(Re-)assessing need and maximizing PPP Loan forgiveness May 13, 2020
Presenters Agenda Mac Bernstein 1 Paycheck Protection Program update Partner, Federal Law and Policy T: 202 799 4302 mac.bernstein@dlapiper.com 2 (Re-)assessing need Shaked Hoter Associate, Corporate T: 202 799 4238 shaked.hoter@dlapiper.com 3 Positioning for forgiveness Michael “Mick” Helmicki Client Development Executive 4 A look ahead – what’s next T +1 703 773 4142 michael.helmicki@us.dlapiper. com Tami Howie Partner, Corporate T +1 202 799 4555 tami.howie@us.dlapiper.com The information provided is not intended to constitute legal advice; instead, Ryan Vann all information, content, and materials are for general informational purposes Partner, Employment only. T +1 312 368 4410 ryan.vann@us.dlapiper.com www.dlapiper.com 2
Setting the stage ‘‘ ▶ The PPP was designed to benefit “small” businesses to help save jobs and We have noted the large protect payrolls in an unprecedented time number of companies that have appropriately ▶ Accordingly, PPP loans have attractive features including the absence of reevaluated their need for guarantees and the ability to seek forgiveness for all or part of the loan PPP loans and promptly ▶ As a result, applicants need(ed) to certify that the loan was “necessary” in repaid loan funds in light of “current economic uncertainty” and meet other eligibility and usage response to SBA guidance criteria reminding all borrowers of an important certification ▶ A second tranche of $310B in PPP funding passed into law on April 24 required to obtain a PPP ▶ After a number of publicly held firms qualified for the program, Treasury ’’ loan. said these and other companies with “adequate sources of liquidity” have until May 7 to repay the loan in full; subsequently extended to May 14 Joint statement by Secretary ▶ Congressional oversight provisions, including appointment of the House Steven T. Mnuchin and Select Subcommittee on the Coronavirus Crisis (with subpoena power) – Administrator Jovita sent letters May 8 demanding 5 large companies return PPP loans Carranza on April 28, 2020 ▶ Uncertainty remains – it is imperative to work with advisors to work through company specific issues relating to both need and forgiveness www.dlapiper.com 3
PPP timeline: where we’ve been May 5: Q43-Q44 April 23: Q31 Published Published TREASURY TREASURY TREASURY TREASURY May 6: Q45 April 24: Q32-35 GUIDANCE GUIDANCE, GUIDANCE GUIDANCE Published Published FUNDS RUN OUT May 7: Date to March 27: April 24: repay loan in full for Foundation for the April 6: Q2-Q18 Additional $310B public and other Paycheck Published Allocated to PPP companies with Protection April 8: Q19-20 April 26: Q36 “adequate sources Program set Published Published of liquidity” Week of: March 23 March 30 April 6 April 13 April 20 April 27 May 4 May 11 April 3: April 13: Q21-Q25 April 28: Q37 May 14: New date Q1 Published Published; Published to repay loan in full April 14: Q26-28 April 29: Q38-Q39 for public and Published; Published other companies April 15: Q29 May 3: Q40-42 with “adequate CARES ACT TREASURY TREASURY TREASURY Published; Published sources of ENACTED GUIDANCE GUIDANCE & GUIDANCE April 16: $349B liquidity” ADDITIONAL PPP Allocated & FUNDING Applications Closed April 17: Q30 Published www.dlapiper.com 4
Blueprint for the days ahead (Re-)assess need Position for forgiveness Explore alternative programs Generally, loan amounts will be forgiven Consider (re-)convening the board or Others stimulus related programs may be as long as: management to reconfirm/reconsider (more) applicable based on Loan proceeds are used to cover “necessity” certification in light of new • circumstances: payroll costs, and most mortgage guidance Deferral of employer taxes • interest, rent and utility costs over the Employee retention tax credit • eight week period starting for the time Board or management to consider Other tax programs • that the loan proceeds are disbursed; repayment (before or after May 14 and on BARDA and other grant programs • and accelerated or standard terms) vs. Main Street Lending Program • Employee and compensation levels are forgiveness • maintained Potentially a recertification of “necessity” For all loans over $2M, Secretary Mnuchin has indicated full review Best option based on risks & circumstances Best practice for loan use, tracking & audit Alternatives to PPP that may be applicable www.dlapiper.com 5
