April 10, 2020 by Leonardo Trivigno and Matthew J. Schwartz
On March 27, 2020, this firm issued an advisory that summarized the Paycheck Protection Program (“PPP”) provisions in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Recently, the Treasury Department and the Small Business Administration (“SBA”) issued interpretative guidance regarding the PPP. Based on this guidance, this advisory addresses some common questions that have arisen regarding the PPP.
1. Are all Borrowers with 500 or More Employees Per Se Ineligible for a PPP Loan?
No. The recent guidance has made clear that the following businesses or non-profits are eligible to receive a PPP loan: (i) a business or non-profit that employs less than 500 employees, (ii) a business or non-profit that employs less than the size standard in number of employees established by the SBA for the business’ primary industry, or satisfies the revenue based size standard for its primary industry, and (iii) “small business concerns” as defined in the existing statutory and regulatory definition under Section 3 of the Small Business Act, 15 U.S.C. § 632.
2. Should Employees of an Affiliate Be Included When Calculating an Applicant’s Employees?
Yes. For the purposes of determining the number of employees a PPP applicant has, the applicant’s employees are considered together with the employees of its affiliates. Businesses are affiliates of each other when (i) one controls, or has the power to control, the other, or (ii) a third-party controls, or has the power to control, both. It does not matter whether such control is direct or indirect through a third party, or whether it is actually exercised, so long as the power to control exists. However, the CARES Act waives the generally applicable affiliation rules for (i) any business with 500 or fewer employees that is assigned a North American Industry Classification System code beginning with 72 (Accommodation and Food Services), (ii) franchises that are assigned a franchise identifier code by the SBA, and (iii) any business that receives financial assistance from an SBA-licensed Small Business Investment Company. Accordingly, a business that fits into any of those three categories will be considered on a stand-alone basis for PPP eligibility purposes.
Affiliation may be based on (i) ownership, (ii) stock options, convertible securities or agreements to merge, (iii) management, or (iv) identify of interest.
i. Affiliation Based on Ownership
An applicant is an affiliate of an individual, concern or entity that owns or has the power to control more than 50% of the applicant’s voting equity. If no individual, concern or entity is found to control, the SBA will deem the Board of Directors or President or Chief Executive Officer (“CEO”) (or other officers, managing members or partners who control management) to be in control of the applicant.
The SBA will deem a minority shareholder to be in control of the applicant, if it has the ability, under the applicant’s charter, by-laws or shareholder’s agreement, to prevent a quorum or otherwise block action by the Board of Directors or shareholders. If a minority shareholder irrevocably gives up these rights, it will not be deemed to be an affiliate of the applicant (assuming no other relationship exists that would otherwise trigger the affiliation rules).
ii. Affiliation Based on Stock Options, Convertible Securities and Agreements to Merge
The SBA considers stock options, convertible securities and agreements to merge (including agreements in principle) to have a present effect on the power to control an applicant, and will treat such options, securities and agreements as through the underlying rights have been exercised. Stock options, convertible securities and agreements to merge that are subject to conditions precedent which are incapable of fulfillment, speculative or unenforceable, or where the probability of the transaction (or exercise of the rights) occurring is shown to be “extremely remote” are not given present effect.
A party that controls an applicant cannot use options, convertible securities or agreements to appear to terminate such control before actually doing so. The SBA will not give effect to a party’s ability to divest all or part of its ownership to avoid a finding of affiliation.
iii. Affiliation Based on Management
Affiliation may also be based on shared management where (i) the applicant’s CEO or President (or other officers, managing members or partners who exercise control) also controls the management of one or more other concerns, (ii) an individual that controls the applicant’s Board of Directors or management also controls the Board of Managers or management of another concern, and (iii) a single individual, concern or entity controls the applicant’s management through a management agreement.
iv. Affiliation Based on Identity of Interest
Affiliation arises when there is an identity of interest between close relatives (as defined in 13 CFR 120.10) with identical or substantially identical businesses or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area).
3. Is There Any Additional Guidance Regarding the Terms of the PPP Loan?
Yes. While the CARES Act provided that a PPP loan has a maximum maturity of 10 years and a maximum interest rate of 4% per annum, the Treasury Department has stated that a PPP loan will have a maturity of 2 years and accrue interest at 1% per annum.
4. Is There any Additional Guidance Regarding the Use of Loan Proceeds for Loan Forgiveness Purposes?
Yes. While the CARES Act provides that a PPP loan will be forgiven in an amount equal to the sum of the borrower’s payroll costs, payments of interest on covered mortgage obligations, payments on covered rent obligations, and covered utility payments made during the covered period, the SBA has implemented rules requiring that not more than 25% of the forgiven amount may be for non-payroll costs. Therefore, to maximize loan forgiveness, borrowers should dedicate at least 75% of loan proceeds to payroll costs.
5. Are Foreign-Owned Businesses Eligible for a PPP Loan?
In certain circumstances. The CARES Act is silent as to the eligibility of non-U.S. owned businesses for a PPP loan. While a note in an early form of the PPP application indicated that any company with a 20% owner that is not a U.S. citizens or permanent resident would be denied a loan, this note has been deleted from the current application, though the SBA’s preexisting limitations on foreign ownership remain in place.
6. Should a Borrower Include Payments to Independent Contractors or Sole Proprietors When Calculating Payroll Costs?
No. Any amounts that a borrower has paid to an independent contractor or sole proprietor must be excluded from a borrower’s payroll costs. As independent contractors and sole proprietors may themselves apply for a PPP loan, this provision is intended to prevent “double dipping.”
7. Must Applicants Who Have Already Submitted Their Loan Application Take Any Action Based on the Changes Included in the Recently Issued Guidance?
No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted applications have not yet been processed may revise their applications based on clarifications reflected in the recently issued guidance.
As the legal landscape continues to rapidly evolve in the wake of the COVID-19 pandemic, business-owners are encouraged to consult legal counsel to assist in assessing the applicability of the various statutes and regulations and in evaluating their compliance obligations, including with respect to completing a PPP loan application. The Carter Ledyard team is monitoring developments in this area and will continue to issue updates as the situation evolves.
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For more information concerning the matters discussed in this publication, please contact the authors Leonardo Trivigno (212-238-8724, firstname.lastname@example.org), Matthew J. Schwartz (212-238-8692, email@example.com), or your regular Carter Ledyard attorney.
 The advisory is available here: https://www.clm.com/publication.cfm?ID=5695.
 The recent guidance is available here https://home.treasury.gov/cares.
 The SBA provides employee-based size standards for certain industries, and revenue-based size standards for others.
Carter Ledyard has created a COVID-19 Response Group to monitor the evolving legal landscape, address client questions and ensure client compliance with the laws and regulations issued in response to the COVID-19 pandemic. The Carter Ledyard COVID-19 Response Group consists of Jeffery S. Boxer (212-238-8626, firstname.lastname@example.org), Judith A. Lockhart (212-238-8603, email@example.com), Bryan J. Hall (212-238-8894, firstname.lastname@example.org), Alexander G. Malyshev (212-238-8618, email@example.com), Melissa J. Erwin (212-238-8622, firstname.lastname@example.org), and Leonardo Trivigno (212-238-8724, email@example.com). Clients should contact the attorneys listed above or their regular CLM attorney for any questions concerning legal obligations arising from the COVID-19 pandemic.