CLAYTON AND HINMAN GO ON THE RECORD URGING CORPORATE DISCLOSURES RELATED TO COVID-19

3 minute read

In a Public Statement issued by the SEC, Chairman Jay Clayton and Division of Corporate Finance Director William Hinman urged public companies to include corporate disclosures related to the effects of COVID-19 in their “quarterly earnings releases and analyst calls, as well as in subsequent communications to the marketplace.” The SEC requested that corporate disclosures address: “(1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as [ ] efforts to fight COVID-19 progress.” Suggested disclosures include, “[d]etailed discussions of current liquidity positions,” “expected financial resource needs,” “efforts to protect worker health and well-being and customer safety,” and “financial assistance received under the CARES Act or other similar COVID-19 related federal and state programs.”

The SEC acknowledged that “providing detailed information regarding future operating conditions and resource needs is challenging . . . but is important on many levels.” For investors, forward-looking COVID-19 disclosures foster more well-reasoned investment decisions. For the market more-generally, such disclosures “enhance valuable communication and coordination across our economy—Including between the public and private sectors." And for the greater fight against COVID-19, such disclosures increase confidence and understanding about particular business and industries which, in turn, “reduces risk aversion and facilitates action.” As an example of this third, “less familiar” policy consideration, the SEC explained, for example, that “if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees.”

The SEC warned that even though “it may be tempting to resort to generic, or boilerplate, disclosures,” such disclosures “do little to inform investors.” Instead, the SEC urged companies to convey “meaningful information” that give investors “a level of insight that allows them to see the key operation and financial considerations and challenges the company faces through the eyes of management” even though such information will be “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company.”

Of course, companies are typically cautioned to limit the forward-looking disclosures—they are discouraged from making forward-looking financial estimates. Recognizing this, the SEC stated that companies should still try their best to make forward-looking disclosures related to COVID-19 and to “avail themselves of the safe-harbors” found in Section 27A of the Securities Act and Section 21E of the Exchange Act. In effect, companies should avoid making boilerplate COVID-19 disclosures, but should identify them as “forward-looking statement[s]” and couple them with customary “cautionary statements identifying factors that could cause actual results to differ materially from those in the forward-looking statement.”

The SEC concluded by assuring public companies that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.” Nevertheless, the SEC continues to closely monitor markets for fraud relating to COVID-19, suspending trading of stock for companies making questionable claims. See, e.g., Predictive Tech. Group, Inc., SEC Order of Suspension of Trading, File No. 500-1 (April 21, 2020) (suspending trading “because of questions regarding . . . statements PRED made about being able to immediately distribute large quantities of serology tests to detect the presence of COVID-19 antibodies”). The best course remains for public companies to follow the SEC’s guidance in order to inform their investors, assure markets, assist in the nation-wide fight against COVID-19, and ultimately protect themselves from enforcement actions and shareholder litigation.

For questions regarding this post, please contact the authors:


So You’ve Successfully Applied For A PPP Loan, Now What ? What You Need To Know About The PPP Forgiveness Process

7 minute read

(Last updated April 17, 2020)

Information provided by media outlets indicates that the entire $349B in funding authority allocated to the Paycheck Protection Program (PPP) was lent through the issuance of 1,661,397 loans by 4,975 lenders, all in less than 13 days.  That is an average loan amount of just over $210,000, an indication that many businesses with smaller payrolls have received the short term assistance that they so desperately needed.

If you are among the lucky ones who have received an SBA loan approval number (or better yet, the funds), then congratulations!  If not, then don’t abandon all hope just yet.  Clearly there is some political wrangling currently going on between the White House (which wants $250B in additional PPP funding authority approved now) and certain elements of Congress (which are seeking to promote additional funding for state and local governments first), but the likelihood is that additional funding authority for PPP loans for small businesses with be forthcoming at some point in the coming weeks.

Regardless of whether your funding has been approved or not at this point, it makes sense to start making plans now for how those funds will be used once received, how you can simplify the process for proving appropriate use of funds, and how you will apply for forgiveness of your PPP loan.

Section 1106 of the CARES Act (the Act) sets forth the loan forgiveness process for PPP loans (referred to in the statute as “covered loans” or – in legalese – loans guaranteed under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by Section 1102).  The “covered period” for forgiveness is the 8 week period beginning on the date of the origination of your PPP loan.  This means that you need to spend your PPP loan proceeds during the 8 week period directly following the funding of your loan.  Any portions of your PPP loan which are not spent for authorized purposes during that 8 week period will not be subject to being forgiven and must be repaid at 1% interest over a 2 year period after the 6-month deferral for the loan.

