Navigating the Legal, Economic and Business Challenges of the - PowerPoint PPT Presentation

Navigating the Legal, Economic and Business Challenges of the Coronavirus Pandemic W EBINAR 3 Nelson Mullins Riley & Scarborough LLP

CARES Act Stimulus Package: SBA Loan Programs, Mid-Sized Business Relief and Employer Pay Provisions Nelson Mullins Riley & Scarborough LLP COVID-19 Taskforce

Contact Information Ann Murray Suhail Seth Bret A. Cohen Partner Partner Partner Atlanta, GA Atlanta, GA Boston, MA (404) 322-6603 (404) 322-6149 (617) 217-4617 ann.murray@nelsonmullins.com suhail.seth@nelsonmullins.com bret.cohen@nelsonmullins.com Jonathan H. Talcott E. Peter Strand Partner Partner Washington, D.C. Washington, D.C. (202) 689-2806 (202) 689-2983 jon.talcott@nelsonmullins.com peter.strand@nelsonmullins.com 3

Agenda I. Summary of SBA Relief Programs (Jon Talcott) II. Paycheck Protection Program (Peter Strand, Jon Talcott, Suhail Seth) III. Emergency Economic Injury Disaster Loans (Peter Strand, Jon Talcott) IV. Title IV (Suhail Seth, Jon Talcott) V. Employer Pay Provisions of CARES Act (Ann Murray) 4

I. Summary of SBA Relief Programs in the Stimulus Package 5

Summary Three SBA Relief Programs in the Stimulus Package: 1. Paycheck Protection Program — o $349 billion for eligible businesses (generally under 500 employees) to be provided under SBA’s 7(a) loan program. Loans are 100% government guaranteed, up to $10 million based on businesses’ payroll, 2 year term at 0.5%. Loan forgiveness available. 2. Emergency Economic Injury Disaster Loans (EIDLs) — o $10 billion additional funding for EIDLs under the SBA’s Section 7(b)(2) emergency lending program. CARES Act also waives certain EIDL requirements, such as personal guarantee and collateral requirements, and relaxes and fast- tracks the application process. 3. Relief for certain existing SBA loans — o The CARES Act permits the SBA to pay the principal, interest and fees on these loans for six months beginning with the next payment due date. Loans already on deferment will receive six months of payment after the deferral period. SBA will also encourage lenders to provide deferments and will allow lenders, for up to one year, to extend the maturity of SBA loans in deferment beyond current limits. Title IV Assistance for Mid-Sized Businesses (500 to 10,000 employees) $454 billion reserved for direct lending by Treasury. Of this, a portion will go to a Mid-Sized Business Lending Program. 6

II. Paycheck Protection Program 7

Paycheck Protection Program • $349 billion • Generally available to companies with 500 or fewer employees o Important to consider affiliation rules • Loans approximately equal to lesser of 10 weeks’ payroll or $10 million • Loan forgiveness available for up to entire principal amount, subject to reduction for workforce and wage/salary reductions 8

Paycheck Protection Program • Who is eligible? • How much can you borrow? • How much loan forgiveness is available? • What are the permitted uses? • Other details • How do you apply? 9

PPP – Who is eligible? • Are you a business located in the U.S. and which operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, material or labor? o Application requires all 20% or greater owners that are individuals to be either U.S. Citizens or have Lawful Permanent Resident status. o Application disqualifies certain bad actors, felons, and if you have defaulted on an SBA or federal government loan or guarantee that caused a loss to the government. • Are you below the size thresholds for eligibility? o 500 or fewer employees (or such larger amount of employees if set forth in the SBA size standards) ▪ You must include affiliated companies’ employees in this calculation ▪ For hotels and restaurants, it is 500 or fewer employees per physical location . o Also available for traditional “small businesses” under the existing SBA size standards. 10

