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US Securities and Corporate Governance

CARES Act

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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

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

The U.S. Shows it CARES by Enacting Taxpayer-Friendly Modifications to Rules for Deducting NOLs

Section 2303 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes taxpayer-friendly modifications to the restrictions placed on the deductibility of net operating losses (“NOLs”) pursuant to the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).

One of the most significant changes was to reverse provisions of the 2017 Tax Act to allow taxpayers to carry back NOLs arising in 2018, 2019, and 2020 up to 5 years (including to years when the corporate tax rate was as high as 35% (i.e., prior to 2018)).   For parties that have engaged in M&A transactions during these years, the changes may provide opportunities to realize value from carrying back NOLs from past acquisition targets, depending on factors such as the acquisition agreement terms, the tax position of the target at and prior to the acquisition, and the extent of transaction tax deductions associated with the acquisition.

Here are a few fact patterns that may be applicable depending on the taxpayer’s particular situation and acquisition history:

  • With respect to buyers of a corporation in 2018 or later, consideration should be given to carrying back the corporation’s NOLs to obtain a refund of taxes paid, particularly if:
  • the corporation was paying federal income taxes in the years preceding the acquisition,
  • the corporation incurred significant transaction tax deductions that gave rise to NOLs, and
  • the acquisition agreement does not require refunds of taxes attributable to pre-closing periods to be paid over to

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
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