Category: Business Organizations

COVID-19 Government Enforcement And Investigation Priorities: Minimizing Your Business Risk

The 2019 novel coronavirus (COVID-19) pandemic has changed our day-to-day routines and forced us to navigate many unique challenges in our personal and business lives. One challenge many businesses are facing is how to operate within the confines of the pandemic while complying with federal rules and regulations, both those that are well-established and those that have been promulgated to address specific needs brought on by COVID-19. While the pandemic has also affected the U.S. Department of Justice (DOJ) and other agency enforcement offices, there is no sign that government investigations into wrongdoing will decline. In some cases, government authorities are increasing their efforts to protect the public.

In this environment, it is important that businesses ensure operations are in accordance with DOJ and agency guidance so their actions do not trigger a government investigation. While some steps businesses can take to minimize the likelihood of an investigation were commonplace prior to the pandemic, others require a better understanding of specific guidance promulgated by DOJ and other agencies in the wake of COVID-19.

DOJ PRIORITIZATION OF EXPLOITATION CASES

The DOJ has taken clear steps to establish prioritization of investigations during the pandemic and will be focusing on exploitation cases and other COVID-19-related fraud schemes.

In March 2020, Attorney General William Barr directed all U.S. Attorneys to prioritize the investigation of these fraud schemes. Common schemes include:

  1. Individuals and business selling fake COVID-19 cures
  2. Phishing emails from entities posing as being associated with the World Health Organization or the U.S. Centers for Disease Control and Prevention
  3. Malicious websites or apps appearing to share COVID-19-related information to gain and lock access to devices until payment is secured
  4. Illegitimate or non-existent charitable organizations seeking donations
  5. Fraudulent billing by medical providers obtaining patient information for COVID-19 testing and then billing for other tests and procedures

To further that directive, the Attorney General’s Office also instructed each U.S. Attorney to appoint a Coronavirus Fraud Coordinator (Coordinator) for his or her judicial district. This Coordinator is to serve as legal counsel for his or her district on COVID-19 matters, direct the prosecution of COVID-19-related crimes, and conduct outreach and awareness initiatives regarding common forms of fraudulent schemes that seek to wrongly take advantage of needs and conditions resulting from the pandemic. The Coordinators in the Eastern District of Wisconsin and Western District of Wisconsin are Assistant U.S. Attorneys Kelly Watzka and Chadwick Elgersma, respectively.

DOJ is actively investigating and prosecuting wrongdoing during pandemic

Watzka, Elgersma and their colleagues at the various U.S. Attorneys’ Offices across the nation are encouraging the public to report fraud and other schemes resulting from the pandemic. Many U.S. Attorneys are contacting health care facilities for leads on potential schemes involving hoarding personal protective equipment and warning and advising the public on scams related to COVID-19 Economic Impact Payments. Additional measures include teaming with the American Association of Retired Persons (AARP) and other organizations to disseminate information to the public.

Since late March 2020, enforcement actions have been filed against providers and nonmedical personnel for promoting fake COVID-19 treatment. Charges have also been filed against those attempting to sell fake personal protective equipment to the U.S. Department of Veterans Affairs, attempting to smuggle mislabeled drugs into the U.S. to treat COVID-19, making false statements regarding accumulation and sale of personal protective equipment, and soliciting investments in a company fraudulently claiming funds would be used to market COVID-19 treatments and cures. Further, the DOJ estimates federal authorities have disrupted hundreds of internet domains that were used to exploit the pandemic to commit fraud and other crimes.

REDUCE YOUR RISK OF ALLEGATIONS OF FRAUD OR MISUSE OF GOVERNMENT FUNDS

While the cases above involve particularly egregious cases of fraud, it is important to remember that we are in the early months of COVID-19 relief programs and pursuit of COVID-19-related investigations. As the government continues to provide various aid packages to individuals and businesses alike, it will be important for all businesses, and especially those receiving federal funds, to take action to ensure compliance with the law relating to those funds in order to prevent future investigations. It is likely future investigations would be for less flagrant corporate actions.

Initiatives such as the White House’s National Emergency Declaration, which devotes $50 billion to containing the pandemic, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes a $2 trillion dollar stimulus package, will help relieve some of the financial stress impacting businesses. However, with these initiatives comes rules and regulations to ensure that the funds are used as intended.

The CARES Act also created a Special Inspector General for Pandemic Recovery (SIGPR) to “conduct, supervise, and coordinate audits and investigations” of the CARES Act’s financial assistance programs and any other U.S. Department of the Treasury programs established under the CARES Act. In so doing, the SIGPR will be meticulously monitoring those businesses that have received assistance under the CARES Act to prevent and detect fraud and abuse, and to facilitate the identification and prosecution of participants of fraud and abuse.

With these initiatives comes special concern for investigations, charges and enforcement actions under the False Claims Act (FCA).1 The FCA is the primary civil enforcement tool used by the DOJ to pursue those who fraudulently obtain relief money, and fraudulently bill under contracts with the government. The government’s employment of the FCA is likely to expand as small businesses and large corporations alike receive federal funds under the CARES Act, and enter contracts to meet the increased need for emergency goods and services.

Businesses of all sizes and operating in all industries should therefore take additional steps beyond their standard practices to limit the potential for allegations of fraud or misuse of government funds. These steps should not only reinforce pre-pandemic workplace compliance and internal governance standards, but should also involve a system for maintaining documentation and preservation of relief-related correspondence, documents and actions. Importantly, no business should ignore or loosen any of their internal governance procedures or any laws, rules or regulations in the name of expediency.

