ticket refunds will likely prove inevitable.
In any case, so long as events remain on hold, sports and entertainment companies are dealing with decreased advance ticket sales for future events and the loss or deferral of walkup or gate ticket sales, parking fees, and merchandise and concession revenues.
At the same time, it is more important than ever for sports and entertainment companies to pay careful attention to public messaging and fan engagement topics in light of the COVID-19 pandemic. Here are a few industry themes:
- Communicating genuine care for fans, artists, players and employees — above all else. This is a time for engagement with fans; they miss cheering on their favorite teams and going to their favorite concerts.
- Communicating not only factually, but transparently, as both fans and employees need clarity. In this period of heightened anxieties, sports and entertainment companies are using their communications to anticipate and answer fans' and employees' questions.
- Reassessing traditional communications channels to determine if those channels will still work when fans' content choices are changing. Short, creative video communications distributed via Facebook, Twitter and Instagram, or email to explain new policies regarding ticket exchanges, or to advertise upcoming summer events, may be the preferred path forward during this shutdown. As fans work from home, they are now, more than ever, clicked into their social media platforms, and appreciate visual communications.
Protecting Employees and Facilitating Remote Working Arrangements
For a company, there is no more human and direct impact from COVID-19 than on its employee base. Sports and entertainment companies around the world are facing unprecedented challenges managing a large-scale shutdown of their workforces.
In order to manage these challenges, designated individuals or core teams should be responsible for staying on top of the latest COVID-19 developments and legislation, and leading efforts to develop or further refine COVID-19-related policies and procedures.
But perhaps the most pressing need employers are facing in the short term is how to manage a workforce that, for the most part, are no longer needed at — or in some cases, prevented from coming into — their workplaces, while at the same time still complying with labor and employment laws that are changing on a nearly daily basis. We are seeing sports and entertainment companies vigilantly reviewing and evaluating their legal compliance obligations, both to their employees and to their independent contractors.
Given the value these companies place on their workforces, many are trying to go above and beyond those requirements during this outbreak. As with many other employers, sports and entertainment companies place a tremendous emphasis on safety, but at the same time balancing the rights of their workers.
Implementation of key safety measures — such as asking those who have been exposed to the virus to self-quarantine, including athletes exposed during league play prior to the recent suspensions — remains a top priority, and employee and athlete testing issues remain top of mind. Moreover, consistent with the recent governmental guidance, we are seeing a cautious and coordinated approach with respect to travel, including domestic travel.
Addressing Liquidity Concerns
With all live events on pause, the COVID-19 pandemic is presenting unique liquidity challenges, particularly in the short term. Sports and entertainment companies are facing a new reality: meaningful deferral or loss of revenue sources such as ticket sales, sponsorship and media, but continued payroll, rent and other expenses.
Simply put, it is not easy for these companies to shut off relatively fixed expenses, despite the fact that COVID-19 may be crippling their income. In this environment, cash-flow forecasting based on revised revenue and expense projections is paramount.
Sports and entertainment companies with debt leverage are assessing impacts to their financial covenants and material adverse change provisions, and also taking proactive steps with their relationship lenders. In many cases, these companies are increasing their overall working capital borrowing capacity and drawing down on their revolving loans in order to help alleviate these short-term liquidity concerns.
For professional sports teams, we are seeing capital calls from ownership groups and, in some cases, teams are evaluating bringing in additional minority owners as a way to tap some extra cash. In either case, now is the time to carefully evaluate league requirements and capital contribution, preemptive rights and governance provisions within existing organizational documents.
The good news is that there are some cash-flush investors out there who are now ready to opportunistically deploy capital in the down market.
Insurance Coverages and Recovery
As sports and entertainment companies take stock of the "new normal" that is suspended operations and canceled or postponed events, they are carefully reviewing their insurance policies to determine the availability and magnitude of coverage for losses that are likely to arise from the COVID-19 outbreak.
Specifically, these companies are first evaluating whether they may be able to avail themselves of coverage of event cancellation policies, to the extent such policies have been procured, which generally include coverage for losses that directly result from the cancellation, abandonment or postponement of events, subject to any exclusions.
Many event cancellation policies for larger events obtained prior to the COVID-19 outbreak did not exclude communicable diseases, and therefore, those may present an opportunity to recover for losses associated with cancellations, abandonments or postponements of their marquee events.
To the extent event cancellation coverage was not procured or is not available, there may be other potential avenues for loss recovery, including pursuant to any robust property coverage for contingent business interruptions, supply chain disruption, civil authority orders and even specialized pandemic policies, where available. However, many of these policies often include a bacteria/virus exclusion that may make recovery for COVID-19-related losses more difficult.
Regardless of the policy coverage being pursued, it is important to be mindful of sublimits that may curtail loss recovery, as well as claims-made policies coming up for renewal, as it is likely the new policies following renewal may include specific exclusions for COVID-19-related losses. Importantly, the scope and availability of each of these coverages is subject to the detailed and often negotiated wording of each company's policy.
Conclusion
Navigating this uncharted territory presents the sports and entertainment industry — and the rest of the economy — with insistent challenges. But working together, planning for the unforeseen and developing creative solutions, we fully expect that we will be able to return to enjoying the entertainment that defines us as fans.
Mark Kurtenbach and Michael Kuh are partners, Tao Leung is counsel, and Christopher Weigand is a senior associate at Hogan Lovells.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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