On March 27, 2020, the New York State Empire State Development Corporation (“ESD”) revised its guidance for determining whether businesses are “essential” and therefore exempt from the in-person workforce restrictions under Governor Cuomo’s March 20, 2020 “New York State on PAUSE” Executive Order (EO 202.8), which requires that all non-essential businesses keep 100 percent of their workforce at home. The revised guidance provides that all “non-essential” construction “must shut down,” with the exception of “emergency construction,” and limits the businesses in the construction industry that are deemed essential. It also notes that fines of up to $10,000 per violation may be issued for sites that cannot maintain social distancing and safety best practices.
Prior to March 27, ESD did not make clear whether all construction was deemed essential. Pursuant to the revised guidance, however, it is clear that “[a]ll non-essential construction must shut down except emergency construction,” which is defined to include projects “necessary to protect health and safety of the occupants,” as well as projects for which it would be “unsafe to allow to remain undone until it is safe to shut the site.”
The revised guidance also provides more detail on the types of construction deemed essential, which now includes construction of “roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters.” Sites providing essential, or emergency non-essential construction, must maintain social distance and follow “safety best practices.” According to ESD, the state will be enforcing these restrictions in coordination with local authorities.
Finally, the revised guidance clarifies that construction work “does not include a single worker, who is the sole employee/worker on a job site.”
The New York Daily News has reported that Governor Cuomo “told the city that construction work must stop immediately, like other industries that are closing down to combat the spread of the deadly pandemic.”
Businesses whose functions are not covered in ESD’s guidance but believe that they should be considered an “essential business,” may still request designation as an essential business via ESD’s website.
Prior client alerts providing an overview of the executive order’s in-person workforce restrictions and ESD’s guidance on essential businesses exempt from the order may be accessed here and here. As noted in Gibson Dunn’s March 24, 2020 alert, New York Attorney General Letitia James has urged employees who believe their employers to be acting in violation of Governor Cuomo’s executive order to file a complaint with the New York State Office of the Attorney General’s Labor Bureau.
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Mylan Denerstein – New York (+1 212.351.3850, [email protected])
Lauren Elliot – New York (+1 212.351.3848, [email protected])
Lee Crain – New York (+1 212.351.2454, [email protected])
Doran Satanove – New York (+1 212.351.4098, [email protected])
Stella Cernak – New York (+1 212.351.3898, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
I. Overview
The COVID-19 pandemic is having an unparalleled effect on a wide range of businesses, many of which are subject to government-mandated shutdowns and other restrictions throughout the United States. In addition, while federal lawmakers negotiate the contours of a $2 trillion aid deal—the largest in modern history—they and some state legislators are also debating requiring particular companies or industries, rather than taxpayers or bondholders at large, to bear the burden of bailout efforts.
These and other governmental responses to this pandemic raise significant constitutional considerations. For example, government-mandated shutdowns could constitute regulatory takings that require just compensation under the Fifth Amendment. State interference with contractual obligations presents issues under the Contracts Clause. And all government economic regulation is ultimately subject to the requirements of the Due Process and Equal Protection Clauses of the federal Constitution.
Although case law, not surprisingly, does not anticipate these particular government actions, the constitutional analyses courts have applied in other contexts provide a framework for considering the constitutionality of proposed and actual legislative and executive action during the current crisis.
II. Regulatory Takings
The Takings Clause of the Fifth Amendment provides that private property shall not “be taken for public use, without just compensation.” U.S. Const. amend. V. The Clause applies to the States via the Fourteenth Amendment. Murr v. Wisconsin, 137 S. Ct. 1933, 1942 (2017). Regulations imposed by the government, including public health and safety regulations, may amount to a taking, where, although there is no physical appropriation, the regulation is “so onerous that its effect is tantamount to a direct appropriation or ouster—and that such ‘regulatory takings’ may be compensable under the Fifth Amendment.” Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005). The Supreme Court has divided regulatory takings into two types, categorical (or per se) takings, and partial takings. See Murr, 137 S. Ct. at 1942–43.
Given that many of the restrictions imposed to combat the spread of COVID-19 are both expansive and being rapidly rolled out, it is possible that some businesses may find themselves subject to a potential categorical regulatory taking. A categorical (or per se) regulatory taking “applies to regulations that completely deprive an owner of all economically beneficial use of her property.” Lingle, 544 U.S. at 538 (brackets omitted). This is an “extraordinary circumstance,” because “[a]nything less than a complete elimination of value, or a total loss, is a non-categorical taking.” Sherman v. Town of Chester, 752 F.3d 554, 564 (2d Cir. 2014) (internal quotations omitted).
Temporary deprivations are typically not considered to be categorical takings, even if lengthy. Rather, categorical takings require that the “regulation permanently deprive[] [the] property of all value.” Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S. 302, 332 (2002); see also id. at 341–42 (nearly three-year moratorium on development imposed to conduct an impact study did not constitute a categorical taking). That said, an indefinite moratorium may constitute a potential categorical regulatory taking, as some courts have found. See, e.g., Monks v. City of Rancho Palos Verdes, 84 Cal. Rptr. 3d 75 (Cal. App. 2008) (moratorium prohibiting construction on certain properties due to an indeterminate future landslide constituted a categorical taking).
Any takings claims would more likely be evaluated within the framework of a partial regulatory taking. In Penn Central Transportation Co. v. City of New York, the Supreme Court set forth a three-factored, fact-specific inquiry to determine whether a law or regulation constitutes a “partial taking”: (1) the economic impact of the regulation; (2) the extent to which the regulation has interfered with distinct and reasonable investment-backed expectations; and (3) the character of the governmental action. 438 U.S. 104, 124 (1978). Whether a partial regulatory taking has occurred depends on “an intensive ad hoc inquiry into the circumstances of each particular case.” Sherman, 752 F.3d at 565. Even takings temporary in duration may be actionable as partial takings. See Ark. Game & Fish Comm’n v. United States, 568 U.S. 23, 33 (2012). And “[o]nce the government’s actions have worked a taking of property, no subsequent action by the government can relieve it of the duty to provide compensation for the period during which the taking was effective.” Id. (internal quotation marks omitted).
Rather than announcing “definitive rules,” the Supreme Court has instead made clear that regulatory takings claims are driven by “factual inquiries, designed to allow careful examination and weighing of all relevant circumstances.” Murr, 137 S. Ct. at 1942. Under the Penn Central test, a regulatory taking claim may be asserted where a business can show, for example, severe economic losses suffered in an industry where sweeping regulations are highly unexpected. Perhaps ironically, though, the broader the shutdown, the less likely it is to constitute a regulatory taking, as the purpose of the Takings Clause is to “prevent the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” Id. at 1943. Still, the lines drawn between essential and non-essential businesses matter, and if drawn arbitrarily or unreasonably, government-mandated shutdowns can effect regulatory takings.