OTHER FEDERAL AND STATE AGENCY ENFORCEMENT POLICIES DURING COVID-19

Beyond DOJ, several federal and state government agencies have issued policy statements regarding their enforcement priorities and activities during the pandemic.

U.S. Securities and Exchange Commission

Unlike some agencies that have publicized their willingness to be flexible and considerate of the unique circumstances in exercising their enforcement authority, the Securities and Exchange Commission (SEC) has maintained that its enforcement division is fully operational and that it will be vigilant against threats targeting “Main Street” investors.

In its public statements, the SEC has emphasized the importance of maintaining market integrity and following corporate controls. Its recent enforcement activities have focused on fraud schemes and other illegal activity arising from the COVID-19 emergency. It has issued trading suspensions for a number of stocks, many for companies that purported to offer health products or services related to COVID-19. Additionally, the agency has cautioned about “fraudulent stock promotions, unregistered offerings, phony charitable investments, affinity fraud, and fake products offering high returns.”

Investment scams come in a variety of flavors suited to COVID-19. For example, investment in underfunded or fraudulent companies that supposedly make products or services related to COVID-19 prevention or treatment, alternative investments claiming to not be vulnerable to ongoing market risk, or investments purporting to offer unrealistic returns by taking advantage of the market volatility or low prices. In Wisconsin, the Department of Financial Institutions has specifically called out the threat of COVID-19-related charity scams.

In addition to investment scams, the SEC has warned about an increased potential for insider trading owing to a greater number of people who may have access to nonpublic information. The enforcement division has released a statement reminding directors, officers and employees of their obligations to keep nonpublic information confidential and to comply with insider trading laws. The statement likewise urged public companies to adhere to their established disclosure controls, codes of ethics and other regulatory obligations.

The SEC is also encouraging consultation with its staff to ensure that financial reporting standards are maintained, demonstrating enhanced focus on these issues, and may not be forgiving of regulatory lapses where consultation with the SEC was not undertaken. However, the SEC has stated that it is not looking to second-guess good faith attempts to provide investors and other market participants appropriately-framed, forward-looking information.

U.S. Department of Health and Human Services

In the wake of extraordinary efforts by health care providers to combat the COVID-19 pandemic, including through enhanced and novel collaborations among different entities, the U.S. Department of Health and Human Services (HHS) has issued blanket waivers with respect to the Stark Law, which generally prohibits providers from referring Medicaid or Medicare patients to entities with which they have a financial relationship. The blanket waivers permit such referrals for 18 specifically designated relationships, such as referrals by owners of physician-owned hospitals or owners of ambulatory surgery centers that temporarily convert to hospitals. The relationship must be related to the COVID-19 emergency (which is broadly defined) and must not raise concerns regarding fraud or abuse. The blanket waivers are retroactive to March 1, 2020.

Subsequently, in an April 3, 2020, policy statement, HHS’s Office of the Inspector General (OIG) announced that it will similarly relax enforcement of the Anti-Kickback Statute in relation to certain remuneration related to COVID-19. The Anti-Kickback Statute generally prohibits providing or receiving remuneration in exchange for patient referrals. The purpose of the OIG’s temporary policy is to afford flexibility to providers of health care services who may be unable to comply with technical aspects of the Anti-Kickback Statute. The policy permits providers to pursue certain financial relationships that would otherwise be prohibited, such as payments made by a facility or physician for space or equipment rental below fair market value, the purchase of items or services below fair market value, or payments to physicians that are above their normal contracted rate.

Importantly, while the Anti-Kickback Statute policy is based on the Stark Law blanket waivers, it is notably narrower than the blanket waivers, covering only certain of the 18 enumerated categories provided for in the blanket waivers. All other arrangements prohibited by the Anti-Kickback Statute are unaffected by this policy. Moreover, the Anti-Kickback Statute policy applies only prospectively to conduct occurring on April 3, 2020, and later. Like the blanket waivers, to qualify for the Anti-Kickback Statute policy conduct must be related to care provided in connection with COVID-19, must not create a risk of fraud or abuse, and must be adequately documented.

While these HHS policies show the agency’s willingness to accommodate the special needs of health care providers, the policies are complex and warrant careful review to determine how they may apply to your organization or practice.

U.S. Environmental Protection Agency

After early reports suggesting that the U.S. Environmental Protection Agency (EPA) was significantly curtailing enforcement efforts, the agency has since issued a more detailed temporary policy.

Under the Temporary COVID-19 Enforcement Policy, the EPA will not seek penalties for noncompliance with routine monitoring and reporting requirements, if, on a case-by-case basis, the EPA agrees that such noncompliance was caused by COVID-19. The same policy applies to administrative settlement agreements: the EPA will not seek penalties for noncompliance with basic reporting requirements provided such failure was occasioned by COVID-19. Businesses should continue to use notice provisions set forth in agreements to keep the EPA apprised of their compliance efforts.

Regulated parties must document the basis for a claim that the pandemic prevented it from conducting the routine monitoring and reporting. These case-by-case determinations will be made after the pandemic is over and the EPA reserves its right to disagree that any asserted noncompliance was caused by the pandemic.

The temporary policy does not excuse exceedances of pollutant limitations in permits, regulations or statues due to COVID-19. Regulated entities are expected to comply. The temporary policy does not affect businesses’ responsibility to prevent and respond to spills or releases, or to criminal violations. However, the temporary policy contemplates that the EPA’s response to compliance will be determined in light of the circumstances created by the public health emergency, provided that the facility contacts the EPA or their state agency as soon as possible.

Businesses that may encounter challenges complying with environmental laws and regulations as a result of COVID-19, due to workforce or resource issues, for example, should review the temporary policy carefully to determine whether it may apply.