USES OF THE PPP LOAN FUNDS THAT QUALIFY FOR FORGIVENESS

Section 1106 further provides that the following costs are approved for forgiveness to the extent that they are incurred and paid during the 8 week period:

Payroll Costs – Section 1106 relies on the definition set forth in Section 1102(a) of the CARES Act for “payroll costs.”  This is a relatively broad definition and is the same definition that you relied in calculating your PPP loan amount.  With respect to W-2 employees, payroll costs include (a) salary, wages, commissions and cash tips, (b) vacation, parental, family, medical and sick leave, (c) allowance for dismissal or separation, (d) payment for provision of group health benefits, including premiums, (e) payment of retirement benefits, and (f) payment of state or local tax assessed on the compensation of employees.  For sole proprietors or independent contractors, the definition includes wages, commissions, income, net earnings from self-employment, or similar compensation.  In all cases, wages or salary in excess of $100k annualized are excluded, but sums paid up to that amount count. For more specific details on what is included or excluded, please refer directly to the referenced provision of the CARES Act and to the FAQs updated by the U.S. Department of Treasury from time to time (which can be found here).

Interest Payments on Covered Mortgage Obligations – Interest paid on a covered mortgage obligation (any prepayment of or payment of principal on that covered mortgage obligation is expressly excluded).  A “covered mortgage obligation” is a mortgage incurred before February 15, 2020 that is a liability of the borrower and secured by real or personal property.

Payments on Covered Rent Obligations – Rent that is an obligation under a leasing agreement in force before February 15, 2020.

Covered Utility Payments – Defined as payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began prior to February 15, 2020.

It is important to note that regulations released in response to the Act have made it clear that at least 75% of the amount to be forgiven must be for payroll costs and that the above-referenced interest payments, covered rent payments and covered utility payments cannot amount to more than 25% of the PPP loan proceeds forgiven.  The Act provides that “an eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the [above-referenced] costs incurred and payments made during the covered period.” So, the key is to be able to show your lender that you have properly and timely spent your PPP loan funds.

APPLICATION FOR LOAN FORGIVENESS

Upon the completion of your 8 week “covered period,” you will need to submit another application to your lender – this time for loan forgiveness.  Between now and then, your lender will certainly have an application form available to you for that purpose.  We do know that your application will need to include the following:

(i) Documentation verifying the number of full-time equivalent (FTE) employees on payroll and pay rates for the applicable periods, including payroll tax filings reported to the IRS, and state income, payroll, and unemployment insurance filings;

(ii) Documentation including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, covered lease obligations, and covered utility payments;

(iii) A certification (from a representative authorized to make the same) that the documentation is true and correct and that the amount for which forgiveness was requested was used to retain employees or to make payments on a covered mortgage, covered rent obligation or covered utility payments; and

(iv) Any other documentation the SBA determines necessary.

The Act makes it clear that no forgiveness will be given if the necessary documentation is not provided.  Your lender must issue a decision on your application for forgiveness not later than 60 days after the date that your lender receives your application for forgiveness.  Your lender’s decision will control how much of your loan is forgiven, although we don’t expect that lenders will be unduly tough on you in this process, rather they will be just taking reasonable steps to confirm that you have submitted necessary confirming documentation.

REDUCTION IN LOAN FORGIVENESS

In addition to simply not spending your PPP loan funds for the proper purposes in the referenced 8 week period, there are two additional bases for a reduction in your loan forgiveness amount.

Reduction in Number of Employees:  If the average number of full-time equivalent (FTE) employees that you employed during your 8 week covered period is lower than the average number of FTE employees that you had during (at your election) either: (i) the period from February 15, 2019 to June 30, 2019; or (ii) the period from January 1, 2020 to February 29, 2020, then your loan forgiveness will be proportionately reduced.  To calculate FTEs for a given period, we expect that the forthcoming guidance will be to calculate the average number of FTE employees based on a 40-hour workweek.  For example, if you have 15 employees (combination of full and part-time) and, for the 8 week covered period, you paid your employees for a combined total of 3,600 hours, then your calculation of average FTE employees would be 3,600 total hours divided by 40 hours in a full-time workweek divided by 8 weeks (the length of the period), for a result of 11.25 FTE employees during that period – even if your actual employee headcount is actually 15.  We expect that further specific guidance will be provided on the exact calculation method that your lender expects you to use.  One important note, there is no requirement that we have seen that requires that your employees are actually busy working during this period.  Indeed, many businesses that qualify for PPP loans may be forced by operation of law to be closed during the subject period.  We think that the key consideration is that you are paying your employees during the covered period, whether you are open for business or not.

Reduction in Compensation:  The amount of your PPP loan forgiveness will also be reduced to the extent that you reduce the wages of any one or more employees by more than 25% when compared to the most recent full quarter during which the employee was employed (please note that highly compensated employees (those making over $100k per year) are expressly excluded from this provision). The Act implies that this will be an employee-by-employee analysis.  We expect that further guidance will be provided as to how to treat special situations, for example, if you have an employee who elects to quit and to not return to work.  Guidance on this front will be especially important for employers in high turnover industries.

