In Case You Missed It - Interesting Items for Corporate Counsel - July 2020

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  1. Over the last month, Congress and the SBA have continued to tinker with the Paycheck Protection Program (PPP), most recently extending the PPP loan application deadline to August 8, 2020. As of June 30, 2020, $132 billion remained available under the PPP. The current lay of the land is this: PPP loan terms and loan forgiveness terms are more attractive to borrowers, and taking a loan is less risky after the SBA walked back enforcement action threats. We expect that many borrowers, including those who returned or didn’t accept proffered PPP loans, will reconsider a PPP loan in light of continued economic uncertainty due to increased COVID-19 infection rates and stalled efforts to re-open businesses.

    It is interesting, to say the least, that the PPP morphed from desired, to toxic, and mostly back again in just a few short months. Just for fun, here’s how we got where we are:

    • March 27, 2020: The CARES Act amends Section 7(a) of the Small Business Act to add a new paragraph 36, which authorizes the SBA to guarantee up to $349 billion in PPP loans. The CARES Act also specifies the conditions to have all or a portion of the PPP loans forgiven. The Small Business Administration (SBA) scrambles to prepare guidance on the PPP.
    • April 2, 2020: The SBA publishes loan application forms the day before applications may be made.
    • April 3, 2020: Some banks begin accepting loan applications; others delay because they have no idea what to do or how the PPP works. The SBA publishes its first interim final rule and FAQs about the PPP.
    • April 3-23, 2020: Banks figure out how to process loans and, not surprisingly, give priority to their existing, larger customers (like any rational bank would). SBA loan guaranty authority is used up by April 16. Treasury Secretary Mnuchin throws a hissy fit when criticized because large, well-known or public companies got loans; Mnuchin threatens to throw people in jail for fraud; he says he means business. The SBA continues to trickle out guidance in the form of FAQs, interim rules, and letters.
    • April 23, 2020: The SBA “clarifies” that companies with other sources of funds probably can’t certify that the PPP loan is “necessary,” despite that the CARES Act specifies that unavailability of other sources of credit is not a requirement for a PPP loan, and says it will review all loans over $2 million to determine if the borrower validly certified that the loan was “necessary.” The SBA gives borrowers until May 7 to repay the loan without repercussions (FAQ 31). It says it means business.
    • April 24, 2020: Congress allocates another $310 billion for the PPP, raising the aggregate authorized amount to $659 billion.
    • April 24-May 5, 2020: The SBA continues to dribble out guidance.
    • May 5, 2020: The SBA extends the deadline to repay PPP loans without repercussions to May 14 (FAQ 43), but says it still means business.
    • May 13, 2020: The SBA tells those with loans under $2 million it won’t go after them for representing that their PPP loan was “necessary,” ostensibly to ensure SBA audit resources will be used most effectively. The SBA extends the repayment safe harbor to May 18, 2020 and backs off its threats of enforcement action as long as a borrower repays the loan when the SBA says it didn’t qualify, possibly suggesting it didn’t really mean business earlier and was just caught up in the moment (FAQ 46).
    • May 13-15, 2020: The SBA dribbles out more guidance.
    • May 15, 2020: The SBA publishes the loan forgiveness application, which answers some basic questions, but leaves others unanswered.
    • May 15-June 5, 2020: The SBA dribbles out more guidance, including some interim rules that establish items reflected in the loan forgiveness application, and some other stuff.
    • June 5, 2020: The Paycheck Protection Program Flexibility Act provides for a 24-week covered period, creates a safe harbor for FTE reductions based on compliance with federal guidance, reduces the portion of the loan to be spent on payroll to 60%, pushes out the first loan installment repayment date, and, for new borrowers, extends the loan term from two to five years.
    • June 5-16 , 2020: The SBA publishes interim final rules and guidance that largely make conforming changes to earlier guidance.
    • June 16, 2020: The SBA publishes a revised loan forgiveness application and a new simplified forgiveness application Form EZ for those relying on safe harbor exemptions to forgiveness reduction cutbacks.
    • June 16-26, 2020: The SBA issues additional interim final rules and guidance.
    • July 5, 2020: Congress extends the deadline for PPP loan applications to August 8, 2020.
    • July 6, 2020: After pressure from Congress, the SBA begins to publish information about PPP loan recipients, identifying by name those with loans over $150,000.

    The SBA has issued no new rules or guidance since June 26, despite many aspects of the PPP remaining unclear. That may be by design, but it kicks to the SBA review process critical loan forgiveness decisions. (We are not confident the SBA will make uniform decisions, and everyone should be braced for servicing lenders and the SBA to handle the process poorly.) In part because guidance is lacking, we believe most PPP borrowers will take good faith, aggressive positions to have the maximum loan amount forgiven, and that nearly all who reduced FTEs since February 15, 2020, will rely on the “compliance” safe harbor for those reductions. To help those borrowers document that reduced FTEs were due to direct or indirect compliance with federal guidance, we have compiled references to federal and Oregon COVID-19 guidance here.

    We have published a number of alerts about the PPP, including our latest on the application deadline extension and recent considerations, here. The Treasury Department’s website, here, remains the best place to go for rules, guidance, and forms. A PPP guide we find useful is here.

