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Public company PPP participants with liquidity alternatives beware: New U.S. Treasury guidance allows safe harbor for return of funds by May 7, 2020 in cases of insufficient need

Reportedly more than 100 public companies received more than half a billion dollars of funds available under the SBA’s Paycheck Protection Program.  On April 23, 2020, the U.S. Department of Treasury published new guidance suggesting public company participants who could not demonstrate sufficient need could be subject to scrutiny unless they return the funds by May 7, 2020.

PPP applications require certification that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations.”  To the extent that public companies may have had other reliable, accessible sources of capital markets funding, the borrower’s certification of economic need could be called into question.  In light of this new guidance, public companies should analyze the risks associated with participation in the PPP.

April 23, 2020 Treasury Guidance – PPP FAQ Question 31

The Treasury guidance focuses on sources of potential liquidity other than potential participation in the PPP. The U.S. Treasury posits: “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”.

Treasury provides a safe harbor for applications filed prior to

SEC continues 2020 whistleblower award surge; hotline vigilance is key during COVID-19 pandemic

Despite the challenges of the COVID-19 pandemic, the SEC continues its surge in whistleblower awards, announcing on April 20 a $5 million award to a whistleblower who provided critical evidence of wrongdoing that benefitted the SEC’s investigation, while also suffering unique hardship because of termination soon after raising concerns internally.  A few days earlier, on April 16, the SEC announced its largest award so far in 2020, more than $27 million to a whistleblower who objected to misconduct in an organization, after repeatedly and strenuously raising concerns internally.

Jane Norberg, Chief of the SEC Office of Whistleblower, noted that the April 20 award was the seventh announced by the SEC in the last month.  “These awards demonstrate the valuable contributions whistleblowers make to the protection of markets and investors and we encourage people to come forward with information about possible securities law violations,” Norberg said in the April 20 SEC press release.

The SEC has awarded approximately $430 million to 80 individuals since 2012.  All payments are made from an investor protection fund established by Congress that is funded entirely through monetary fines and penalties paid to the SEC by companies and individuals accused of securities law violations.

This noteworthy increase in awards reminds us that despite the unique communication and remote working challenges of COVID-19, companies must continue to promote access to hotlines or other avenues for employees, and potentially others, to report concerns and must maintain robust internal compliance programs.  Audit Committees and company management,

U.S. companies weigh pros and cons of paying quarterly dividends during COVID-19 pandemic

As COVID-19 moves across the U.S. decimating revenue sources, companies in severely impacted industries, including hospitality, retail and travel, among others, rushed to announce that quarterly dividend payments would be deferred, delayed, suspended or revoked, as the case may be.  Many simultaneously announced drawdowns on credit facilities, employee furloughs or layoffs and salary reductions, presumably as justification for the dividend change.

Companies with strong cash reserves, on the other hand, so far generally appear to be moving forward with regular dividend payments.  Their decision to continue to pay dividends as they are able despite the pandemic helps project stability in the U.S. securities markets and arguably strengthens investor relations, especially among retirees who depend on dividend income.

As economic fallout from the pandemic continues and the ripple effect of stay-at-home orders begins to impact nearly all businesses in some manner, companies may want to include disclosure forewarning that the board of directors continually monitors market conditions and will continually evaluate the company’s quarterly cash dividend program, balancing it with the company’s capital and financial strength needs.

In recent ISS Guidance regarding COVID-19 issues, ISS stated that this year it will support broad discretion for boards that change customary dividend practices and consider whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce.

Glass Lewis also recently recognized the need for flexibility during the pandemic, noting the reality of

U.S. SEC: “This quarter, earnings statements and calls will not be routine”

Companies face unprecedented challenges as they grapple with earnings releases and analyst and investor calls, all while trying to understand the impact COVID-19 has had on their businesses in less than one month.  While many companies had strong first quarters before the nation’s full-mitigation response to COVID-19, it is likely that many experienced a very different end to the quarter and start of the next.  It is also likely that as a result, some companies will miss previous earnings projections.

The SEC and the exchanges (NYSE and Nasdaq) are clearly making an effort to help companies during this period of uncertainty. SEC Chairman Jay Clayton has been very vocal in encouraging public companies to provide prompt earnings information as well as information about past and future efforts to address the effects of COVID-19, regardless of whether they are in a position to file reports on time.