TAX TREATMENT OF AMOUNT FORGIVEN

Forgiven debt is usually taxable as income to the borrower.  As a welcome relief, the CARES Act is clear that PPP loan amounts forgiven will not be included in gross income of the borrower for income tax purposes. Section 1106(i) of the CARES Act provides that “(f)or purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includable in gross income of the eligible recipient by reason of forgiveness . . . shall be excluded from gross income.”

RECOMMENDED BEST PRACTICES

We have a few recommendations to help ensure that your forgiveness process is as smooth as possible.

1. Use a Separate Account.  To the extent that you can, set up a new account with your lender that is separate from your usual business accounts and have the funding from your PPP loan and all payments from those funds flow through that separate account.  This should make the process of proving appropriate and timely uses of your PPP funds quite a bit simpler in that you won’t have to track and explain commingling of funds and debits unrelated to qualified PPP expenditures from the account.

2. Keep in Close Communication with your Lender. It goes without saying that keeping in close contact with your lender and keeping up to date on additional information and guidance that they provide is a great idea.

3. Keep Good Documentation. Be sure to maintain very accurate and detailed documentation on all uses of your PPP loan funds. Following the recommendation in subsection (1) above will dramatically help you in this process.  If you keep track of cancelled checks, receipts and other supporting documentation substantiating your expenditures, this will go a long way towards simplifying the document submission process that you already know is coming.

4. Prepare your Loan Forgiveness Application in Advance. Start preparing your loan forgiveness application well in advance of the completion of your 8 week period so that you are in a position to file your forgiveness application with your lender immediately upon the completion of that period.  Just as lenders were inundated with applications at the outset of this process, they will undoubtedly be inundated with forgiveness applications on the back end.

5. Pay Attention to your FTE and Compensation Numbers. Carefully watch your FTE employee counts and your compensation amounts to ensure that your forgiveness amount is not reduced unnecessarily.

6. Watch for Future CCSB Client Alerts.  Together with you, we will continue to watch developments and additional regulations and guidance that are provided and will prepare and distribute future CCSB Client Alerts to assist you in navigating the PPP process.

David Heidenreich
[email protected]
214.855.3031

Dallas County Amends And Extends Its “Stay Home, Stay Safe” Order On APRIL 16, 2020 – Face Covering Requirements And More

3 minute read

(Last updated April 17, 2020)

On April 16, 2020, Dallas County Judge Clay Jenkins issued an amended and extended “Stay Home, Stay Safe” order.  The order is effective as of 1 p.m. on April 16, 2020 (with the exception of the face covering requirements which are effective as of 11:59 p.m. on April 17, 2020) and continues in force until 11:59 p.m. on April 30, 2020.  The latest version of the order can be found here.

Since the initial “Stay Home, Stay Safe” order was issued effective at 11:59 p.m. on March 23, 2020, Judge Jenkins has issued numerous gradual amendments to the order on a piecemeal basis as and when additional rules and guidelines were established.

The following are the Exhibits added since the original order:

Exhibit A – Rules for Essential Retailers (attached here) – Added to the order on March 31.

Exhibit B – Rules for the Construction Industry (attached here) – Released initially on March 29 and added officially to the order on March 31.

Exhibit C – Rules for Manufacturers and Distributors (attached here) – Added to the order on April 2.

Exhibit D – Rules for Financial Institutions (attached here) – Added to the order on April 6 and relates primarily to check cashing businesses and pawnshops.

Exhibit E – Rules for Common Carriers, Shipper, Delivery Services, and Related Companies (attached here)  – Added to the order on April 6.

Exhibit F – Rules for Real Estate Agents (attached here) – Added to the order on April 6.

Exhibit G – Guidance on Covering Nose and Mouth (attached here) – Added to the order on April 16.

Key Changes Since the Initial Order

Face Coverings Required.  Effective at 11:59 p.m. on April 17, 2020, everyone in Dallas County is required to use face coverings specifically when: (i) patronizing Essential Businesses; and (ii) utilizing public transportation, taxis or ride-sharing services.  See Exhibit G for more information.

Recovered Employees. Employers may not implement any rules making a negative COVID-19 test or a healthcare provider note a requirement before a COVID-19 recovered employee can return to work.

Significant Construction Rules.  The rules imposed on construction projects are significant and include, without limitation, temperature checks, workers not being able to change shifts, requirements to provide soap and water or hand sanitizer at each site, and establishing a COVID-19 safety monitor for each site.  Many construction companies have had concerns about the practical ability to implement all of the rules.  The penalty for not complying with the rules can include removal from the essential business list and being prohibited from operating in Dallas County.