Given the nature of the COVID-19 pandemic and the need for government action to combat it, the government will argue that a government-imposed shutdown should be presumed reasonable as a lawful and valid exercise of police powers. But those powers are not without limits. A government’s exercise of its police powers must be valid and “reasonably necessary for the accomplishment of the government’s purpose.” Goldblatt v. Town of Hempstead, 369 U.S. 590, 595 (1962). To evaluate the reasonableness of a regulation, courts will look, for example, to “the nature of the menace against which [the regulation] will protect, the availability and effectiveness of other less drastic protective steps, and the loss which [the property owner] will suffer from the imposition of the ordinance.” Id.at 596. This fact-intensive inquiry will vary based on the scope and breadth of the COVID-19 regulations, the infection rate in the area at issue, the type of businesses subject to closure, the foreseeable risks that those business could spread COVID-19, and the specific losses suffered.
The government would likely assert the defense of public necessity. This defense requires the government to show: (1) an actual emergency, (2) imminent danger, and (3) actual necessity of government action. See TrinCo Inv. Co. v. United States, 722 F.3d 1375, 1377–79 (Fed. Cir. 2013). This defense is a corollary to the government’s ability to abate nuisances without implicating the Takings Clause. See Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1029 n.16 (1992); see also Miller v. Schoene, 276 U.S. 272 (1928) (holding compensation not required for destruction of privately owned trees to prevent spread of disease to other nearby trees). A bald claim of public necessity, however, may not suffice. In TrinCo Investment Co., for example, the U.S. Forest Service intentionally lit fires directly on and adjacent to the plaintiff’s properties, destroying nearly 2000 acres of merchantable timber. The government argued that its actions, undertaken to manage existing wildfires, were protected under the “doctrine of necessity.” On appeal from dismissal by the Court of Claims, the Federal Circuit reversed because there were “legitimate questions as to imminence, necessity, and emergency,” and “[w]hile there is no doubt that there was a fire, there is also no doubt that at the time [Plaintiff’s] property was burned, only approximately 2% of the 2.1 million-acre national forest was in flames.” 722 F.3d at 1380.
The applicability of each of these defenses, as with the underlying claim, will depend on the particular facts of a case. That said, businesses should keep in mind that they may have a viable regulatory takings claim and should seek further guidance where appropriate.
III. Other Constitutional Challenges
A. The Contracts Clause
The Contracts Clause presents a potentially promising claim to those business sectors responding to potential federal or state laws that effectively overwrite existing contracts, either by adding obligations or by removing rights, in an effort to have one or more industries and companies bear an outsized portion of the economic burden resulting from the COVID-19 pandemic.
The Contracts Clause states: “No state shall . . . pass any . . . Law impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1. Contracts Clause challenges are subject to the Supreme Court’s two-step framework. At the first step, a business challenging a state law must show that the law has “operated as a substantial impairment of a contractual relationship.” Sveen v. Melin, 138 S. Ct. 1815, 1821 (2018). Under this step, courts ask “whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial.” Gen. Motors Corp. v. Romein, 503 U.S. 181, 186 (1992). Whether an impairment is substantial turns on several factors, including “the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights.” Sveen, 138 S. Ct. at 1822. Courts are less willing to find a substantial impairment if “the industry the complaining party has entered has been regulated in the past.” Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 411 (1983).
If a business demonstrates a substantial impairment, courts will proceed to the second step, which asks whether the law is “drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.” Sveen, 138 S. Ct. at 1822. Significant and legitimate public purposes include “the remedying of a broad and general social or economic problem.” Energy Res. Grp., 459 U.S. at 411–12. And in determining whether an impairment is reasonably and appropriately drawn, courts “defer to legislative judgment as to the necessity and reasonableness of a particular measure.” Id.
The Contracts Clause offers businesses a potential avenue for challenging federal or state COVID-19 laws that interfere in their ongoing contractual relationships, particularly for any industries required to fulfill obligations nowhere specified in (or even specifically excluded from) carefully negotiated agreements. See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245–47 (1978) (holding law requiring employer to make additional payments operated as substantial impairment of pension plan). These businesses have colorable arguments that shifting to them the financial burdens of the pandemic’s economic interruption is not an appropriate or reasonable means of responding to the crisis.
B. The Due Process and Equal Protection Clauses
The Due Process Clauses of the Fifth and Fourteenth Amendments may provide a potential ground for challenging federal and state laws that retroactively deprive businesses of property. Although due process “generally does not prohibit retrospective civil legislation,” it may do so if “the consequences are particularly harsh and oppressive.” U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 17 n.13 (1977). To successfully challenge a retroactive federal or state law as “particularly harsh and oppressive,” a business would bear the burden of showing that the law is “arbitrary and irrational.” Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 733 (1984); see Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976).
Finally, the Equal Protection Clause of the Fourteenth Amendment may provide another viable path to challenge COVID-19 legislation, particularly where regulations place unique burdens on one industry or business sector. That Clause provides that “[n]o State shall . . . deny to any person . . . the equal protection of the laws.” U.S. Const. amend. XIV, § 1. Because state laws responding to the virus will likely be classified as social and economic legislation, courts would subject those laws to rational-basis review—that is, courts would assess whether “there is a rational relationship between the disparity of treatment and some legitimate governmental purpose.” Bd. of Trustees of Univ. of Ala. v. Garrett, 531 U.S. 356, 366–67 (2001). A similar constraint has been implied against the federal government through the Fifth Amendment. See Bolling v. Sharpe, 347 U.S. 497, 500 (1954).
Given the nature of rational-basis review, any due process or equal protection challenge to COVID-19 legislation would almost certainly face an uphill climb. Nonetheless, where a state law places a unique burden on an industry or business sector without a clear justification, the Constitution may provide a viable claim.
