BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

Main Content

SEC reportedly investigating public disclosures by PPP loan recipients

We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.

This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests. There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice  Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.  While existing allegations appear focused on extreme behavior, as

Paycheck Protection Program: Analyzing Borrower Certification Risks

The shifting narratives around the government’s interpretations regarding eligibility for participation in the Paycheck Protection Program (PPP) has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

As part of the PPP loan application process, each borrower must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  This certification is one of seven certifications that borrowers must certify in good faith as part of the PPP loan application.  Neither the PPP loan application nor the text of the certification has been changed since implementation of the PPP on April 3, 2020.

With the backdrop of increasing criticism with regard to a small number of PPP borrowers, in a series of informal guidance releases, the Treasury and SBA have provided further guidance on what the Treasury and SBA appear to believe is required by this certification.

On April 23, 2020, the Treasury published FAQ 31 providing “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

Virtual annual meeting glitches impact shareholder participation

Because of the rapid shift from in-person to virtual annual meetings mandated by COVID-19 health and safety concerns, many companies held first-time virtual-only meetings, with both management and shareholders exploring the process in real time.  Not surprising, reports of virtual meeting glitches soon began to emerge.

Twenty minutes into the virtual-only annual meeting of Goodyear Tire & Rubber Company, shareholder John Chevedden was presenting his shareholder proposal (to allow shareholders to vote on bylaw and charter amendments) when the microphone cut out.  Chevedden filed a shareholder alert with the SEC requesting that the polls be reopened so Goodyear shareholders can vote based on the full text of his proposal presentation.  So far, no word from Goodyear on Chevedden’s allegation that management cut off the microphone.

Earlier this week, the Council of Institutional Investors (CII) sent to a letter to the SEC Investor Advisory Committee expressing concern about some virtual-only annual meetings early in the 2020 proxy season, citing anecdotal reports of problems including:

  • Shareholders struggling to log into meetings, in part due to control number snafus;
  • Inability to ask questions in some cases if the shareholder voted in advance by proxy;
  • Shareholders unable to ask questions during the meeting;
  • Possible cherry-picking of questions asked by shareholders and lack of transparency on questions asked by shareholders; and
  • Confusion on channels for shareholder participation, with shareholder proposal proponents required to use a different line than that used for general shareholders.

The CII urged public companies to mitigate the

U.S. SEC staff issues FAQs relating to extension of filing deadlines due to COVID-19

May 5, 2020

Categories

Late Monday, the SEC Staff published FAQs addressing several questions relating to the SEC’s March 25th Order extending filing relief for public companies unable to meet a filing deadline because of circumstances related to COVID-19 and previously discussed in our April 1 blog post.

  • Disclosure Required to Utilize Filing Extension (FAQ 1). To utilize the filing extension, a reporting company must disclose in the Form 8-K (or 6-K):
    • that it is relying on the Order;
    • a brief description of the reasons why the company could not make the filing on a timely basis;
    • the estimated filing date;
    • a company-specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
    • if the reason the report cannot be timely filed relates to the inability of a third party to provide any required opinion, report or certification, the filing should include as an exhibit a statement signed by the third party specifying the reasons they were unable to provide the document by the original due date.

When the delayed report is eventually filed, the company must disclose that it is relying on the Order and state the reasons why it could not file the report on a timely basis.

  • Shelf-Takedowns Permitted If Required Information Included in Prospectus (FAQ 2). A company that has utilized the Order to delay filing current or periodic reports can continue to complete shelf-takedowns from an effective shelf registration statement if it determines

U.S. Board oversight of “culture shock” as employees return to radically different workplaces

As states slowly move to reopen their economies, many returning employees will be shocked by the radical changes in their workplaces.  Collaborative spaces, ping pong tables and community break rooms, among other areas, will be transformed or closed for social distancing.  Employers will monitor and collect employee health information as never before.  Some employers already have announced they are exploring contact tracing and testing apps and wearable wristbands to alert employees if they are within six feet of each other or have come into close proximity with someone who has tested positive for COVID-19.

Directors will play a crucial role in overseeing these pandemic-related corporate culture and privacy challenges, far beyond typical oversight of operations and finance.  Directors have duties of care and loyalty to make well-informed decisions and act in the best interest of company stockholders.  To fulfill those duties and protect themselves under the business judgement rule, directors should require management to provide appropriate and timely reports  so they can monitor and consider up-to-date information in order to provide strategic direction and oversight in the rapidly-changing COVID-19 environment.