Eviction Hearings.  The amended rule apparently extends the suspension on eviction hearings and writs of possession in Dallas County for the next 60 days (apparently until the middle of June).  The rule does not distinguish between commercial properties and residential properties, although the order states that the intent is to “prevent renters from being displaced.”  Judge Jenkins’ amended order also provides guidance that Landlords should cap late fees at $15/month.   In contrast, the current applicable emergency order of the Texas Supreme Court is clear that, as to the statewide order at least, only residential evictions are halted and such statewide moratorium is in effect through April 30.  Additionally, under the order of the Texas Supreme Court, writs of possession may still be issued but may not be executed until after April 30.

This Client Alert is intended to highlight significant developments and is not intended to be a complete description of all aspects of Judge Jenkins’ order.  Please consult the order (linked above) for further information.

We will continue to watch for further updates and will provide additional Client Alerts as warranted.

But, Wait! It Has To Be Notarized…

3 minute read

(Last updated April 16, 2020)

As people and businesses adapt during the COVID-19 crisis, an alternative means for having documents notarized has become important.  Texas Governor Greg Abbott’s Executive Order of March 13 (the “Disaster Declaration”) and various “shelter in place” orders of most Texas counties require people to minimize in-person contact with one another, in effect prohibiting the traditional notarization process. In response, Governor Abbott suspended certain in person notarization requirements in limited situations.  This client alert discusses this suspension. The relaxed requirements will likely not be as defensible as traditional notarization under some circumstances.  Accordingly, the safest practice (where the date of physical execution does not have material legal consequences) might be to re-execute and notarize remotely-notarized documents in the traditional fashion once the Governor lifts the March 13 Disaster Declaration and applicable shelter in place orders have expired.

Governor Abbott’s Directive.  On April 8, 2020, Governor Abbott suspended requirements concerning the physical presence of a notary public for the execution of certain documents. Governor Abbott’s notice of these relaxed requirements is not an “executive order,” but instead a notice to the Texas Secretary of State, https://www.sos.state.tx.us/statdoc/oog-temporary-suspension.shtml (the “Notice”). The Disaster Declaration notes in pertinent part that the Governor may suspend “any order or rule of a state agency that would in any way prevent, hinder, or delay necessary action in coping with a disaster.”  Pursuant to this, the Governor acted to suspend the rules requiring the physical appearance of a principal before a traditional notary with regard to the execution of certain estate planning documents.

Who is Involved:  There are two types of notaries in Texas — a traditional notary and an online notary. This alert will not discuss the details, but each notary classification requires a separate license, with differing standards, documentation, and retention requirements.  The newly relaxed requirements apply only to traditional notaries. The Governor’s Notice does not change any requirements for online notaries.

What is Involved:  Governor Abbott’s Notice waives the physical presence requirement for traditional notaries allowing the identification process to be accomplished through two-way video conferencing using the method set forth in the Notice. Only the following documents may be notarized under the relaxed standard:

  • Self-proving affidavits for Wills
  • Statutory Durable Power of Attorney (financial)
  • Medical Power of Attorney
  • Directive to Physicians
  • Oath of an executor or administrator, and
  • Oath of guardian

The Governor reportedly considered a blanket authorization for remote notarization of any document, but ultimately denied such, apparently because of a concern for the potential for fraud and abuse, particularly concerning real estate documents.

The Governor’s suspension of the in presence notary rules as set forth above expires with the expiration of the March 13 Disaster Declaration, as it may be extended.

In the event that you require execution of any of the above referenced estate planning documents during the time that the Governor’s Disaster Declaration remains in place, please call one of our estate planning attorneys listed below and we will be happy to assist you in working through this situation so that you have a properly notarized document. Likewise, if you require notarization on a document other than one set forth above, please call us and we will assist you.

Bob BottsCatherine Bright HawsAshley McMillan
[email protected][email protected][email protected]
214.855.3105214.855.3002214.855.3066

CARES Act Provides Subsidies For Loan Payment Relief On Certain SBA Loans

2 minute read

(Last updated April 10, 2020)

As one of the many financial relief programs intended to help small businesses weather the COVID-19 crisis, The Coronovirus Aid, Relief, and Economic Security Act (CARES Act) provides subsidies for certain existing and new Small Business Administration (SBA) loans.

Under Section 1112 of the CARES Act, the SBA is required to subsidize certain existing and new SBA loans by paying the principal, interest and any associated fees on such loans for a six (6) month period. Qualified SBA loans include:

• SBA 7(a) guaranteed loans (including loans made under the Community Advantage Pilot Program but excluding loans made under the Paycheck Protection Program)

• SBA 504 loans under the Certified Development Company Loan Program

• SBA 7(m) loans under the Microloan Program

The subsidy will begin with the next payment due on qualified SBA loans and applies to:

• Existing qualified SBA loans (made before March 27, 2020), including those that are in deferment and those that are not in deferment

• New qualified SBA loans made after March 27, 2020 and before September 27, 2020

The SBA is required to begin making the required subsidy payments within thirty (30) days of the first payment due date on a qualified SBA loan. For loans in deferment, the first payment due date will be the first payment due after deferment. Qualified borrowers will not have the obligation to repay or reimburse the SBA for any subsidy payments.