As usual, states maintain parallel authority to enforce many environmental laws, and any exemptions allowed by the EPA may not be respected by state agencies. The Wisconsin Department of Natural Resources (DNR), in particular, has issued its own process for case-by-case determinations of flexibility from regulatory burdens. Regulated entities are encouraged to work with their DNR contact to discuss compliance assistance if COVID-19 justifies the assistance sought.

1Learn more about the FCA and COVID-19 through our recent article entitled Managing and mitigating the risk of qui tam actions in the wake of COVID-19.

Copyright © 2020 Godfrey & Kahn S.C.

For more on governmental actions on COVID-19, see the National Law Review Coronavirus News section.

Small Business Administration Loan Portal Compromised

Following the devastating impact of the coronavirus on small businesses, many small businesses applied for a disaster loan through the Small Business Administration (SBA) for relief.

Small businesses that qualify for the disaster loan program, which is different than the Paycheck Protection Program offered by the SBA, can apply for the loan by uploading the application, which contains their personal information, including Social Security numbers, into the SBA portal www.sba.gov.

Unfortunately, the SBA reported last week that 7,913 small business owners who had applied for a disaster loan through the portal had their personal information, including their Social Security numbers, compromised, when other applicants could view their applications on the website on March 25, 2020. On top of the turmoil the businesses have experienced from closure, owners now have to contend with potential personal identity theft.

The SBA has notified all affected business owners and is offering them free credit monitoring for one year. The notification letter indicates that the information compromised included names, Social Security numbers, birth dates, financial information, email addresses and telephone numbers.

Copyright © 2020 Robinson & Cole LLP. All rights reserved.

For more on SBA Loans, see the National Law Review Coronavirus News section.

Did Economic Uncertainty Make My PPP Loan Necessary?

The United States Department of the Treasury (Treasury) and the Small Business Administration (SBA) continue to issue information and guidance with respect to the Paycheck Protection Program (PPP) and the loans made available under it by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). One of the most recent items of note is the SBA’s updated PPP Loan FAQs, which in particular added FAQ 31 and FAQ 37. The answers to these two questions purport to provide guidance, retroactively, on one of the particular certifications that applicants were required to make in the PPP loan application process. This guidance, not coincidentally, came on the heels of negative press regarding the fact that larger companies (notwithstanding the CARES Act’s waiver of affiliation rules and employee sizes that made them otherwise eligible) were some of the recipients of funds appropriated to the PPP loan program.

So, what are the borrowers in the PPP to make of this? Below is an outline that may be helpful to a borrower that is evaluating next steps in light of this new “guidance” and how it plays into the certification initially made at loan application time.

Good Faith Certification

The PPP loan documents required the applicant to certify in good faith to several items. One of those certifications (Loan Necessity Certification) provided that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant?” Without having the commentary now available in the PPP Loan FAQs, early borrowers understood that the CARES Act did not require that the business had no other means of obtaining credit. That certainty and clarity was provided by the CARES Act itself, which provided that the requirement that an applicant be unable to obtain credit elsewhere was not applicable to the PPP loans. However, no other guidance or definitions were provided with respect to the Loan Necessity Certification.

Guidance

The SBA’s updated version of its PPP Loan FAQs includes, in pertinent part, the following new items:

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

These new FAQs, in effect, modify the Loan Necessity Certification such that additional factors are now part of that certification. Whether these new factors are applicable to all borrowers, or just the “businesses owned by large companies”, is unclear. However, the answers seem to indicate that all borrowers should assess their economic need for the loans with these other factors in mind: (a) their current business activity, and (b) their ability to access other sources of liquidity to support their ongoing operations in a manner that is not significantly detrimental to the business.

Suggested Steps and Response

So, what should a borrower do in light of these new factors, and apparent change or at least qualifier thrown in midstream?

Unless or until additional information or guidance is provided, we suggest that a borrower revisit the certification that it initially made, and do so with additional attention to the facts and circumstances existing as of the date of the Loan Necessity Certification. If those facts and circumstances have changed since that date to the positive for the borrower and its economic position, then it might be prudent to evaluate the Loan Necessity Certification at two additional points in time: (a) the time it received the loan proceeds, and (b) the date of the newest guidance.

If a borrower revisits its Loan Necessity Certification, and does not feel good about the initial certification, the government is allowing a borrower to return the PPP loan proceeds on or before May 7, 2020, and that borrower will be deemed to have made the Loan Necessity Certification in good faith. This means that the borrower will avoid the possibility of civil or criminal enforcement with respect to that certification.  Although we believe testing of the good faith certification should as of the date it was made, the recent developments and problematic guidance make it unclear whether other points in time might have bearing on the evaluation of a borrower’s Loan Necessity Certification. That is the reason for the mention of testing at additional points of time.

To assist in revisiting the initial Loan Necessity Certification, a borrower should consider working backwards to the point of time in question, and borrower should reduce to writing the consideration and analysis of the economic uncertainty and its needs for the PPP loan. Issues or factors that might be useful in the analysis include:

  • The current and projected impact of COVID-19 to the business, and the uncertainties surrounding those projections, including any communications from customers or clients regarding their level of business with the borrower and their respective economic conditions;
  • Recent history of the business and its performance in the wake of other economic downturns;
  • Existing levels of cash reserves or cash equivalents, and the borrower’s ability to access other sources of capital and what the terms and conditions of such sources of capital might be;
  • Current or projected plans for retention or reduction of workforce or payroll costs of such workforce, and the ability of borrower to reinstate such workforce to pre-COVID-19 levels;
  • Reaction and measures taken by competitors to COVID-19;
  • Actions or measures that borrower is considering, or has already taken, to address the economic uncertainty outside of workforce or payroll reduction.