Most recently, Chairman Clayton was joined by William Hinman, the Director of the Division of Corporation Finance, in a joint statement detailing their observations and requests “[i]n an effort to facilitate robust disclosure and engagement.”  The NYSE then sent emails to its listed companies directing attention to the joint statement.  Here are some key takeaways:

  • This quarter, earnings statements and calls will not be routine. SEC staff encourages disclosure to be as timely, accurate and robust as practicable under the circumstances.
  • Companies are urged to provide as much information as practicable about their current operating status and future operating

US – COVID-19: Delaware Governor modifies emergency declaration to address virtual meeting matters

The Delaware Governor modified the state’s existing emergency declaration on April 6, 2020 to, among other things, allow stockholder meetings currently noticed for a physical meeting to pivot to virtual meetings to the extent permitted by law during the state of emergency, as well provide a method of adjournment of a meeting noticed for a physical location to a virtual meeting in case of public health threats and restrictions on personal travel.

The  declaration provides that if, because of COVID-19 pandemic public health threats, the board of directors wishes to change from a physical meeting location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute as to valid means of giving notice to stockholders.

In addition, if it is impracticable to convene a currently noticed stockholder meeting at the physical location because of COVID-19 public health threats, the corporation may adjourn the meeting to another date or time, to be held by remote communication, by providing notice of the date, time and means of remote communication by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute, which doesn’t address the method of adjournment under these circumstances.

While the guidance above is welcome

Selected requirements of the Economic Stabilization Provisions of the U.S. CARES Act

As discussed in BCLP’s recent client alert, the CARES Act provides broad relief to a cross section of the country.  Title IV, focused on economic stabilization, has particular relevance to public and other larger companies. We highlight some of the noteworthy requirements below.

Conditions of Loans and Loan Guarantees.  As discussed in our alert, the Treasury Department is authorized to make loans, loan guarantees and other investments in eligible businesses where credit is not otherwise reasonably available, including: air carriers, ticket agents and aircraft services companies; cargo airlines; and “businesses critical to maintaining national security,” .

Federal Reserve Programs.  Additional funds will be available to Treasury to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities.  Eligible businesses must be organized and conduct significant operations, and have a majority of their employees, in the U.S. The Act directs Treasury to seek implantation of a program to finance lenders to make direct loans, to the extent practicable, to mid-sized companies (including many nonprofits) with between 500 and 10,000 employees, with interest no higher than 2% per annum and no payment obligation during the initial months.

Selected Conditions.  Under both the Treasury and Federal Reserve programs, until one year after any loan is repaid:

  • No Stock Repurchases. The company (and, under the Treasury program, its

U.S. emerging trends in Form 8-K filings disclosing COVID-19-driven compensation changes

Companies filed a flurry of Form 8-K filings last week announcing voluntary executive officer compensation reductions driven by the COVID-19 pandemic.  While some companies disclosed the compensation changes under Item 7.01 or 8.01 on Form 8-K and others simply issued a press release, we saw an uptick in the number of companies making the disclosure under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with the principal executive officer, principal financial officer or named executive officer.

Among companies making the disclosure under Item 5.02(e) of Form 8-K (Ford , Nordstrom , Lands’ End and Briggs & Stratton, among others), the executives generally reduced their compensation by at least 20% (and in some cases, 50% or 100%), seemingly taking the position that salary decreases of 20% or more were generally viewed as material amendments to the executives’ compensation arrangement (in parallel to the view that salary increases of 20% or more would generally would be viewed as material), although it is difficult to predict how long the reductions will continue and the true impact on the executives’ overall compensation.

Companies relying on Item 7.01 or 8.01 or a stand-alone press release likely were comfortable that based on their specific facts and circumstances, either that the decrease was not material to the executives’ compensation arrangements or, in the case where employment agreements were in place, perhaps by analogy to SEC CDI 117.13, that

U.S. TriBar Committee opines on validity of electronic signatures in new comment; SEC relief on signatures on filings during COVID-19

TriBar Committee.  Last week the TriBar Opinion Committee issued a new Comment concerning the use of electronic signatures and third-party opinion letters, in response to COVID-19 and its impact on the giving of opinions on the execution of agreements signed electronically.  Although virtual closings have been the norm for some time, the Committee observed that COVID-19 has increased focus on giving opinions on the execution of agreements signed electronically. The Comment explains the legal basis for the conclusion underlying those opinions that the electronic signatures on those agreements have the same legal effect as manual signatures, focusing on the UETA and E-SIGN.

For more information on e-signing, see BCLP’s client alert on Executing U.S. Contracts While Working from Home.

SEC Relief.  On the same day, and in response to COVID -19, the SEC staff issued a statement, that while compliance with Rule 302 of Regulation S-T is still expected, they will not recommend enforcement action if:

  • the signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
  • such document indicates the date and time when the signature was executed; and
  • the filer establishes and maintains policies and procedures governing this process.

As one example, the statement notes that if a signatory is teleworking,

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