Notably, the CARES Act does not require any action by qualified borrowers to participate in the subsidy program. Qualified borrowers (or borrowers who believe they qualify), however, are strongly encouraged to check with their lenders to confirm that they are qualified for the subsidy program before skipping any loan payments.

As Section 1112 of the CARES Act expressly assumes that all borrowers are adversely affected by COVID-19, Section 1112 also encourages lenders to defer loan payments and extend maturity dates on qualified SBA loans.

Bonnie BarksdaleMichael Lin
[email protected][email protected]
214.855.3119214.855.3525

“I Need a Hero” – The Fed Comes to the Rescue with an Array of Weapons Aimed at Combating Economic Impacts of COVID-19; PPP Support, Main Street Business Loans and More

5 minute read

Leading the charge of a cavalry of government-backed loan programs, Jerome Powell, Chairman of the Federal Reserve (affectionately, the “Fed”), rode into a morning press conference on April 9, 2020 on the proverbial white horse and announced a wide variety of new programs and enhancements to existing programs aimed at attacking the liquidity crunch facing businesses, households, markets and state and local governments as a result of the economic slowdown resulting from the COVID-19 pandemic.

The programs described in this alert were all created under the authority of Section 13(3) of the Federal Reserve Act, with the approval of the Treasury Secretary.

While many details are yet to be announced, this is what we know today:

PPP CREDIT SUPPORT

The Fed established a Paycheck Protection Program Liquidity Facility (PPPLF) to extend credit to lending institutions making PPP loans to qualifying small businesses, non-profits and other approved borrowers. Many lenders looking to issue PPP loans found that they were quickly handicapped by FDIC capital requirements. This lending bottleneck created significant angst among small business owners seeking their respective pieces of the PPP loan pie on the opening day of the program (March 3, 2020).

Under the PPPLF each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the SBA under the PPP. Furthermore, the Fed is presenting for the approval by the FDIC Board of Directors an interim final rule that would allow lenders to neuter the impact of holding PPP loans on their balance sheets. Additionally, consistent with the mandate established in section 1102 of the CARES Act, loans originated under the PPP will receive a zero percent risk weight under the capital rules of the applicable federal agencies.

These actions make a lot of sense as the usual credit risks to lenders in issuing loans are heavily mitigated in the PPP context by the SBA’s 100% guarantee of the PPP loans and the forgiveness component of the program. These actions should provide the necessary grease to help the PPP funding engine to finally function properly. More information can be found here (memo to the FDIC), here (PPPLF Interim Final Rule) and here (PPPLF Term Sheet).

MAIN STREET BUSINESS LENDING PROGRAM

In an effort to quench the liquidity thirst shared by many medium-sized businesses who found themselves ineligible for a highly desirable (and forgivable) PPP loan available to smaller businesses, the Fed announced two complementary credit facilities – the Main Street Expanded Loan Facility (MSELF) and the Main Street New Loan Facility (MSNLF) – which combined account for the planned purchase of $600B in loans (with Treasury providing $75B in combined equity to the facilities). These facilities are collectively referred to as the “Main Street Lending Program.”

Loans issued or upsized, as applicable, under the MSELF and MSNLF include the following common elements:

– Four (4) year maturities.

– Companies with up to 10,000 employees or with revenues of less than $2.5B in 2019 are eligible.

– Principal and interest payments are to be deferred for 1 year.

– Interest will be the Secured Overnight Funding Rate (SOFR) (which is currently .01%) plus 250 to 400 basis points (in other words 2.51% to 4.01%).

– Minimum loan size of $1,000,000.

– No prepayment penalty.

– Lenders will retain 5% of each Main Street loan made on their books while the remaining 95% will be purchased by the applicable Main Street facility.

– Origination fee payable by the borrower of 1.00% of the loan amount funded.

– Lender is charged a fee by the facility equal to 1.00% of the portion of the loan to be purchased by the applicable facility (in other words, 0.95% of the total MSNLF loan amount for a new loan or of the expanded loan tranche in the case of the MSELF). This fee can be passed on by the lender to the borrower.

– The applicable facility will pay the lender a loan servicing fee equal to 0.25% of the loan amount serviced.

– Borrowers, among other certifications, must commit to make reasonable efforts to maintain payroll and retain workers.

– Borrowers must follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act (so that loan funds don’t end up rewarding executives and shareholders).

– Small businesses that have secured a PPP loan are still eligible to apply for an additional Main Street loan.

– Unlike PPP loans, Main Street loans are not forgivable.

– Participations will stop being purchased by the facilities on September 30, 2020, unless extended.