For the borrower that revisits the Loan Necessity Certification and determines that it did make the certification in good faith, the written work product should be saved in case that part of a borrower’s PPP loan is questioned in the future. In that regard, the Treasury has advised that borrowers receiving $2 million or more of PPP loan proceeds will be audited. The audit will likely focus on the Loan Necessity Certification, as well as other aspects of the loan and loan process, including (i) number of employees, (ii) the determination of the size of the loan, and (iii) use of the loan proceeds.

If the consideration and analysis of the Loan Necessity Certification makes a borrower uncomfortable, then it should consult its advisors and maybe also consider returning the amount of any loan proceeds by May 7th.

© 2007-2020 Hill Ward Henderson, All Rights Reserved

For more on PPP loan administration, see the National Law Review Coronavirus News section.

Texas Governor Announces $50 Million Loan Program for Texas Small Businesses through Goldman Sachs/LiftFund Partnership

As discussed in our previous alert on this issue, the CARES Act established a $349 billion U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) to provide immediate access to capital for small businesses who have been impacted by COVID-19. On April 13, 2020, Texas Governor Greg Abbott provided additional guidance to Texas employers when he announced that investment banking, securities and investment management firm, Goldman Sachs, will partner with San Antonio-based nonprofit organization, LiftFund, to provide $50 million in loans to small businesses. Specifically, Goldman Sachs will provide the capital, and LiftFund and other community development financial institutions will administer the funds. Texas business owners can now apply for a PPP loan and find more information about the program on the LiftFund website.

“What this capital will do [is] provide these companies the resources they need to keep employees on the payroll for the remaining few weeks or so until businesses can begin [the] process of opening back up,” Governor Abbott said. Notably, Governor Abbott indicated that he intends to issue an executive order that will outline strategies to begin the gradual process of reopening businesses in Texas.

This is a matter that is evolving regularly.

Copyright © 2020, Hunton Andrews Kurth LLP. All Rights Reserved.

For more on small business loans for COVID-19-relief, see the National Law Review Coronavirus News section.

Board Oversight in the Age of COVID-19: Part Four

Part 4 of a weekly series detailing approaches that independent board members are utilizing to address coronavirus-related matters and highlighting emerging issues. Part 1, Part 2 and Part 3 of the series may be accessed on our website. 

The surreal nature of the current coronavirus environment in the United States continues. The number of new cases appears to have peaked in New York City and the Bay Area, while the S&P 500 ended the week down only about 13.5% year to date, and is higher now than on January 1, 2019. Yet, unemployment claims surged and are approximately 8.5 times higher than levels from the 2008–2009 financial crisis, and scores of businesses across the country remain shuttered and face bankruptcy. So the question of the past four weeks remains — where exactly do we go from here?

What Are Boards Doing Now?

Board Communications. Boards continue to evolve the nature of the periodic updates they are receiving. In addition to hearing about fund performance and operational matters, now some are including presentations from those asset management employees that focus on macro-economic themes, including the head of fixed-income research or those in similar positions.

Future Board Meetings. Boards continue to evaluate their June board schedules, and more are expecting to hold these meetings virtually. Some are also considering the need to hold additional telephonic board meetings to address items already deferred from meeting agendas in March, and expected to be deferred from June meeting agendas, as boards continue to assess the maximum length and most efficient structure of virtual board meetings.

15(c) Requests. Boards and their independent counsel continue to evaluate additional questions for 15(c) Request Letters to address COVID-19 matters. While the nature and extent of these requests is dependent on the types of periodic updates the board is already receiving, most are expecting to request and receive some form of “bring down” update from Fund management closer to the date of the meeting during which 15(c) renewals will be considered.

What’s Next – Emerging Issues

Below are some emerging issues that came to light over the past week, which boards may want to consider as they continue to exercise their fiduciary duties.

Liquidity: Some complexes are filing Form N-LIQUID with respect to funds that have breached the 15% limit on illiquid securities, and related reports are being made to the board, along with a remediation plan. Breaches may be due to a more careful review of holdings or to changes in the character of holdings. Alternatively, some complexes are reporting issues with liquidity categorizations provided by third party service providers causing Liquidity Risk Program Administrators to consider overriding or challenging the liquidity classifications provided. The SEC staff has been open and willing to discuss such filings and related matters, and we are aware that OCIE staff has been participating on some of these calls.

Service Providers: As the impact of the virus is expanding globally, boards are considering the types of risks that may be presented by service providers with operations in less developed countries, including India, where BCP plans may be less robust, do not contemplate “work from home” opportunities for all employees and may be harder to implement. This may be a heighted concern for ETFs, as these funds tend to have more unaffiliated service providers with offshore operations.

Index providers: Fund management has noted the benefit of advance communication with index providers to address the potential impact of market halts or bankruptcies of companies included in an index. While most index rebalances have been suspended, the impact of other market developments remains.

Back Office Issues: Fund management continues to consider operational matters, including the speed and efficiency of processing customer orders and the working relationship with financial printers, where production delays and other operational concerns are occurring.

Borrowing Relief: So far, we are not seeing many Funds utilizing this relief to access liquidity, as fund management considers operational issues.

Closed End Funds: The advantages of holding virtual annual shareholders meetings are being weighed against potential disadvantages, including that certain proxy solicitation firms may object to hosting a virtual meeting if it is contested and concerns that activists could take advantage of this format to hijack the meeting.

Interval Funds: Boards are closely monitoring management’s preparation for upcoming periodic repurchase offers to assess liquidity and valuation issues. In addition, boards are discussing whether repurchase amounts should be set at levels that seek to clear out shares tendered or to prorate, and considering the impact of such decisions on the management of the portfolio, continuing sales and liquidity for future repurchase offers.