IV. Conclusion
None of this is to say, of course, that there can be any prejudgment on the constitutionality or unconstitutionality of any contemplated COVID-19 legislation. The analysis under the clauses of the federal Constitution that most readily apply to economic regulation is too fact-specific to draw blanket conclusions. But as the Nation moves through this crisis, it bears remembering that the operations of federal, state, and local governments remain subject to constitutional scrutiny, and regulatory actions that irrationally or unfairly target or prefer one segment of the economy may raise significant constitutional questions.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client alert: Avi Weitzman, Mark Perry, Lochlan Shelfer, Andrew Kuntz and Nina Meyer. Gibson Dunn regularly counsels clients on issues raised by this pandemic. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Appellate, Litigation, Public Policy, or other practice groups, or the following authors:
Avi Weitzman – New York (+1 212-351-2465, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667,[email protected])
Please also feel free to contact the following practice leaders or members of the New York team:
Litigation Group – New York:
Randy M. Mastro – Co-Chair, Litigation Group, New York (+1 212-351-3825, [email protected])
Shireen A. Barday – New York (+1 212-351-2621, [email protected])
Mylan L. Denerstein – Co-Chair, Public Policy Group, New York (+1 212-351-3850, [email protected])
Lauren J. Elliot – New York (+1 212-351-3848, [email protected])
James L. Hallowell – New York (+1 212-351-3804, [email protected])
Mitchell A. Karlan – New York (+1 212-351-3827, [email protected])
Marshall R. King – New York (+1 212-351-3905, [email protected])
Mary Beth Maloney – New York (+1 212-351-2315, [email protected])
Robert L. Weigel – Co-Chair, Judgment & Arbitral Award Enforcement Group, New York (+1 212-351-3845, [email protected])
Avi Weitzman – New York (+1 212-351-2465, [email protected])
Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected]
Mark A. Perry – Washington, D.C. (+1 202-887-3667,[email protected])
Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Mylan L. Denerstein – New York (+1 212-351-3850, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
As already described in Gibson Dunn’s client alert of 20 March 2020, the European Commission (Commission) has announced that it will authorize the grant of State aid to the real economy for liquidity shortages and financial losses resulting from the COVID-19 outbreak in at least two ways.
First, the Temporary Framework adopted by the Commission on 20 March based on Article 107(3)(b) TFEU for remedying a serious disturbance in the economies of the Member States authorizes the grant of liquidity support to companies that have faced financial difficulties after 31 December 2019 due to the COVID-19 outbreak. Second, the Commission has pledged to authorize State aid directly on the basis of TFEU Article 107(2)(b) allowing aid to be granted for damages of an exceptional occurrence, such as the COVID-19 outbreak.
The Temporary Framework
Recapping the conditions for the authorization of aid under the Framework, aid may be granted for liquidity support under the Framework in four ways.
First, up to EUR 800.000 may be granted to a single company in the form of a lump sum, a repayable advance (i.e., loans with reimbursement terms that depend on the outcome of the loan project) or tax advantages. Second, aid may be granted to SMEs and large enterprises in the form of below-market rate premiums for State guarantees covering loans of 1-6 years provided that the amounts do not exceed a fixed percent of the company’s capital. Third, aid may be granted in the form of below-market interest rates, provided that the reduced interest rates are at least equal to the base rate (1 year IBOR or equivalent) applicable on 1 January 2020 plus the credit risk margins defined in the Temporary Framework. It should be noted that the aid provided in the form of below-market rate premiums for State guarantees and below-market rate interests for loans may also be granted through banks (or other financial institutions) provided that safeguards are put in place ensuring that the banks do not receive too much of a residual benefit (in the form of an expanded customer base or expanded business with one customer). Finally, aid may be granted for marketable risks through credit-export insurance provided there is evidence of the unavailability of private insurance coverage.
By 25 March,the Commission had already approved ten aid schemes under the Temporary Framework of which at least five were approved within 48 hours from their notification. Within the next weeks further notifications are expected to cover aid for transport, tourism, culture, hospitality and retail. The following schemes have been already approved:
- On 21 March 2020, the Commission approved a Danish scheme to issue guarantees covering loans to SMEs with the Danish State covering up to 70% of the risk.
- On the same day, the Commission approved three French schemes of which two authorize a French public investment bank (Bpifrance) to provide State guarantees for loans and credit lines to enterprises with up to 5,000 employees, while the third allows for the grant of State guarantees by banks for new loans to all types of companies.
- Also on 21 March the Commission also authorized two German schemes under which the German bank, Kreditanstalt für Wiederaufbau (KfW) may cover up to 90% of the risk for 5-year loans of up to EUR 1 billion per company and KfW may, together with private banks, issue loans with the State covering up to 80% of the risk, (provided that the loan does not cover more than 50% of the company’s total existing debt).
- On 22 March, the Commission approved four Portuguese schemes to grant guarantees for loans obtained by SMEs active in tourism, restaurants, travel agencies, tourist entertainment, event organizing, and the extractive & manufacturing industry. It also approved an Italian aid scheme to grant lump sums of up to EUR 800.000 to companies for the production and supply of medical protection equipment (e.g., masks, goggles, gowns, and safety suits).
- On 23 March, the Commission also approved two Latvian schemes for the grant of reduced interest loans and guarantees covering a value of more than EUR 200 million with the Latvian State covering up to 50% of the risk.
- On 24 March the Commission approved a Luxembourg scheme to channel aid to companies and liberal professions in the form of repayable advances of up to EUR 500.000 per entity. It also approved two further German schemes authorizing banks and authorities to issue low interest/premium 6-year loans and 9-month guarantees as well as lump sums, repayable advances and tax advantages for a maximum of (i) EUR 100.000-120.000 to companies in the fisheries, aquaculture sectors and primary agriculture production; and (ii) EUR 800.000 to companies in other sectors. On the same day, the Commission also authorized two Spanish schemes for the issuance of guarantees to cover loans to self-employed workers, SMEs and large companies where the State may guarantee up to 80% of the risk for self-employed workers and SMEs and up to 70% of the risk for larger companies.
- Finally, on 25 March, the Commission approved two UK schemes authorizing the British Business Bank to grant loan guarantees to SMEs in all sectors with a turnover of up to GBP 45 million; and authorities to grant lump sums of up to EUR 800.000 to SMEs.
Aid Authorized Directly under the Treaty
While the Temporary Framework covers liquidity needs, the Commission has already stated that it will consider COVID-19 as an “exceptional occurrence” under Article 107(2)(b) TFEU for which aid may be authorized to cover damages.
While the Temporary Framework and Article 107(2) are platforms for authorizing State aid that overlap somewhat, one legal difference is that the Temporary Framework covers liquidity support (relating to a lack of cash flows) while Article 107(2)(b) only covers damages (relating to evidenced past/future losses). However, given the uncertainties surrounding the duration and the impact of the COVID-19 outbreak, in practice this difference is rather a question of how the funding shortage is presented. The most practical difference appears to be the fact that aid authorized under the Temporary Framework is more limited in amount whereas in principle unlimited funding may be authorized under Article 107(2)(b). This is also confirmed by the fact that under the Temporary Framework it is, in principle, only possible to authorize aid schemes (providing for the grant of aid to several companies based on the same conditions) as opposed to under Article 107(2)(b) where stand-alone grants may also be authorized.