Key differences between the MSELF and the MSNLF are the following:

– The MSELF is only for the upsizing of existing loans first originated by the applicable lender to the borrower prior to April 8, 2020 and has a maximum loan amount that is the lesser of (i) $150M; (ii) 30% of the Borrower’s existing outstanding and committed but undrawn bank debt; or (iii) an amount that, when added to the Borrower’s existing outstanding and committed but undrawn bank debt, does not exceed six (6) times the Borrower’s 2019 earnings before EBITDA.

– The MSNLF is for new loans originated from and after April 8, 2020 and has a maximum loan amount that is the lesser of (i) $25M; or (ii) an amount that, when added to the Borrower’s existing outstanding and committed but undrawn bank debt, does not exceed four (4) times the Borrower’s 2019 earnings before EBITDA.

Additional information on the MSELF can be found here and on the MSNLF can be found here.

Perhaps learning from the somewhat messy rollout of the PPP loans under the umbrella of the SBA, the Fed has decided to take a little time to work out details before these loans become available. Additional information is expected to be forthcoming following April 16, 2020, when the public comment period on the Main Street Business Lending Program will close. These programs are not likely to begin closing loans until early May and, given that lenders must hold 5% of these loans, borrowers will likely face satisfying not only Fed requirements but also lender covenants. As additional guidance is released, we will provide further updates.

MUNICIPAL LIQUIDITY FACILITY

In recognition that many state and local governments are hurting financially after spending untold amounts of money to combat the health effects of COVID-19, together with the virtually guaranteed diminished tax revenues expected, the Fed announced the creation of the Municipal Liquidity Facility (MLF) which will offer up to $500B in lending to states, heavily populated counties (with at least two million residents) and heavily populated cities (with at least one million residents). The Treasury is providing $35B in credit protection for the MLF. The MLF term sheet can be found here.

ADDITIONAL FED ACTIONS

In a huge nod to the Wall Street capital markets, the Fed previously announced on March 23, 2020 the creation and implementation of the following three facilities totaling $850B in credit (backed by $85B in credit protection provided by the Treasury):

– Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance (the PMCCF Term Sheet can be found here).

– Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds (the SMCCF Term Sheet can be found here).

– Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses through enabling the creation of asset-backed securities backed by student loans, auto loans, credit card loans, loan guaranteed by the SBA, and certain other assets. Notably, this iteration of the TALF (first used in 2008 to deal with the Great Recession) expanded its reach beyond the original investment grade securities included in the 2008 version (on which the Fed made money) to include below investment grade ETFs. The TALF Term Sheet can be found here.

Despite the huge rollout of new and enhanced programs by the Fed (supported with credit protection or equity by the Treasury), there is still a lot of authorized ammunition left as Congress in the CARES Act authorized the Treasury to provide $500B to support loan programs by the Federal Reserve – $46B of which was committed by the CARES Act to the aviation industry – leaving a staggering $454B to the discretion of Secretary Mnuchin. The loan program support provided by the Treasury to the Fed for all of the Fed loan programs announced to date is less than half of what has been authorized. This all but guarantees that we will hear of yet additional historical announcements in the coming days and weeks as additional programs are created and deployed.

U.S. Small Business Administration (SBA) Issues Suppemental Interim Final Rule For Affiliation Rules Applicable To Paycheck Protection Program (PPP) Loans

2 minute read

(Last updated April 5, 2020)

After a rocky start for many on the first day that SBA lenders were able to accept PPP loan applications, on Friday evening, April 3, 2020, the SBA issued its supplemental Interim Final Rule providing guidance to desirous PPP applicants whose affiliate relationships left them wondering whether they qualify to apply for and receive a highly popular and advantageous PPP loan. The link to the supplemental Interim Final Rule on affiliation rules can be found here).

Some Key Observations from the Supplemental Interim Final Rule on the PPP Affiliation Rules:

Applicants for a PPP loan are generally subject to the affiliation rules contained in 13 CFR 121.301. Treasury’s overview of the affiliation rules applicable to PPP loans dated April 3, 2020 (linked here) provides that affiliation found under any of the following four circumstances is sufficient to establish affiliation for applicants for purposes of determining whether the subject applicant qualifies for a PPP loan (most significantly, the “500 employees or below” requirement) (these four categories are set forth in 13 CFR 121.301(1)-(4) linked here):

(i)  Affiliation based on ownership.

(ii)  Affiliation arising under stock options, convertible securities, and agreements to merge.

(iii)  Affiliation based on management.

(iv)  Affiliation based on identity of interest.

A significant portion of the discussion in the supplemental Interim Final Rule was aimed at nonprofit and veterans organizations (which were previously not permitted to secure SBA loans) and, in most cases, the affiliation rules apply to nonprofits and veterans organizations the same as they do to business concerns. Notably, however, significant discussion is included explaining why the SBA affiliation rules “do not apply to the relationship of any church, convention or association of churches, or other faith-based organization or entity to any person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitutes a part of the exercise of religion.”