© 2020 Vedder Price

For more on COVID-19 impact on various industries, see the Coronavirus News section of the National Law Review

Restriction on PPP Loans to Insiders and Their Close Relatives

On

Friday, April 3, we posted that under the Interim Final Rule issued by the Small Business Administration (SBA) on April 2, businesses owned by an officer, director, key employee, or 20% or more shareholders of a lender are not eligible for a Paycheck Protection Program (PPP) loan from that lender. As noted at the top of page 8 of the Interim Final Rule, “[b]usinesses that are not eligible for PPP loans are identified in 13 CFR 120.110.” Section 120.110(o) says “[b]usinesses in which the Lender . . . or any of its Associates owns an equity interest” are ineligible. “Associate” of a lender is defined in 13 CFR § 120.10(1) as “[a]n officer, director, key employee, or holder of 20 percent or more of the value of the Lender’s . . . stock.” Thus, any business in which any one of those types of individuals owns any equity interest would be disqualified from a PPP loan made by that lender.

Since that alert was posted, you should be aware of one other important aspect of loans under the PPP. According to 13 CFR § 120.10(1)(ii) and the SBA’s guidance in SOP 50 10, this restriction applies not only to a lender’s officers, directors, key employees, and 20% or more shareholders, but also to businesses in which a “Close Relative” of any such individual has an interest. A “Close Relative” is defined in 13 CFR § 120.10 as “a spouse; a parent; or a child or sibling, or the spouse of any such person.”

We have been asked numerous times since our last alert whether a bank’s Associates, including directors, could obtain a PPP loan from a lender with which they are not affiliated. We have no reason to believe that they cannot participate through an unaffiliated lender since 13 CFR § 120.110(o) only prohibits loans to businesses in which Associates of the Lender have an equity interest.

© 2020 Jones Walker LLP

For more on SBA administration of the PPP loans, see the Coronavirus News section on the National Law Review.

Small Business Administration Announces Access to Emergency Relief Loans (Updated April 6, 2020)

The Small Business Administration (SBA) announced on March 31, 2020, that small businesses and sole proprietorships may apply for Paycheck Protection Program (PPP) loans authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act starting Friday, April 3, 2020. Independent contractors and self-employed individuals may begin to apply for such loans starting Friday, April 10, 2020.

The CARES Act was passed by Congress and signed into law last week to provide emergency relief to American businesses in the wake of the disruptions caused by the COVID-19 pandemic. Among its most notable provisions, the CARES Act establishes the PPP, which will:

  • Enable small businesses to borrow up to $10 million that may subsequently qualify for forgiveness

  • Provide additional funding for the Economic Injury Disaster Loan (EIDL) program, pursuant to which certain businesses may qualify for loans of up to $2 million

  • Authorize grants of up to $10,000 for EIDL loan applicants.

UPDATE:

The interim final rules contain two changes to the information provided in the original alert. The SBA:

  • Announced that the interest rate on PPP loans would be 1.0% per annum (not the 0.5% per annum previously reported).
  • Clarified that repayments on such loans would be deferred for six months.

PPP Loans

Businesses and individuals may apply for PPP loans through any existing SBA lender or through any federally insured depository institution, federally insured credit union, Farm Credit institution or other regulated lender that is participating in the program. The SBA recommends consulting with local lenders to determine whether they are participating. A list of SBA lenders can be found at www.sba.gov.

A form application for PPP loans can be found at https://www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form. Applications must be submitted to a participating lender, not the SBA. Loan applications must be submitted and processed prior to June 30, 2020.

Eligibility

Businesses with 500 or fewer employees generally will be eligible to apply for PPP loans (with some exceptions for businesses with more employees in the hospitality and foodservice industries). The 500-employee threshold applies to all employees whether full-time, part-time or any other status, and SBA affiliation rules typically apply when counting employees. Passive business investments, gambling businesses, private clubs or businesses that limit membership for reasons other than capacity, religious organizations and other businesses listed in 13 CFR § 120.110 generally are not eligible for PPP loans.

Requirements

As part of the application, borrowers will be required to certify in good faith the following:

  • Current economic uncertainty makes the loan necessary to support ongoing operations.

  • Borrowed funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments.

  • Borrower will provide lender with documentation verifying the number of employees, payroll costs, and covered mortgage, lease or utility payments for eight weeks after receipt of the loan.

Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage, lease or utility payments. However, the SBA advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

No collateral and no personal guarantees will be required in connection with PPP loans.

Terms and Amount

PPP loans will mature after two years and accrue interest at an annual rate of 0.5%. Proceeds of the loans may be used to cover “payroll costs,” group health care benefit costs and insurance premiums, mortgage interest payments, rent, utilities and interest on debt existing prior to February 15, 2020 (Qualifying Expenses). Payroll costs include wages, commissions, salaries and similar compensation (provided that prorated compensation in excess of $100,000 annual salary will not be included as a payroll cost), federal payroll and income taxes, and certain sick leave and family leave wages.

The maximum total principal amount of a PPP loan will be the lesser of (a) $10 million or (b) the sum of two and one-half (2.5) times the business’s average monthly “payroll costs” during the year prior to the closing of the loan (subject to adjustment for seasonal workers) plus EIDL loans received after January 31, 2020, that are refinanced as PPP loans.