  2. The PPP cycled back into the news this month with the SBA’s release of PPP borrower information here. Everyone loves to hate, and a healthy sense of outrage can be cultivated by reviewing the list to see which of your competitors got loans or by reading accounts of The Undeserving here, here, and here. As a caution, and consistent with everything else about the PPP, there appear to be basic errors in the SBA data, including listing companies who never took out loans, and getting loan amounts and recipient names wrong. See, e.g., here, here, and here. The reported data also includes gobbeldy-gook on “jobs retained,” even though borrowers weren’t required even to speculate about that figure on loan applications. (Many borrowers are justifiably upset that reports show their loans resulted in no job retention, but our favorite: The owner of International Dunnage in Thunderbolt, GA, is credited with saving 500 jobs even though the company has seven employees, see here.) Who knows whether the SBA will iron out its data kinks before the Congressional hearings start.
  3. The Main Street Lending Program, a more traditional, federally-backed loan program intended to help mid-sized businesses that didn’t qualify for the PPP, has finally gone live. Our recent client alert, which includes links to a host of resources, is here.
  4. The NYSE extended its temporary rule easing shareholder approval requirements for listed company private capital raises, here. Commentary is here and here. In contrast, Nasdaq confirmed, here, that its temporary COVID-19 relief measures expired June 30, 2020, although it will “continue to closely monitor the impact of COVID-19.”
  5. Expect a Michigan Court’s ruling on COVID-19 business interruption insurance to be cited in the many, many insurance cases pending around the country (the oral ruling begins at minute 23:15 of the YouTube post of the hearing, here). In the case, the Court, applying Michigan law to the language in the insurance policy, held that “direct physical loss or damage” does not cover loss of use of the property due to government mandates: as the Judge put it, “viruses harm people, not property.” The Court also held that the unambiguous virus exclusion in the policy was just that. Analysis of the ruling is here and here. (Our editorial board, as a side note, is bitterly jealous that a Judge can characterize arguments as “just nonsense” without apparent repercussion—when we do that, even in obvious cases, readers invested in those arguments really seem not to like it. Go figure.)
  6. Considerations regarding SEC reporting on COVID-19 matters continue to trickle out:
    • The SEC issued supplemental COVID-19 disclosure guidance, here, and the SEC’s Chief Accountant issued a statement about the continued importance of high-quality financial reporting for investors in light of COVID-19, here.
    • Deloitte’s summary of COVID-19 financial reporting trends is here.
    • FEI reports on the state of internal control over financial reporting here, and the Institute of Internal Auditors reports on the Longer-Term Impact on Internal Audit of COVID-19 here.
    • A suggestion about what the SEC is looking for regarding impairment testing disclosures, including links to an SEC comment letter and response on the topic, is here.
    • A warning about how the effects of COVID-19 in SEC filings can hurt you in other contexts, like, say, as an admission that you have suffered a material adverse change, is here.
    • Analyses of COVID-19 and non-GAAP financial measures are here and here.
    • An SEC roundtable discussion on COVID-19 related disclosures is available here.
  7. In perhaps the least interesting U.S. Supreme Court ruling issued this session, it held, here, that disgorgement that does not exceed the net profit a securities fraudster has earned is permissible “equitable relief” under U.S. securities laws. Analysis is here and here.
  8. Finally, a few notes on fiduciary duties, politics, public disclosures, and social justice:
    • The D&O Diary reports, here, on a lawsuit against Oracle’s board, claiming it “consciously failed to carry out Oracle’s written proclamation about increasing diversity in its ranks” in violation of its duty of candor and federal securities laws.
    • A GAO report on public company disclosure of environmental, social, and governance (ESG) factors is here. The report, commissioned by U.S. Senator Mark Warner, notes the lack of a standardized ESG framework and the challenges to establish one. The report builds on earlier work by the SEC Investor Advisory Committee, here, which recommends that the SEC wade into an ESG reporting framework.
    • ESG factors are still ridiculed by many, who prefer to have companies focus narrowly on profit and financial measures, and consider them mushy-headed. That generally was the theme of SEC Commissioner Hester Pierce’s comments before the American Enterprise Institute, here. Pierce’s train begins with her first name; and stops at Hester Prynne, the Scarlet Letter, and public shaming; before arriving at a criticism of ESG measures and those who champion them. Commissioner Roisman’s more recent comments on ESG disclosure, here, aren’t as flamboyant as Pierce’s, but generally follow the same track.
    • The U.S. Department of Labor recently proposed rules, here, to bar ERISA plan fiduciaries from investing in vehicles when they understand the vehicle may subordinate returns to pursue non-pecuniary ESG objectives.
    • A review of ESG matters, and analysis of a recent petition requesting that the SEC adopt a narrow requirement that companies disclose the location of their assets so investors can assess the physical risk companies face related to climate change, is here.
    • Most companies with a profit motive prefer to stay out of the culture wars based on a sensible concern with alienating customers. That’s why it’s surprising that Goya’s CEO, Bob Unanue, seemingly chose a side by going on a media tour to defend his earlier public praise of President Trump (see here), praise which led to calls for a Goya boycott by some, see here, and Goya support by others, see here and here. With the benefit of the business judgment rule, even if Goya weren’t a closely-held family business, it’s difficult to imagine a successful breach of fiduciary duty claim against Unanue if Goya takes a financial hit from the boycott. Still, potentially alienating a key customer demographic by praising an unpopular political figure seems dumb (and so easily avoided, say by praising Trump’s leadership on the Hispanic initiative Unanue was at the White House to promote, rather than praising Trump himself). It can be tricky for a company to navigate public opinion in polarizing political times, but a little common sense wouldn’t hurt.

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James M. Kearney
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