With that in mind the real question is which sectors may benefit from TFEU 107(2)(b) and how the Commission will ensure a non-discriminatory implementation of this provision. It is very likely that the transport sector (in particular aviation) will be entitled to receive aid by relying directly on TFEU Article 107(2)(b), both due to their massive funding needs and the Commisison’s view that the future competitiveness of the aviation and rail markets depend on maintaining the presence of many (smaller) operators which provide for competitive price pressure. While the maritime sector is in a different situation, the Commission is also likely to rely on Article 107(2)(b) to authorize aid to this sector due to the sheer amounts that will be required for keeping this sector afloat. However, it begs the question of whether the manufacturing industries and other industries also will be considered eligible for aid under Article 107(2)(b), since it is just a question of time before their significant losses will be publicly known.
* * *
We are at your disposal for advice on how a company may benefit from any type of support in the EU and on how to act against competitors which may be receiving support that does not comply with State aid rules in the context of COVID-19.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client update: Lena Sandberg, Yannis Ioannidis and Pilar Pérez-D’Ocon. Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition Practice Group:
Antitrust and Competition Group:
Brussels
Peter Alexiadis (+32 2 554 7200, [email protected])
Attila Borsos (+32 2 554 72 11, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
Lena Sandberg (+32 2 554 72 60, [email protected])
David Wood (+32 2 554 7210, [email protected])
Munich
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
London
Patrick Doris (+44 20 7071 4276, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])
Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Sébastien Evrard (+852 2214 3798, [email protected])
Washington, D.C.
D. Jarrett Arp (+1 202-955-8678, [email protected])
Adam Di Vincenzo (+1 202-887-3704, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
Kristen C. Limarzi (+1 202-887-3518, [email protected])
Joshua Lipton (+1 202-955-8226, [email protected])
Richard G. Parker (+1 202-955-8503, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
Jeremy Robison (+1 202-955-8518, [email protected])
Andrew Cline (+1 202-887-3698, [email protected])
New York
Eric J. Stock (+1 212-351-2301, [email protected])
Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Christopher D. Dusseault (+1 213-229-7855, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])
San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])
Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Mike Raiff (+1 214-698-3350, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On March 25, 2020, the Senate passed (96-0) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus package providing aid for individuals, States, small businesses, and businesses impacted by the coronavirus pandemic. It is expected that the House will swiftly pass the CARES Act, which the President, in turn, will promptly sign into law.
The CARES Act, through a proposal authored by Senators Susan Collins (R-ME) and Marco Rubio (R-FL), authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program, through a new “paycheck protection” program under which loans may be forgiven. This client alert discusses how the SBA provisions in the CARES Act will impact businesses.
Overview of SBA “Paycheck Protection” Loan Program
Eligibility
Size Standard
Under existing law, in order to be eligible for a loan under the SBA’s 7(a) program, the recipient must be a small business concern.[1] The SBA typically uses standards that are stated in terms of number of employees or average annual receipts to determine the largest size that a business concern (including its domestic and foreign affiliates) may be to still be classified as a small business concern.
Under the CARES Act, any business concern would be eligible to receive an SBA loan authorized by the CARES Act (a “covered loan”) if the business concern employs not more than the greater of (I) 500 employees[2] or (II) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates.
The CARES Act also includes some exceptions to this standard. These exceptions are:
- Business Concerns with More than One Physical Location
Any business concern with not more than 500 employees per physical location and that is assigned a North American Industry Classification System (“NAICS”) code beginning with 72 (i.e., a business concern in the Accommodation and Food Services sector) at the time of disbursal is eligible to receive a covered loan.
- Waiver of Affiliation Rules
As noted above, the SBA ordinarily counts the employees or annual receipts of a business concern’s affiliates when determining whether the business concern qualifies as a small business. Section 121.103 of Title 13 of the Code of Federal Regulations sets forth the general principles the SBA uses to determine affiliation. For example, business concerns and other persons (entities or individuals) are affiliates of each other when one controls or has the power to control the other, or a third party (or parties) controls, or has the power to control, both.[3] Control of a business concern may be established by, for example, ownership or control, or the power to control 50% or more of such party’s voting stock, or a block of such party’s voting stock that is large compared to all other outstanding blocks of voting stock.[4] Control of a business concern may also be established through, among other things, a party’s ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders of the business concern. The CARES Act provides that this regulation is waived with respect to eligibility for a covered loan for:
- any business concern with not more than 500 employees that is assigned a NAICS code beginning with 72;
- any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
- any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
Industries
To be covered by the first exception outlined above, the business concern must be assigned a NAICS code beginning with 72.[5] Below 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)
- Full-Service Restaurants
- Limited-Service Restaurants
- Cafeterias, Grill Buffets, and Buffets
- Snack and Non-Alcoholic Beverage Bars
Effect of the Waiver of Affiliation Rules
The CARES Act would allow certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable thresholds to qualify for a covered loan. For example, assume that a business concern in a covered industry with 300 employees received financing from a private equity fund and granted the fund control rights. That business concern is currently deemed an affiliate of the fund, and of any other portfolio company controlled by the fund. Further assume that such affiliation caused the business concern to no longer be considered a small business because when measured against the SBA’s standards, the business concern is deemed to have all the employees of the private equity fund and the fund’s other portfolio companies. As a result of the waiver of affiliation rules in the CARES Act, the business concern would no longer be an affiliate of the private equity fund and the other portfolio companies, and the business concern may qualify for a covered loan.
The proposed waiver of affiliation rules may also help some businesses that are structured so that they consist of more than one business concern. For example, assume a corporation owns three hotels through three separate limited liability companies, and that each such subsidiary has fewer than 500 employees. Further assume that the corporation does 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.
However, the proposed waiver of affiliation rules will not necessarily benefit businesses that own separate establishments through the same business concern. For example, assume the three hotels in the example above are owned directly by the corporation, and the corporation has 1,000 employees, including over 500 employees who work at its largest hotel. The corporation would be a single business concern with over 500 employees and would not be eligible to apply for a covered loan as a result of the waiver of affiliation rules.[6]
Other Eligibility Requirements
Along with small business concerns, nonprofit organizations also are eligible to receive a covered loan. The CARES Act recommends that the SBA issue guidance to lenders to prioritize small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women and businesses in operation for less than 2 years.
A recipient of an SBA economic injury disaster relief loan made between January 31, 2020 and the date covered loans are available under the CARES Act for a purpose other than paying payroll costs and other covered loan purposes described below is still eligible for a covered loan.
Loan Terms
An eligible recipient may receive one covered loan. The CARES Act provides that proceeds of covered loans may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt.