Extension and Forgiveness

The CARES Act provides for a possible deferment of repayment of PPP loans for a period of at least six months but not more than one year. The Act also provides for the forgiveness of a portion of the principal of PPP loans on a tax-free basis for federal income tax purposes (states have not yet announced whether they will offer a similar exemption). The amount forgivable will equal the sum of Qualifying Expenses paid with loan proceeds during the eight-week period following the date of the loan less 25% of the amount that payroll expenses were reduced during that eight-week period as the result of wage or salary cuts or the layoff or furlough of employees. However, the SBA has advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

EIDL Loans and Grants

EIDL loans, like the PPP loans, are generally available for businesses with 500 or fewer employees and the proceeds of such loans may generally be used for similar purposes. However, EIDL loans differ from PPP loans in several important ways. The maximum amount of EIDL loans is $2 million with a maximum term of 30 years. Borrowers apply directly to the SBA for such loans, for which the interest rate was 3.75% as of March 12, 2020. There is no provision for forgiveness of principal of EIDL loans. However, businesses that have secured EIDL loans may refinance such loans with PPP loans.

Businesses that apply for EIDL loans also may request a grant of up to $10,000 from the SBA. Such funds must be used to maintain payroll to retain employees or pay sick leave resulting from the COVID-19 pandemic, make rent, lease or mortgage interest payments, repay obligations that cannot be met due to revenue loss or satisfy increased materials costs resulting from supply chain interruption. Award of the grant is not dependent on approval of the loan.

© 2020 Wilson Elser

For more on PPP provisions in the CARES Act, please see the Coronavirus News section on the National Law Review.

Is a Pandemic a Material Adverse Event or Change in M&A?

Question already casting clouds over corporate deals.

Reuters has reported that Gray Television Inc. has withdrawn its $8.5 billion offer to buy Tegna Inc. due to the potential impact of the COVID-19 outbreak on regional TV stations like those operated by Tegna. The news agency also reported that Volkswagen’s CFO cited the “curveball” the outbreak has thrown at its liquidity in stating that, while the automaker remains interested in buying U.S. truck-maker Navistar, it must first “conserve cash as it shuts down plants and throttles back production.” The New York Times, meanwhile, has reported that Japan’s SoftBank is threatening to withdraw an offer to purchase as much as $3 billion of WeWork stock due to government investigations, but at a time when the outbreak has reduced the value of WeWork’s “shared office space” business model.

There is no question that the coronavirus pandemic – in addition to the devastating human toll – will deeply disrupt business. That includes mergers and acquisitions. For deals not yet consummated, the validity of withdrawing from a deal comes down to the “material adverse effects” or “material adverse conditions” clauses (MAE/MAC) in deal agreements.

Depending on the negotiated terms of an agreement, the MAE/MAC clause may pertain to a company’s financial condition, operations, properties, prospects, tangible or intangible assets, the ability to repay debt, capitalization, products, intellectual property, or liabilities.

The clause may have exceptions, excluding changes such as those:

• Resulting from actions one party takes at the direction or request of the other;
• Affecting the relevant industry, assuming the changes do not disproportionately affect the parties;
• Triggering the loss of value a company may suffer when the market, suppliers or employees learn of the deal;
• Impacting economic, market or political conditions, including those arising out of war, terrorism or, in this case, a pandemic.

These clauses vary as they are negotiated by the parties. So close examination of the clause is required to determine if pulling out of a deal is a viable option. Buyers will want to see if pandemics are included or specifically excluded.

Merging companies will also want to anticipate the slowing down of necessary approvals and antitrust reviews. For example, the DOJ Antitrust Division announced that for pending mergers or those that may be proposed, it may take an additional 30 days to complete its review of transactions after parties comply with document requests.

What’s the impact on “long-term earnings power over a commercially reasonable period”?

One of the leading cases cited in answering questions surrounding MAE/MACs outside of the pandemic context is the Delaware Chancery Court’s 2018 decision in Akorn, Inc. v. Fresenius Kabi AG (2018 Del. Ch. LEXIS 325). A healthcare company terminated a merger with a drug company, because the drug company, as a whistleblower revealed, misrepresented that it was compliant with important government regulations. The drug company tried to enforce the merger agreement, but the court found the misrepresentations had a material adverse effect on the company’s value. The healthcare company’s termination of the deal was valid, the court found. It went on to discuss the high bar set for determining the existence of a MAE/MAC.

“The ‘reasonably be expected to’ standard used in merger agreements to evaluate the deviation between a target business’s as-represented condition and its actual condition is an objective one,” the court held. “When this phrase is used, future occurrences qualify as material adverse effects (MAE). As a result, an MAE can have occurred without the effect on the target’s business being felt yet. Even under this standard, a mere risk of an MAE cannot be enough.”

In the case of a merger, the court said, whether a material adverse change occurred depends on “the long-term impact of the event,” which the court said required a “somewhat speculative analysis.” “The ‘would reasonably be expected’ formulation is best thought of as meaning likely to happen, with likely, in turn, meaning a degree of probability greater than five on a scale of one to ten. In other words, it means more likely than not.” The court said the context of the transaction and the words of the agreement must be examined.

To kill a deal by invoking a MAE clause, the court said, buyers face a heavy burden. “A short-term hiccup in earnings should not suffice; rather the MAE should be material when viewed from the longer-term perspective of a reasonable acquiror. In the absence of evidence to the contrary, a corporate acquirer may be assumed to be purchasing the target as part of a long-term strategy. The important consideration therefore is whether there has been an adverse change in the target’s business that is consequential to the company’s long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.”

The Delaware court said judges must not rewrite contracts to appease a parties who suddenly believe they have agreed to a bad deal. Parties have a right to enter into good and bad contracts and the law enforces both, the court said. However, turning to the facts presented in Akorn, and given all that needed to be established, the court concluded that “any second thoughts” the healthcare company about purchasing the drug company were “justified by unexpected events” at the drug company.