PPP – Affiliate Issues • Calculation of number of employees should include all affiliates (companies controlled by any person or entity controlling the recipient) o Private Equity or Venture Capital controlled companies must count all affiliates o Definition of “Affiliate” and “Control” is a ‘totality of the circumstances’ test, and the SBA generally takes an expansive view of what constitutes control. o Hotels and restaurants, certain franchises designated by the SBA, and companies that receive SBIC funding are exempt from affiliation rules and do not need to aggregate employees. • Affiliate determination is done on an entity by entity (or investor by investor) basis. o Affiliation determined by control (i.e., when one entity controls another, or two or more entities are controlled by a third party). o Power to control 50% or more of voting stock or negative covenants in investor rights agreements, such as blocking rights, may determine “affiliate” status among related investors and entities. • On March 31, 2020, Speaker Nancy Pelosi requested that the U.S. Treasury and SBA provide additional guidance and requested that startups be considered for some of the same relief as other small businesses. 11

PPP – Accommodation and Food Services • North American Industry Classification System (NAICS) code beginning with 72 : The following is a list of industries with a NAICS code beginning with 72: Hotels and Motels; Casino Hotels; Bed-and-Breakfast Inns; All Other Traveler Accommodation; RV Parks and Campgrounds; Recreational and Vacation Camps; Rooming and Boarding Houses, Dormitories, and Workers’ Camps; Food Service Contractors; Caterers; Mobile Food Services; Drinking Places (Alcoholic Beverages). • Eligibility : if the business has more than one physical location (with 500 or fewer employees per location) and is assigned a NAICS code beginning with 72. • Waiver of Affiliation Rules . • Example : Assume a corporation owns three hotels (NAICS Code 72) through three separate limited liability companies, and that each such subsidiary has fewer than 500 employees. Ordinarily, the corporation would not qualify as a “small business” because it is too large when you consider the total number of its affiliates’ employees, i.e., the employees of the three subsidiaries it controls. However, if the affiliation rules are waived, each such subsidiary may apply for a covered loan under the PPP. 12

PPP – How much can you borrow? • Lesser of $10 million or ~10 weeks of “Payroll Costs”: • Salary, wage, commission or similar compensation; payroll costs • Payment of cash tips or equivalent; o 2.5x average total monthly payments • Payment of vacation, parental, family, medical or sick leave; of payroll costs during 1-year period • Allowance for dismissal or separation; prior to date loan is made* • Payment required for the provision of group health care benefits, including insurance premiums; • You can also borrow the amount of any • Payment of retirement benefits; and 7(b)(2) disaster loans borrowed since • Payment of state and local tax assessed on the compensation of employees. January 31, 2020 that are eligible for Special Rules: refinancing (subject to $10 million o Only count salary up to $100,000 (any excess is disregarded). maximum) o Do not count any compensation of an employee whose principal place of residence is outside of the U.S. o Exclude qualified sick or FMLA leave wages for which a credit * 12-week period ending June 30, 2019 for seasonal is allowed under Families First Coronavirus Response Act. employers 13

PPP – Loan Forgiveness • Loan forgiveness is available for up to entire principal amount, subject to reduction based on workforce and wage/salary reductions o Treasury guidance says that at least 75% of loan funds must be used towards payroll costs, although this requirement is not in the CARES Act. • Loan forgiveness amount: o Amounts incurred or paid during first 8 weeks of loan for: ▪ Payroll costs ▪ Interest on mortgage obligations (but not principal or prepayment amounts) ▪ Rent ▪ Utilities (electricity, gas, water, transportation, telephone or internet access) o Will be reduced proportionately to any reduction in workforce, plus reduced by any decrease in salary/wages in excess of 25% for any employees earning less than $100,000 14

PPP – Loan Forgiveness – Reduction • Reduce the amount of forgiveness by both : o Reduction in workforce : ▪ Divide : The average number of full-time equivalent employees per month employed during the covered period; ▪ By , at your election: o The average number of full time equivalent employees per month employed from February 15, 2019 to June 30, 2019; or o The average number of full time equivalent employees per month employed from January 1, 2020 to February 29, 2020. • “Full - time equivalent” employee definition is unclear, but in the past the SBA has defined it as: • Each employee who averages 30 hours per week counts as 1 FTE; plus • All other employees’ hours are combined (up to 120 each), then divided by 120 o Reduction in salary/wages : ▪ The amount that total salary or wages for any employee that has decreased in excess of 25% during the covered period as compared to the most recent full quarter during which the employee was employed before the covered period. o Do not count any reduction of any employee that in any pay period in 2019 received wages or salary at an annualized rate of pay more than $100,000. • Cure provision available (see next page) 15