The maximum loan amount is the lesser of (1)(a) the average total monthly payments by the applicant for payroll costs[7] incurred during the one-year period before the date the loan is made[8] multiplied by (b) 2.5 and (2) $10 million. If an applicant was not in business from February 15, 2019 to June 30, 2019, the maximum loan amount is the lesser of (1)(a) the average total monthly payments by the applicant for payroll costs incurred from January 1, 2020 to February 29, 2020 multiplied by (b) 2.5 and (2) $10 million. No collateral or personal guarantee is required for a covered loan.
Loan Forgiveness
The loan forgiveness amount is equal to the payroll costs, mortgage interest payments, rent, and utilities (the “forgivable costs”) incurred or paid by a recipient during the covered period. For purposes of determining the loan forgiveness amount, “covered period” means the 8-week period beginning on the date of the origination of a covered loan. (the “covered period”). The loan forgiveness amount is excluded from taxable income.
The amount of loan forgiveness will be reduced by multiplying (1) the forgivable costs by (2) the quotient obtained by dividing (a) the average number of full-time equivalent employees per month during the covered period by (b) at the election of the borrower, (i) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (ii) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020.[9] The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25 percent of the total salary or wages during the most recent full quarter during which the employee was employed before the covered period.[10] There are exceptions for these reductions if, during the period beginning on February 15, 2020 and ending 30 days after enactment of the Act, there is a reduction in the number of full-time equivalent employees or salary and the reduction is eliminated no later than June 30, 2020.
If a covered loan has a remaining balance after the forgiveness described above, it will have a maximum maturity of 10 years and an interest rate not exceeding 4 percent. Lenders must defer payments under the loan for at least six months and up to one year.
What a Prospective Borrower Can Do Now
To seek loan forgiveness, an eligible business concern must submit an application to the lender that originated the covered loan that will include:
- documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; and state income, payroll, and unemployment insurance filings; and
- documentation verifying payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, transcripts of accounts, or other documents.
The SBA must issue regulations within 15 days of enactment of the CARES Act without regard to notice and comment requirements. Hence, it is possible that lenders could begin taking loan applications as soon as mid-April.
SBA Economic Injury Disaster Loans
In early March of 2020, Congress passed an $8.3 billion appropriations measure to combat the effects of the coronavirus pandemic, the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020. The Act allows the SBA to provide up to $1 billion in loan subsidies for economic injury disaster loans. This funding enables the SBA to provide an estimated $7 billion in economic injury disaster loans. Additionally, the Act provides the SBA $20 million to cover the cost of administering these loans. Small businesses in all U.S. states and territories are currently eligible to apply for an economic injury disaster loan due to COVID-19. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million. Affiliation rules have not been waived in connection with determining the eligibility of participants in the Economic Injury Disaster Loan program.
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[1] The CARES Act does not propose any changes to the SBA’s definition of “business concern.” The SBA defines a “business concern” as a business entity organized for profit, with a place of business located in the U.S., which operates primarily within the U.S. or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor. A business concern may be in the legal form of an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture (13 CFR § 121.105).
[2] In determining a concern’s number of employees the, SBA counts all individuals employed on a full-time, part-time, or other basis. The regulation setting forth how the SBA calculates the number of employees does not exclude non-U.S. employees from this calculation (13 CFR § 121.105).
[5] NAICS codes may be self-assigned, i.e., a company can select the code that best represents its primary business activity, or the activity of a particular establishment. NAICS codes may also be assigned by an organization, such as a government agency, trade association, etc., to a company or establishment for various purposes. According to the U.S. Census Bureau, there is no central government agency that assigns, monitors or approves NAICS codes, or changes to NAICS codes. See: https://www.census.gov/eos/www/naics/faqs/faqs.html#q1.
[6] If the hotel in our example had fewer than 500 employees at each of its three hotels, it could apply for one covered loan as a result of the proposed exception described above for business concerns with more than one physical location.
[7] “Payroll costs” are defined to include payments for salary, wage, commission, or similar compensation; payments for cash tip or equivalent; payments for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; payments of any compensation or income of a sole proprietor or independent contractor that is an amount not more than $100,000 in 1 year, as prorated for the covered period. “Payroll costs” do not include the compensation of an individual employee in excess of an annual salary of $100,000, as pro-rated for the covered period; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code; compensation of an employee whose principal place of residence is outside of the United States; and qualified sick leave wages or qualified family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act. For purposes of determining the maximum loan amount, “covered period” means February 15, 2020 through June 30, 2020.
[8] For seasonal employers, the applicable payments are the average total monthly payments for payroll during the 12-week period beginning February 15, 2019, or at the election of the recipient, March 1, 2019, and ending June 30, 2019
[9] In the case of a seasonal employer, the denominator is the average number of full-time equivalent employees per month employed by the eligible recipient from February 15, 2019 through June 30, 2019.
[10] An employee described in this subparagraph is any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyers with whom you usually work, any member of the firm’s Public Policy Group, or the authors:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Alisa Babitz – Washington, D.C. (+1 202-887-3720, [email protected])
Samantha Ostrom – Washington, D.C. (+1 202-955-8249, [email protected])
* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The UK Government has launched two funding mechanisms to assist firms with the potential impact of COVID-19 on their businesses:
- a joint lending facility between the UK HM Treasury and the Bank of England (“BoE”) designed to support liquidity among larger firms through the purchase of commercial paper, the Covid Corporate Financing Facility (“CCFF”); and
- financial support for smaller businesses by giving lenders a government-backed guarantee for loan repayments, the Coronavirus Business Interruption Loan Scheme (“CBILS”).
This client alert provides an overview of the CCFF and CBILS and provides practical guidance as to how firms can make use of these facilities.
(1) The Covid Corporate Financing Facility
The CCFF is a joint lending facility between HM Treasury and the BoE designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.
| Is my firm’s commercial paper eligible?
The CCFF will purchase sterling-denominated commercial paper, with the following characteristics:
The BoE will accept commercial paper with standard features that is issued using ICMA market standard documentation. Commercial paper with non-standard features such as, for example, extendibility or subordination is not eligible. The BoE may consider accepting simplified versions of documentation, based on standard ICMA materials. Commercial paper issued by banks, building societies, insurance companies and other financial sector entities regulated by the BoE or the Financial Conduct Authority will not be eligible. Commercial paper will also not be eligible if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation. |
Can my firm use the CCFF?
The CCFF is available to companies, and their finance subsidiaries, that “make a material contribution to the UK economy.” The BoE states that, in practice, firms that meet this requirement would typically be:
- UK incorporated companies (including those with foreign-incorporated parents and with a genuine business in the UK);
- companies with significant employment in the UK;
- firms with their headquarters in the UK.
The BoE notes that it will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.