A justifiable question.

A typical MAE/MAC provision addresses material adverse changes in a company generally. Also, as we have discussed, the clause may delineate specific types of events that constitute adverse changes and list exceptions that would preclude bidders from leaving a deal or seeking a renegotiation.

Surveys, like the Nixon Peabody MAC Survey 2015, have shown that the most common MAE/MAC element is a change in the financial condition of the business, however some of the most common exceptions include changes in the economy and acts of God. Understanding those elements and exceptions, which differ from deal to deal, are key to any determination or litigation over whether financial turmoil facing a business as a result of COVID-19 means that a MAC/MAE has occurred.

Whether a pandemic and its related business effects will constitute a MAE/MAC remains an open question and certainly one which will be repeatedly litigated. However, in light of the various government mandates surrounding the COVID-19 crisis, the dire predictions for the economy from both official sources and highly credible non-official sources, and the recent stock market downside volatility, parties that invoke MAE/MAC clauses at this time appear to have supportable justifications.

© MoginRubin LLP

ARTICLE WRITTEN BY Dan Mogin and Jennifer M. Oliver  & Edited by Tom Hagy of MoginRubin.

SBA Loans Under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on Friday March 27, 2020, introduces the Paycheck Protection Program (the “PPP”) with $349 billion in funding and the goal of preventing job loss and small businesses failure due to losses caused by the COVID-19 pandemic.  The new PPP loan program is available for eligible small businesses, including sole proprietors, and non-profits, veterans organizations and tribal business concerns, to provide a forgivable loan to cover payroll and other costs.  Additionally, the CARES Act greatly expands the Economic Injury Disaster Loan Program (the “EIDL” Program) with $10 billion of additional funding for the SBA.

Businesses need to understand both programs as well as the additional financial and other relief that may be available under the CARES Act in order to make short- and long-term planning decisions.  The CARES Act provides assistance to many businesses that may not meet the customary small business thresholds.  Given the various qualification criteria, the programs and incentives enacted under the CARES Act must be evaluated separately for each business, considering industry, legal requirements and financial and other contractual commitments during this challenging time.

Paycheck Protection Program (“PPP”)

PPP loans are 100% federally guaranteed loans for small businesses intended for companies to maintain their payroll levels and allow partial loan forgiveness, as described below.  The loans are available until June 30, 2020 for eligible companies to cover the cost of:

  • Payroll
  • Health care benefits and related insurance premiums
  • Employee compensation (with some limitations for employees with salaries over $100,000 and exclusions for employees based outside the U.S.)
  • Mortgage interest obligations (but not principal)
  • Rent and utilities
  • Interest on debt incurred prior to the loan

The maximum amount of a PPP loan available to each borrower is equal to the lesser of: (a) $10 million, or (b) 2.5 x its average total monthly payroll costs, as defined in the Act.  Unlike most typical SBA loans, the PPP Loans are unsecured loans requiring no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere.  The PPP loan, to the extent not forgiven, has a maximum 10-year term and the interest rate may not exceed 4%.  PPP loans will be made available through SBA-approved lenders, who must offer a 6-12 month deferment on payment of principal, interest, and fees.

A borrower of a PPP loan is eligible for loan forgiveness for amounts spent during the 8-week period after the origination date, subject to proper documentation, on (i) rent, (ii) defined payroll costs, (iii) mortgage interest, and (iv) utilities, not to exceed the principal of the loan.  The amount of the PPP loan forgiveness may be reduced if the borrower reduces the number of employees or salaries and wages (for employees with annual salaries less than $100,000) during the 8-week period following the origination of the loan.  However, this reduction penalty doesn’t apply to the extent the borrower restores their workforce count and salaries/wages by June 30, 2020.

To be eligible for a PPP loan, a company must be either (i) a small business concern under the SBA regulations, or (ii) a business concern, nonprofit organization, veterans’ organization, or Tribal business concern that employs not more than 500 employees (or the number of employees in the size standard applicable to the borrower’s industry, which for some industries is up to 1500 employees).  Businesses in the Accommodation and Food Services Industry with more than 500 employees in multiple locations can avail themselves of the PPP loan program as long as they have 500 or fewer employees per location.

Notably, the CARES Act waives the SBA’s affiliation rules for determining PPP program eligibility for certain specific categories of businesses, including businesses in the Accommodation and Food Services Industry, businesses operating as a franchise that are assigned a franchise identifier code in the SBA Franchise Directory (available here), and businesses that receive financial assistance from a licensed Small Business Investment Company.  Given this limited waiver, subject to guidance expected from the SBA, the remainder of eligible businesses appear to be subject to the SBA’s affiliation rules.  These SBA rules would aggregate the number of an applicant’s full-time and part-time employees with those of their domestic and foreign affiliates.  Identifying which companies qualify as “affiliates” can be a fact-intensive inquiry under the SBA’s regulations, but the touchstone of affiliation is the ability to control a business concern.  Forthcoming guidance from the SBA will hopefully clarify the application of the SBA’s affiliation rules to PPP loan applicants.

Eligible companies must have been in operation on February 15, 2020 and must have, as of that date, had employees for whom the entity paid salaries and payroll taxes, or paid independent contractors. Additionally, when applying for a PPP loan, a borrower must certify that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

Economic Injury Disaster Loan (“EIDL”) Program

Another option for small businesses is the SBA’s existing EIDL Program, which was expanded by the CARES Act and provides for longer-term loans with favorable borrowing terms.  Companies in all 50 states, District of Columbia, and some U.S. territories are eligible for EDIL loans relating to economic injury caused by the COVID-19 pandemic.  While there are no loan forgiveness provisions applicable to EIDL loans, companies that have already applied for or received EIDLs due to economic injury attributable to the COVID-19 pandemic can seek to refinance their EIDL loans under the PPP to take advantage of the PPP’s loan forgiveness provisions.  Additionally, while companies may be eligible for loans under both programs, they are unable to seek recovery under the EIDL loan for the same costs that are covered by a PPP loan.