The supplemental Interim Final Rule confirmed that – in most cases – a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP (however, the supplemental Interim Final Rule has no effect on the statutory waivers included in the CARES Act for (1) any business concern with not more than 500 employees which has an NAICS code beginning with a 72, (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA, and (3) any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681)).

Like the previously-issued PPP Interim Final Rule, the supplemental Interim Final Rule outlining the applicable affiliation rules is immediately effective, notwithstanding the usual 30 day notice and comment period, and any comments received during the 30 day period after the supplemental Interim Final Rule is published in the Federal Register will be considered in future potential revisions.

For a better understanding of how the SBA affiliation rules may specifically impact your business or organization, please review the resources linked herein and consult with your legal and tax advisors if needed.

As a concluding note, for those interested, the PPP Borrower Application (updated 4-2-20) can be viewed here.

U.S. Small Business Administration (SBA) Finally Issues Much Anticipated Ineterim Final Rule For Paycheck Protection Program Loans

4 minute read

(Last updated April 3, 2020)

On Thursday evening, April 2, 2020, the night before SBA Lenders were supposed to start accepting loan applications under the Paycheck Protection Program (PPP) enacted by the CARES Act signed into law on March 27, 2020 by President Trump, the SBA finally issued its Interim Final Rule providing much-needed guidance to prospective PPP borrowers and lenders (the link to the Interim Final Rule can be found here).

While much of the PPP terms have remained the same, the SBA did make some changes and has made some other interpretations that are a bit different than originally understood.

Notable Changes and Insights:

The interest rate to be charged on PPP loans has increased from the 0.5% per annum previously issued by the U.S. Department of the Treasury to 1.0% per annum. The maturity date for PPP loans will still be 2 years as the considerable economic disruption by the coronavirus is expected to abate well before the two-year maturity date.

The SBA has clarified that businesses may not include independent contractors who work for them in the payroll cost numbers submitted in the loan applications nor in their forgiveness calculations. The SBA states that this is because the independent contractors can submit for their own individual PPP loans.  Please note that this seemingly conflicts with one of the PPP loan application form certifications which states “(t)he applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”  This discrepancy seems to hint that this may not be the last word on this issue. 

The Interim Final Rule will be effective immediately without regard to the usual advance notice and public comment periods.  Any comments that are received will be considered in connection with any potential revisions to the rule.

PPP lenders will not be required to comply with the SBA lending criteria set forth in 13 CFR 120.150. Instead, lenders are authorized to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness.  The PPP program requirements as set forth in the Interim Final Rule temporarily supersede any conflicting Loan Program Requirement (as defined in 13 CFR 120.10).

Lenders will be held harmless by the SBA for a borrower’s failure to comply with program criteria.

The Interim Final Rule states that the “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.” Stay tuned on this point if your intended borrower has one or more affiliates.

Ineligibility Standards were clarified, namely that you are ineligible for a PPP loan if:

(1) You are engaged in any activity that is illegal under federal, state, or local law;

(2) You are a household employer (individuals who employ household employees such as nannies or housekeepers);

(3) An owner of 20 percent or more of the equity of applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or

(4) You, or any business owned or controlled by you or any of your owners, have ever obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

The methodology (together with examples) for calculating the maximum amount that can be borrowed is provided in the Interim Final Rule.

The following items are not includable in the definition of “payroll costs”:

(1) Any compensation of an employee whose principal place of business is outside of the United States;

(2) The compensation of any individual employee in excess of an annual salary of $100,000, prorated as necessary;

(3) Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employees’ and employer’s share of FICA and income taxes required to be withheld from employees; and

(4) Qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127).

E-signatures and e-consents are permitted.

The Interim Final Rule clarifies that the amount of loan forgiveness can be up to the full principal amount and any accrued interest, meaning that the borrower will not have to pay anything back if the borrower uses all of the loan proceeds for forgivable purposes within the requisite 8 week period (assuming employee and compensation levels are maintained).

No more than 25% of the PPP loan forgiveness amount may be for non-payroll costs.

To apply, an applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and required payroll documentation.

What happens if PPP loan funds are misused? The SBA will direct you to repay those amounts.  If the misuse is knowingly done, you will be subject to additional liability such as charges for fraud.  Personal liability against shareholders, members, or partners who misuse funds is possible.

Underwriting requirements for PPP loans are spelled out in the Interim Final Rule as is the process for how agents assisting borrowers are to be paid by the PPP lenders.

PPP Loans may be sold on the secondary market after the loan is fully disbursed.

For a complete understanding of what is set forth in the Interim Final Rule, we recommend that the rule (linked above) be reviewed directly.

NOTE:  As the SBA has confirmed that the PPP loans will be issued on a “first come, first served” basis, we strongly recommend that qualifying applicants submit their applications as soon as possible.