The CCFF is open to firms that can demonstrate they were in “sound financial health” prior to the impact of COVID-19. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent. If firms have different ratings from different agencies, and one of those is below investment grade then the commercial paper will not be eligible. The CCFF is open to all firms and sectors, providing that the eligibility criteria as set out above are satisfied. The BoE has indicated that the CCFF will be available for at least 12 months.
How does the CCFF work in practice?
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What if my firm does not have a credit rating?
The BoE notes that some firms wishing to access the scheme will not have a credit rating. The BoE encourages such companies to discuss the matter with their bank. If that bank’s advice is that the firm was viewed as equivalent to investment grade as at 1 March 2020, the BoE suggests such companies contact the BoE. Alternatively, the BoE notes that companies can contact one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with the BoE and HM Treasury.
What if my firm has not previously issued commercial paper?
Companies do not need to have issued commercial paper prior to using the CCFF. The BoE recommends that such businesses contact their bank regarding issuing commercial paper. If eligible, banks can assist firms with issuing such commercial paper to the CCFF.
How do I apply to use the CCFF?
Applications to participate as counterparties in the CCFF are now open. Firms wishing to participate in the CCFF must complete and file the following documents:
- Issuer Eligibility Form;
- Issuer Undertaking and Confidentiality Agreement; and
- evidence of the signatory’s authority to act.
If the commercial paper is issued by another group entity, that entity may need to provide: (1) guarantee in favour of the BoE; and (2) a legal opinion on the capacity and authority of the guarantor.
Additional documentation is required from banks acting as dealers on behalf of companies.
The CCFF application documents are now available on the BoE’s website. Once the relevant paperwork has been submitted, the BoE will confirm if a firm’s commercial paper is eligible as soon as possible. If eligibility is confirmed before 4 pm on a working day, a firm will be able to sell commercial paper to the BoE the next working day.
(2) Coronavirus Business Interruption Loan Scheme
How does the CBILS work?
The British Business Bank operates CBILS via its “accredited lenders”. This includes over 40 lenders ranging from high street banks, challenger banks, asset-based lenders and smaller specialist lenders.
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What are the lending criteria? In order to be eligible, businesses that wish to use the facility must satisfy all of the following criteria:
The following businesses are not eligible:
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What are the key finance terms and the maximum loan covered?
As noted above, lenders can provide up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance. The lender is given a government-backed guarantee for the loan repayments. However, the borrower remains 100% liable for the debt. The CBILS can be used for: (1) term loans and asset finance facilities of up to six years; and (2) for overdrafts and invoice finance facilities of up to three years.
What payments will the UK Government make?
The UK Government will make a “Business Interruption Payment” to cover the first 12 months of interest payments and any lender-levied charges.
What is the position with respect to security?
The position is that if a lender can offer finance on normal commercial terms without making use of the CBILS, it will do so. The lender can choose to use the CBILS for unsecured lending for facilities of £250,000 or less. If the facility is over £250,000, the lender must establish if the borrower is unable to provide security, before it uses CBILS. It is open to banks to ask for security including personal guarantees from directors and security over their assets in support of such guarantees, however, there is a prohibition on taking such security over a director’s primary residential property.
Are there any guarantee fees for businesses?
There are no guarantee fees for SMEs, however, lenders pay a fee to access the scheme.
How do businesses access the CBILS?
Businesses should approach a CBILS accredited lender. A full list of accredited lenders is available on the British Business Bank’s website.[1]
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[1] https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn’s lawyers regularly counsel clients on the compliance issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Financial Institutions Group, or the authors:
Gregory A. Campbell – London (+44 (0)20 7071 4236, [email protected])
Christopher Haynes – London (+44 (0)20 7071 4238, [email protected])
Michelle M. Kirschner – London (+44 (0)20 7071 4212, [email protected])
Steve Thierbach – London (+44 (0)20 7071 4235, [email protected])
Martin Coombes – London (+44 (0)20 7071 4258, [email protected])
Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Gregory A. Campbell – London (+44 (0)20 7071 4236, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Christopher Haynes – London (+44 (0)20 7071 4238, [email protected])
Michelle M. Kirschner – London (+44 (0)20 7071 4212, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Steve Thierbach – London (+44 (0)20 7071 4235, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On March 25, 2020, the German Parliament (Bundestag) passed a far reaching rescue package to respond to the COVID-19 pandemic and its dramatic economic effects. The full text of the package can be found here.[1]
The package is a combination of significant changes on different levels: (i) Temporary changes in the German civil code to protect individual tenants, debtors, and obligors under continuous obligations; (ii) the relaxation of provisions for businesses that are otherwise threatened by insolvency, (iii) practical solutions for companies to handle their corporate affairs in a virtual or remote setting, and – a bit out of step with the other context – (iv) extending strict court deadlines in a criminal proceedings to ensure criminal hearings keep pending during the COVID-19 crisis.
Below are the specific elements of the comprehensive package that are each discussed in more detail below:
I. Protect Individual Consumers, Micro-Businesses and Tenants Affected by COVID-19
For cases in which consumers or micro-enterprises are no longer able to meet their obligations under continuing obligations due to the COVID-19 pandemic, the temporary (non-waivable) moratorium should enable them to cover liquidity losses due to their loss of income through June 2020.
With the “Act on Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law” (the “Act”), the German legislator has adopted a new temporary right to refuse performance under these contracts (See Article 240 of the Introductory Act to the German Civil Code).
The new regulation not only raises substantial questions of economic policy and constitutional law, but will also lead to substantial legal uncertainties due to the large number of legal “blanket terms” used and the required weighing of interests.
1. Temporal scope of application
The moratorium is initially limited to June 30, 2020, but can subsequently be extended by directive – if the Bundestag does not object – through September 30, 2020. The short period reflects that the moratorium is intended to bridge short-term liquidity constraints of those affected until the start of government aid measures (ultima ratio function).
2. Personal scope of application
Consumers and micro-enterprises are supposed to be the beneficiaries of the moratorium. Section 13 of the German Civil Code (BGB) defines the term “consumer” as an individual that concludes a transaction for primarily private purposes. The definition of a micro-enterprise can be found in the EU Commission’ Recommendation 2003/361/EC of May 6, 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36). Therein, a micro-enterprise is defined in particular as an enterprise which employs fewer than ten employees.
3. Substantive scope of application
Specifically, the legislator provides that the beneficiaries of the moratorium can refuse to fulfill obligations arising from “substantial continuing obligations”. Rental and property lease agreements are specifically regulated in Section 2, and loan relationships specifically in Section 3 (for more details, see below). Employment contracts are exempted from the scope of application. With regard to the term ”continuing obligation”, the legislator apparently uses the long-established definition from civil law. For consumers, substantial continuing obligations are those which serve to provide goods/services of general interest (e.g. the supply of electricity and water), and for micro-entrepreneurs those which are “necessary for the appropriate continuation of their business”. Thus, the scope of application for micro-entrepreneurs appears to be wider and includes regular supplies of goods to the micro-entrepreneur based on agreements with continuing obligations, and services that the micro-entrepreneur has to provide himself under such agreements. With regard to insurance contracts, for example, it will be necessary to differentiate based on their relevance.
