Small business owners looking for lifelines to keep their operations running are scrambling to apply for a Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  PPP Loans have caught the eye of small business owners because they provide for favorable terms, quick access to cash to support their operations, and the prospect of both deferment of repayment and outright forgiveness of the loan, for qualifying businesses eligible for the program.  With blistering speed, the U.S. Treasury issued a four-page “Fact Sheet” summarizing key features of the Program, and the Small Business Administration released its own brief overview of the Program with important details, including an interest rate of 0.5% and two year terms for covered PPP loans.  The CARES Act also includes a variety of provisions designed to encourage lenders to participate in the PPP Loan Program by lending to small businesses, and lending quickly.  For more information about the PPP Loan Program, please see our Client Alerts:  Does my Business Qualify for an Immediate Loan under the new CARES Act? and The Essential Differences Between an SBA Economic Injury Disaster Loan and a Payroll Protection Plan Loan.

PPP Loans under the CARES Act are designed for business concerns with not more than 500 employees, with certain exceptions for businesses in the accommodation and food services industries.  The 500 employee restriction requires examination of the legal structure for businesses with complex ownership structures, as the SBA’s affiliation rules require businesses under common control to aggregate employees.  Current SBA affiliation regulations include a broad standard, based on the concept of control, including the ability to control.  Affiliation exists, according to 13 CFR Section 121.103(a)(1), where one person or entity has the power to control the other.  The SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.  “In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.”  13 CFR Section 121.103(a)(5).

Accordingly, questions of eligibility and the determination of benefits available under the PPP Loan Program require a close look at an applicant’s ownership structure and organizational documents, as well as their U.S. federal income, payroll and information tax filings. 

Due to the finite amount of PPP Loan funding being made available by SBA lenders under the CARES Act and anticipated high demand, businesses are encouraged to act as quickly as possible to work with their lenders to “get in line” for the PPP Loan Program.  Working with existing banking relationships is suggested to expedite the process, given the “Know Your Customer” and anti-money laundering procedures required by lenders for new relationships. 

There may be an alternative under the CARES Act for businesses who are not eligible for PPP Loans due to the 500-employee size limitation. 

Title IV of the CARES Act creates a new $500 billion lending facility to provide liquidity to eligible businesses, states and municipalities. Direct loans of up to $46 billion are going to be available to distressed, industry-specific and essential companies, including air carriers and businesses critical to maintaining national security.  The remaining funds are to be used for loans, loan guarantees and investments in support of eligible businesses, states and municipalities, including “Midsize Business Loans”.

Eligibility for CARES Act Title IV Midsize Business Loans

“Eligible businesses” are U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act. Such businesses must have been (i) created or organized in the United States or under the laws of the United States and (ii) have significant operations in and a majority of its employees based in the United States.

Loan Timing and Applications

Regulations to implement the Midsize Loan Program under the CARES Act are being prepared, but there is no specific timeline for these regulations. Midsize Business loans must be made prior to December 31, 2020.

Repayment Terms

Midsized Business Loans must be secured by collateral and bear interest at rates determined by the Secretary of the Treasury, not more than two percent (2.0%) per annum. Maturities must be as short as practicable, not exceeding five years, with automatic payment deferment for at least 6 months.  

Conditions and Restrictions

Dividends - The borrower will be prohibited from paying dividends or making other capital distributions on its common stock during term of the loan, and for a year after the date the loan is no longer outstanding.

Stock Buybacks - The borrower cannot repurchase equity securities of the borrower, or any parent of borrower, that are listed on a national securities exchange (except to the extent required by a preexisting contract), during term of the loan, and for a year after the date the loan is no longer outstanding;

Compensation - The borrower must agree to employee compensation restrictions (including salary, stock, and bonuses) for a period ending one year after the loan is repaid as follows:

Employees receiving annual compensation over $425,000 cannot receive (a) more compensation than they received in 2019 (with exceptions for compensation determined through a pre-existing collective bargaining agreement) or (b) severance pay or other benefits upon termination in amounts greater than twice (2X) the 2019 compensation amount.  Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million.

Loan Forgiveness

Unlike Paycheck Protection Loans under the CARES Act, Midsize Business Loans are not eligible for loan forgiveness

Required Borrower Certifications

Midsize Business Loan borrowers will be required to certify the following:

Impact of COVID-19 - The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient.

Payroll - Proceeds of Midsize Business Loans will be used to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020.

Maintain Workforce - The borrower intends to restore not less than 90% of the workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the borrower no later than 4 months after the termination date of the public health emergency in response to COVID-19.

Domestic Status - The borrower is created or organized in the United States, domiciled in the United States, and has significant operations and a majority of its employees based in the United States.

No Bankruptcy - The borrower is not a debtor in a bankruptcy proceeding.

No Outsourcing - The borrower will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment.

Collective Bargaining - The borrower will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after; and will remain neutral in any union organizing effort for the term of the loan.

Businesses considering funding options under the CARES Act, including PPP Loans, Economic Injury Disaster Loans or Midsized Business Loans, are encouraged to seek advice from qualified legal counsel.  Your personal ECG attorneys are closely monitoring COVID-19 developments affecting businesses and are ready to provide support as you navigate the uncertainties and challenges during this pandemic.

Author: J. Michael Vaughn, Shareholder, Enterprise Counsel Group