DELAWARE SUPREME COURT UPHOLDS FEDERAL-FORUM-SELECTION PROVISIONS FOR ’33 ACT CLAIMS

3 minute read

Salzberg v. Sciabacucchi (opinion linked here) presented the Delaware Supreme Court with a clash of policies regarding forum-selection provisions: Helping Delaware corporations avoid the inefficiencies in having to defend claims under the Securities Act of 1933 in multiple forums, state and federal, versus preventing those corporations from barring the state courts of Delaware (the Chancery Court in particular) from adjudicating cases involving the internal affairs of Delaware corporations. Carefully parsing pertinent language from statutes and case law—drawing distinctions among “internal affairs,” “internal corporate claims,” and “intra-corporate affairs”—the Court managed to preserve and promote the former policy while doing no harm to the latter, as it held Delaware corporate charter provisions that require ’33 Act claims to be brought in federal court, rather than the state courts of Delaware, to be facially valid.

The Federal Securities Act of 1933 authorizes private lawsuits, for failures to comply with the Act’s duties of full and fair disclosure in registration statements and other documents, to be brought in either state or federal court. The ’33 Act also bars removal to federal court of cases filed under the Act in state courts. 15 U.S.C. § 77v(a). And in Cyan, Inc. v. Beaver County Employees Retirement Fund, the United States Supreme Court recently made clear SLUSA didn’t change that. 138 S. Ct. 1061, 1078 (2018). As a result, ’33 Act defendants often found themselves litigating multiple iterations of the same claims filed in different state and federal forums, with no way to consolidate them in a single court.

Several Delaware corporations sought to preempt this problem by incorporating into their charters a “federal-forum provision” (FFP) that requires all ’33 Act claims to be brought in federal court, rather than state courts. They relied on 8 Del. C. § 102(b)(1), which authorizes corporations to include in their charters “provision[s] for the management of the business and for the conduct of the affairs of the corporation.” The Delaware Supreme Court agreed with the companies, ruling that a charter provision or “a bylaw that seeks to regulate the forum in which such ‘intra-corporate’ litigation can occur is a provision that addresses the ‘management of the business’ and the ‘conduct of the affairs of the corporation,’ and is, thus, facially valid under Section 102(b)(1).”

The Court reversed the Chancery Court’s ruling that such FFPs ran afoul of “first principles” of Delaware corporate law and another provision of the Delaware Corporations Code, § 115, which bars bylaws or charter provisions that prohibit a plaintiff from bringing “internal corporate claims” in the Delaware state courts. Section 115 was enacted after § 102(b)(1) but did not expressly amend § 102(b), and so the Court concluded § 115 did not foreclose the FFPs in issue, even though they expressly prohibited ’33 Act claims from being brought in Delaware state courts.

Illustrating its reasoning in the diagram above, the Court explained that § 115 constrained only actions involving the “internal affairs” and “internal corporate claims” of Delaware corporations, but that ’33 Act claims were “intra-corporate claims” that lay beyond either of those first two categories. Nor, the Court said, were such claims purely “external,” like third-party tort and contract claims, that are beyond the purview of § 102(b)(1). Instead, the Court held, “FFPs regulating the fora for [’33 Act] claims involving at least existing stockholders are neither ‘external’ nor ‘internal affairs’ claims. Rather, they are in between in what might be called Section 102(b) (1)’s ‘Outer Band’” of authority—again, as illustrated by the diagram above. “[B]y creating a binary world of only ‘internal affairs’ claims and ‘external’ claims, the Court of Chancery superimposed the ‘internal affairs’ doctrine onto and narrowed the scope of Section 102(b)(1)—contrary to its plain language.”

The Supreme Court noted that its holding extended only to the facial validity of FFPs, and that any individual provision might not be enforceable “as applied” if, for example, it were the product of fraud or overreaching or for a variety of other reasons unique to that particular provision. Further, practitioners can expect debate about where various claims fall on the continuum of “internal affairs,” “internal corporate claims,” “intra-corporate affairs,” and “external affairs” of Delaware corporations. At present, however, Delaware corporations at least can deploy FFPs to shield themselves from the morass of multiple, parallel ’33 Act lawsuits in a variety of forums that cannot be consolidated in a single court.

For questions regarding this post, please contact the author:

COVID-19 FAMILY LAW UPDATE NO. 5

less than a minute

Stimulus checks for all—or almost all

On March 27, 2020, President Trump signed the $2 trillion emergency economic stimulus package passed by Congress. One of the most discussed portions has been the stimulus checks that will be issued to Americans meeting certain income thresholds.

The stimulus payments issued will not be taxable, and will not be subject to administrative holds for past due taxes or student loan payments but will be for past due child support payments.

State child support collection agencies such as the Texas Office of Attorney General Child Support Division report court determined child support arrearages to the United States Treasury. The Treasury Department can then intercept income tax refunds of someone who is in arrears and remit the refund to the state agency for ultimate distribution to the parent owed child support.

The latest available figures estimate that 3.3 million Americans are delinquent in their court ordered child support payments.

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