Need: what does it mean? ► Additional guidance (Q31) issued on April 23, 2020, clarified that a loan’s “necessity” needs to be determined in light of the applicant’s “current business activity” and “ability to access other sources of liquidity sufficient to support…ongoing operations in a manner that is not significantly detrimental to the business” ► Q31 and subsequent IFRs also introduced that applicants that applied before the guidance would be deemed to have made the certification in good faith if funds were returned by May 14 ► Continued focus on the facts and circumstances: - changed circumstances may matter (new company financing; improved outlook; etc.) - use of funds/other post loan activities ► Additional scrutiny will likely be based on: - the borrower’s records and contemporaneous notes - consideration given to other sources of capital - loans over $2M (and possibly other loans) for which forgiveness is ultimately sought www.dlapiper.com 6
Assessing and documenting need ► Companies strongly urged to consider all the facts and circumstances relating to loan necessity (including company’s current business activity and access to other sources of liquidity that won’t be significantly detrimental to its business), and to document in a board resolution (and in a memo to the file) the reasons in good faith company meets this revised “need” standard ► Information for PPP Loan Memo – memo should consider the following factors in connection with establishing/reconfirming “need” for PPP Loan eligibility: loss of any current customers confirmation no new investors have offered an alternative • • report of the loss or extension of AR from customers equity/debt financing, and acknowledgement that no new • anticipated reduction in future customer/sales pipeline investors are likely to offer an alternative financing given • any prior furloughs/RIFs/salary reductions the current state of the business and the economic crisis • future furloughs/RIFs/salary reductions prevented or any other information evidencing the difficult financial • • delayed by PPP Loan state of the company (for example, significant liabilities, availability of debt financing ( eg , confirmation of no delayed or prolonged product development, anticipated • available offers for alternative debt financing at this events of default under credit facilities, etc.) time) an assessment of cash balances as compared against the • availability of equity financing from existing investors monthly burn rate and anticipated increased liabilities • ( eg, confirmation of no available offers for alternative ( eg , under credit facilities) equity/debt financing at this time) confirmation of fear that business and economy will • become worse in the future www.dlapiper.com 7
Post PPP Loan planning: intended uses ▶ We encourage directors and management to work with the company to underscore limited uses and, although not specifically required by the PPP, ensure that funds are segregated into a separate bank account: - Loan proceeds can only be used for the following: o Payroll costs (75% or greater of loan proceeds) o Interest on mortgage obligations, incurred before February 15, 2020 o Rent, under lease agreements in force before February 15, 2020 and o Utilities, for which service began before February 15, 2020 (NOTE: the CARES Act limits utilities to electricity, gas, water, transportation, telephone or Internet access (CARES Act § 1106(b)(4).) - Draw a bright line: the company to open a new bank account that segregates loan proceeds o No co-mingling of funds o Clean audit trail - Severe criminal and civil penalties for improper use of funds - Expect more clarification from the SBA on forgiveness in the coming weeks www.dlapiper.com 8
Post PPP Loan planning: payroll costs ▶ Payroll costs specifically not eligible for loan ▶ Payroll costs that are eligible for loan forgiveness: forgiveness: - Payments to an independent contractor - Salary, wages, commission or similar - Cash compensation in excess of $100,000 compensation (recent SBA guidance states - The employer’s share of federal payroll that payroll costs include all cash taxes compensation, including a housing stipend - Qualified sick leave and qualified parental or allowance) leave wages for which credit is allowed - Payments for vacation, parental, family, under the Families First Coronavirus medical or sick leave Response Act (FFCRA) - Allowance for dismissal or separation - Payments for the provision of group health care benefits, including insurance premiums - Payments for retirement benefits - State or local payroll taxes (SUTA) www.dlapiper.com 9
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