4. Standards to be met to refuse performance
In order to be entitled to refuse performance, it is necessary that, due to circumstances caused by the COVID-19 pandemic, the beneficiary is not able to provide the service without risking its “reasonable standard of living” (consumers) or the “economic basis of its business” (micro-enterprises). What this means will have to be clarified on a case-by-case basis.
In particular, the legislator has not clarified, to what extent the use of one’s own assets – in the case of micro-entrepreneurs also of private assets – can be demanded. It is also open to what extent the use of state aid, if available, will be required first. It is also unclear from the wording of the law who will bear the burden of proof. For property lease agreements, the legislator allows an affidavit to prove a connection between the COVID-19 pandemic and the difficulty of performance. In view of the fact that this is found in the provisions dealing with property lease agreements, it is doubtful whether this applies accordingly to other continuing obligations.
5. Legal consequence
The moratorium postpones the obligation to fulfil the primary performance obligations. Once the moratorium ends, these obligations must be fulfilled if the other prerequisites are met. In addition, the moratorium prevents damage claims caused by default, in particular default interest, coming into existence for a period of three months.
6. Exclusion
The right to rely on the moratorium is excluded if the moratorium puts an unreasonable burden on the creditor because failure to perform “would threaten his [own] reasonable standard of living or the reasonable standard of living of his dependent relatives or the economic basis of his business”. In this case, the debtor has the unilateral right to terminate the contract. Obviously, questions similar to those regarding reasonableness naturally arise on the debtor side.
7. The moratorium’s objection character
If the affected person decides to claim the moratorium, he or she must raise the objection (it is not recognized ex officio). This bears substantial risks when applying the law. In particular, it will be up to the courts to interpret the legal “blanket terms”, and to clarify the relevant questions of fact. Considering the current delays in the courts, this could take years in some cases.
8. Recommendations
Going forward, companies should scrutinize their contractual portfolio to identify which contracts vis-a-vis consumer and micro-enterprises qualify as governing “substantial continuing obligations”. In this context, it will be particularly important to distinguish contracts on „continuing obligations“ from such which only stipulate subsequent delivery instalments (Sukzessivlieferverträge).
Once such contractual relationships which are subject to the new law are identified, the accounting department should be notified where the relevant collection processes need to be amended. In this context, a standard letter should be prepared confirming receipt of a notice by the respective consumers or micro-enterprises claiming rights under the moratorium.
The standard letter should not go beyond acknowledging the difficult economic situation in general, but also include language reserving the right to scrutinize whether the legal requirements under the law are in fact met, and reminding the consumer or micro-enterprise that the payment obligation becomes due after the moratorium has expired.
II. Protect Debtors under Consumer Loans and Relax Filing Requirements for Insolvency
The Bundestag has furthermore made significant changes in the laws of consumer loans and insolvency:
1. Changes to the law of consumer loan agreements
A temporary waiver of rights relating to consumer loans has been implemented. Specifically, for any consumer loans that were executed prior to March 15, 2020, claims of the lender for the payment of principal or interest which fall due between April 1, 2020 and June 30, 2020 will be deferred by three months if the borrower claims that performing on such claims would be unreasonable for him due to loss of income caused by the COVID-19 pandemic. Where the borrower can establish that it has suffered a loss of income, it will be assumed that such loss is actually due to the COVID-19 pandemic.
In addition, the right of the lender to terminate the consumer loan for payment default, deterioration of the financial condition or value of any collateral granted will be temporarily suspended in these cases.
If by the end of the suspension period the lender and the borrower have not agreed to amend the loan agreement otherwise, the term of the loan will automatically be extended by three months and any due dates for performance under the loan agreement, including for any payments due during the suspension period, will be extended by three months as well.
No deferral of payments or temporary suspension of termination rights applies where this would not be reasonably acceptable for the lender taking into account all relevant circumstances, including the changes in living conditions generally caused by the COVID-19 pandemic.
Note that the Federal Government may, by way of regulation, extend the personal scope of the new rules. The law sets out that it may particularly include micro-enterprises but it appears that it may even go beyond.
2. Changes to German insolvency law
The German legislator has also passed a law to make certain temporary adjustments to German insolvency laws. Previous obstacles and pitfalls for lenders granting bridge loans or rescue financings to distressed companies shall be eliminated to a large extent. This can be an effective way to support (dis)stressed companies in Germany. The obligation on directors to file for insolvency will be suspended for scenarios caused by COVID-19.
a. Filing requirement
With effect from 1 March 2020 until September 30, 2020 German companies do not have to file for insolvency in case of cash flow insolvency unless it is not caused by the COVID-19 pandemic or there is no prospect that the cash flow insolvency will be remedied. To give directors comfort that there is no obligation on them to file, it will be assumed that an illiquidity is caused by the COVID-19 pandemic where the company was not already cash flow insolvent on December 31, 2019.
b. Payments by companies in a crisis
As a consequence the company can make payments in the ordinary course of business without management risking personal liability. This shall stabilize stressed companies and enable them to continue business with its contractual partners.
c. Lender liability
The new law also eliminates legal risks in connection with the provision of financing in a crisis. Potential lender liability due to a delayed filing for insolvency is suspended. Also, claw-back risks relating to loans granted between March 1 and September 1, 2020 and repaid until September 30, 2023 or the granting of security for such financing have been minimized for all customary scenarios of financing in a crisis. This shall assist lenders in quickly making a decision to support stressed borrowers.
d. Shareholder financing
Last but not least, also shareholders can benefit from this new law. A shareholder shall be able to may make available financing to its subsidiary between March 1 and September 30, 2020 without running the risk of legal subordination of such a loan in insolvency proceedings of the debtor until September 30, 2023. Legal subordination of shareholder loans had in the past often been an obstacle in many rescue financings attempted by shareholders.
3. What am I supposed to do?
The wider economic impacts of the amendments now introduced cannot be predicted and will also depend on how debtors and creditors will sort out their affairs under the new regime. While hurry does hardly ever make good law, businesses need to adapt to these changes, particularly if they or their close business partners significantly lend consumer loans.
With regard to the changes to insolvency law, the German legislator has significantly released the burden on directors of companies to promptly file for insolvency. The assumption that a business that was not cash flow insolvent on December 31, 2019 has been affected by COVID-19 allows the management – without the threat of criminal prosecution and personal liability – to use the additional time granted to find reasonable arrangements with its creditors to hopefully avoid insolvency altogether.