The CARES Act expanded EIDL eligibility for the period between January 31, 2020 and December 31, 2020, to include any business with not more than 500 employees, any individual operating under a sole proprietorship or as an independent contractor, and any cooperative, ESOP or tribal small business concern with not more than 500 employees. Subject to guidance from the SBA, these applicants would also appear to still be subject to the SBA’s affiliation rules governing financial assistance programs.  Entities previously eligible to receive SBA EIDLs, including small business concerns, private nonprofit organizations and small agricultural cooperatives, remain eligible for such loans under the more favorable terms authorized by the CARES Act.

To qualify for an EIDL under the CARES Act, the applicant must have suffered “substantial economic injury” from COVID-19.  EIDL loans under the CARES Act are based on a company’s actual economic injury determined by the SBA (less any recoveries such as insurance proceeds) up to $2 million.  EIDL loans may be used for payroll and other costs as well as to cover increased costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss and for other uses.  The interest rate on EIDL loans is 3.75% fixed for small businesses and 2.75% for nonprofits.  The EIDL loans have up to a 30-year term and amortization (determined on a case-by-case basis).

The CARES Act also permits applicants to request an advance of up to $10,000 to pay allowable working capital needs; the advance is expected to be paid by the SBA within 3 days.  This advance is essentially a grant and is not required to be repaid, even if the application is denied, but the amount of the advance must be deducted from any loan forgiveness amounts under a PPP loan, described above.

EIDLs under the CARES Act do not require personal guarantees for loans up to $200,000, but do require personal guarantees by owners of more the 20% of the borrower for loans in excess of that amount.  The CARES Act waives the requirement for the borrower to demonstrate that it is unable to obtain credit elsewhere.  However, unless changed by the SBA, it appears that the requirement for collateral on EIDL loans over $25,000 would still apply, and, in processing a borrower’s application, the SBA must make a determination that the applicant has the ability to repay the loan.  Further, the SBA can approve a loan based solely on the credit score of the applicant or other means of determining the applicant’s ability to repay the loan, without requiring the submission of tax returns, which should expedite approval of EIDLs during the covered period.

Given the very favorable terms of these two SBA loan programs and the potential for loan forgiveness under PPP loans, eligible small businesses who have been economically impacted by the COVID-19 pandemic should strongly consider taking advantage of these loan programs.  Applications for EIDL loans should be submitted directly to the SBA, while PPP loans will be available from SBA-approved lenders.

For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.

© 2020 Foley & Lardner LLP

For more on the COVID-19 CARES Act, see the National Law Review Coronavirus News page.

Many Companies With More Than 500 Employees Could Qualify For Stimulus Loans

As the nation scrambles to take advantage of the $2 trillion stimulus benefits in the CARES Act, numerous sources have stated that only businesses with 500 or fewer employees are eligible to apply for loans under the Act’s Paycheck Protection Program. In fact, businesses with far more than 500 could be entitled to participate in the program.

First, section 1102(a) of the Act applies to any business concern, nonprofit organization, veterans’ organization, or Tribal business having the greater of:

1) 500 employees or

2) the “size standard in number of employees established by the [Small Business] Administration for the industry” in which the business operates.

These “size standards” are contained in a list maintained by the Small Business Administration, organized by North American Industry Classification System (“NAICS”) code, which establishes the maximum number of employees that a particular entity operating in certain industries can have and still qualify under the Paycheck Protection Program. Depending on the applicable NAICS code, a business with significantly greater than 500 employees may still qualify. For example, petroleum refineries (with capacity of less than 200,000 barrels per calendar day) and turbine manufacturers with up to 1,500 employees could qualify, businesses in the crude petroleum extraction, natural gas extraction and coal mining industries could qualify if they have up to 1,250 employees, and entities in the electric power distribution and natural gas distribution industries may have up to 1,000 employees and still qualify. These are only a handful of examples of hundreds of industries contained on the size standards list. Given the Act’s “greater of” language referenced above, the 500 employee maximum will apply even if the SBA’s size standard table indicates a lower number for a particular industry.1 Bear in mind that the SBA generally considers both the actual business concern, as well as all of its affiliates, in determining whether an entity qualifies as small.

Second, businesses must count “employees” as that term is defined under Title I of the CARES Act, i.e., an individual retained on a full-time, part-time, or “other basis.”  While the SBA previously had not expressly defined the term “employee,” the CARES Act has adopted preexisting SBA guidance from the SBA’s HUBZone Program to provide an explicit definition. As a result, it is likely that the full SBA guidance will be used to calculate the number of employees under section 1102(a) of the CARES Act. Under that guidance, an “employee” is an individual who works a minimum of 40 hours per month, including any employees obtained through temporary employee agencies. Independent contractors may also be considered an “employee” where there is evidence of an employee-employer relationship, which is assessed under a multi-factor test. On the other hand, independent contractors who are not considered employees would not count toward the entity’s employee count for purposes of determining eligibility under the Paycheck Protection Program.

1 The SBA’s size standard list also provides standards for certain industries expressed in annual receipts. These are not relevant under the stimulus package. If an industry’s NAICS code reflects a dollar figure, but does not include a number of employees, the 500 employee limit will apply.

© 2020 Bracewell LLP

For more CARES Act analysis, see the Nationa Law Review Coronavirus News section.