While there is always tension and management sensitivity about possible board over-reach into day-to-day operations, management and directors may need to work together more closely than in the past so that directors are fully informed in order to monitor management’s real-time decisions to re-open while fulfilling their oversight duties.

Conflicts in workplace protocols are likely, as management and directors grapple to balance risks and uncertainties with employee and customer privacy

Updating U.S. Form 10-Q Risk Factors During the COVID-19 Pandemic – New Risks and Risks That Aren’t Just Hypothetical Anymore

As more companies prepare to file Form 10-Qs, they should give special attention to risk factors – particularly to consider whether new risks have emerged or hypothetical ones have become real.  The Form calls for disclosure of any material changes from risk factors included in the last 10-K.  However, the COVID-19 pandemic presents unique challenges to responding to other requirements as well, such as instructions to address “known trends and uncertainties” in MD&A or to provide “such further information . . . as may be necessary to make the required statements, in the light of the circumstances under which they were made not misleading” in Rule 12b-20.  Careful consideration of risk factors can help complete the picture for investors. Although companies need only disclose what is known or reasonably available, it can be challenging to comfortably determine what elements of the current state of affairs will, with hindsight, be viewed as both “known” and material to investors.

In order to prepare their disclosures, companies should

  • utilize appropriate disclosure controls and procedures, and seek input from relevant constituencies, including operating units, HR, IT, the law department and finance, to determine the scope and depth of impacts
  • if a designated individual or team is addressing the company’s COVID-response, be sure they are included
  • review each of the 10-K risk factors to evaluate which ones might need to be updated or supplemented or whether new ones should be added
  • confer with IR and senior management to assess the state of existing knowledge

SEC Approves Additional NYSE Continued Listing Compliance Relief

— New NYSE Relief Proposal Tracks SEC-Approved Nasdaq Temporary Rule

The SEC approved yet another temporary measure related to the continued listing rules of the New York Stock Exchange on April 21, 2020.  This time, the NYSE sought and received immediate effectiveness of a proposed rule change to assist listed companies who may fall out of compliance with the $50 million market capitalization and $1.00 price continued listing requirements by providing a tolling period through June 30, 2020.  The NYSE originally sought SEC approval to suspend these requirements until June 30, 2020, citing the unprecedented market declines resulting from the ongoing COVID-19 pandemic, but the proposal was rejected.

Companies that fail to maintain either of these NYSE continued listing standards are typically notified by the Exchange of their noncompliance and then must promptly issue a press release and file any required Form 8-K.  Listed companies have up to 18 months to regain compliance with the $50 million market capitalization requirement and up to 6 months to regain compliance with the $1.00 trading price standard under the existing rules.   Under the temporary rule, the Exchange will continue to notify listed companies of any noncompliance, companies will still be required to issue a press release and file the required Form 8-K, but the cure periods will be tolled until June 30, 2020, meaning that the 18-month or 6-month cure period will be calculated as beginning on July 1, 2020.

The Exchange still intends to attach a “.BC” indicator to those noncompliant

Is it safe to open our trading window in the midst of a pandemic?

Toward the end of the first quarter of 2020, many public companies imposed a blackout period, during which directors and specific employees deemed insiders could not trade the company’s stock. The obvious purpose of these blackout periods is to prevent insiders from trading at a time when they are likely to have material nonpublic information about the soon to be completed quarter.  This year, insiders were also likely to have material nonpublic information about the early impact of the coronavirus on their business, including demand, supply chain, cancelled orders and the costs of complying with stay-at-home orders.  In an earlier alert, we noted that trading while in possession of early visibility into the impact of the coronavirus on the business could be deemed insider trading, and that the SEC expressed concerns about trading under these circumstances.

Typically, public companies plan to open the trading window to permit insiders to trade within a day or two of issuing their earnings release for the quarter.  Even in these uncertain times, many public companies may be able to maintain their normal protocols.  As they consider this issue, public companies should be sure that their earnings release contains sufficient disclosure around the impact of coronavirus on the business and management’s expectations of the impact going forward.  For some companies, waiting until the Form 10-Q is filed to open the window may be advisable.  For others, including an expanded earnings release that provides more fulsome analysis to the market about the coronavirus impact and then setting out

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,

The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.