However, as this is only a temporary relaxation through September 30, 2020, due care should be taken to get a crystal clear understanding of the prospects of the business before that date to avoid criminal and individual liability if a deadline to file for insolvency would be missed after September
III. Keep the Germany AG Running – Facilitate Virtual and Remote General Shareholders’ Meetings, Allow for Advance Dividends
Due to the COVID-19 related restrictions of gatherings of people numerous German blue-chip stock corporations have canceled their scheduled annual shareholders meetings causing uncertainty when the necessary resolutions can be passed, in particular on the distribution of dividends.
The German legislator reacted quickly. It has passed legislation significantly simplifying shareholders meetings in 2020: In particular virtual-only-meetings may be held with limited rights of shareholders (regarding questions, motions, appeals), convocation periods may be shortened and advance payments on dividends (up to 50%) can be granted without authorization in the company’s articles.
The respective rules are expected to take effect at the beginning of next week and apply to the year 2020, only. The key regulations are:
1. Purely virtual shareholders’ meeting possible for the first time
The management board may (with consent of the supervisory board) hold the annual shareholders meetings without physical presence of shareholders, provided (i) the entire meeting is broadcasted by audio and video, (ii) voting rights can be exercised by way of electronic communication (iii) shareholders are granted a „possibility to ask questions“ and (iv) shareholders may electronically raise objections until the end of the meeting (provided they have also exercised their voting right electronically).
a. No “information right”, “possibility to ask questions” (only)
The possibility to ask questions does not give a right to request information. Rather the management board may select and decide – in its best lawful judgment – which questions to answer and in what way. The management board may privilege questions of investors with major shareholdings. It may also require shareholders to electronically turn in their questions (up to) 2 days before the meeting.
b. Motions DURING meeting don’t need to be permitted
No possibility to file motions during the meeting needs to be provided. If this applies only requests for additional agenda items prior to the meeting are possible.
c. Appeals against resolutions extremely limited
Appeals against resolutions in a virtual general meeting – in particular with respect to appropriate answers to questions – are limited to cases of intentional breach on the side of the company, which has to be proven by the appealing party.
2. Reduction of convocation period
The management board (with consent of the supervisory board) may reduce the convocation period to 21 days (for virtual and physical shareholders’ meetings). If this is applied, the record date (date for proof of shareholding in case of bearer shares) and the timeline for notifications of shareholders are reduced accordingly. This leads to an extremely tight window between notification of the shareholders and the registration deadline which makes it extremely difficult to register in time, in particular for foreign investors.
3. Advance payment on dividend
For virtual and physical shareholders’ meetings alike, the management board (with consent of the supervisory board) may grant advance payments on the expected net profit (irrespective of a respective authorization in the AoA). This allows, once (preliminary) annual accounts 2019 are available, a payment of up to 50% of the annual profit 2019 (less statutory reserves), however, limited to a maximum of 50% of the net profit of the preceding financial year (2018).
4. Deadline for holding the annual meeting extended from 8 to 12 months (after end of fiscal year)
This does, however, not apply to companies in the form SE (Societas Europaea) which is subject to European law (requiring the meeting to be held within 6 months after the end of the fiscal year).
The new law opens most unusual ways to conduct shareholders’ meetings in 2020. Whilst the new rules enable companies to pass necessary resolutions, in particular on the distribution of dividends, despite the COVID-19 restrictions, this comes at the price of limited participation rights of the shareholders. Investors, therefore, need to monitor carefully how to exercise their rights in this year’s AGM season.
IV. Termination for Cause of German Property Leases Restricted
The public health crisis caused by the COVID-19 pandemic increases the risk that residential and commercial tenants alike may no longer be in a position to pay their rent when due. A temporary moratorium has put a halt to this risk for the tenant.
1. Landlord’s termination for cause temporarily restricted
German lease agreements usually allow the landlords to terminate the lease for cause, if the tenants are in default with their rent payments for at least two months. To mitigate the termination risks for tenants, the Act now temporarily restricts the landlords’ termination right concerning German property lease agreements (Miet- und Pachtverträge).
According to the Act, a landlord is not entitled to terminate such a lease agreement based on the argument that the tenant is in default with payment of the rent for the period April 1, 2020 – June 30, 2020 if the tenant provides credible evidence (glaubhaft machen) that the payment default is based on the impacts of the COVID-19 pandemic.
2. All other contractual and statutory provisions remain unaffected
All other contractual and statutory termination rights, however, remain unaffected. Consequently, the landlord remains entitled to terminate the lease for payment defaults that occurred before or after this period or based on other defaults of the tenant.
The temporary moratorium also does not waive in any way all of the landlord’s right to the payments due under the property lease. As of July 1, 2022, the landlord retrieves its termination right with regard to the rental payments for the period April to June 2020, if the respective amounts are still outstanding at that time.
By way of a separate regulation (Rechtsverordnung) to be issued by the Federal Government, the respective restriction to terminate the lease for cause may be extended to backlogs in tenant’s payments for the period between July 1, 2020 through September 30, 2020 if it is to be expected that the social life, economic activity of a multitude of enterprises or the work of many continues to be significantly affected by the COVID-19-pandemic.
3. Many things to talk about…
The Act is silent on the question whether and under which circumstances a tenant may request an abatement (in whole or partly) of rent (Mietminderung) due to the impacts of the COVID-19 pandemic, e.g., due to a shutdown of the tenant’s business by public authorities. An abatement, if the abatement is the result of a defect of the property, would reduce the respective obligation of the tenant to pay the rent (in full or partly).
Absent of any stipulations in the lease agreement to the contrary, German statutory and case law provides for an allocation of risks between the landlord and the tenant. As a general rule, the landlord is responsible for the compliance of the leased object with the agreed and/or common use.
Therefore, any defect related to the constructional status of the lease object (e.g., public order to close the leased object due to constructional related issues (objektbezogene Mängel) and/or its location (e.g., limitation of access due to works)) is within the scope of responsibility of the landlord. Instead, everything related to the operation of the leased object without having any impact on its constructional status is generally within the scope of responsibility of the tenant.
Therefore, in case of a shutdown of the activity of the tenant due to a public order related to the activity of the tenant, the shutdown would typically – absent force major events – be considered as in the tenant’s responsibility and, therefore, the tenant would not be entitled to an abatement of rent.
4. What already happens in the marketplace and what can be done
We see that in cases where the tenant’s operations are temporarily shut down by public orders following the COVID-19 pandemic, many tenants turn to the landlord with an (unspecified) notification of non-payment.
The risks for the tenant to doing so are now quite low as the tenant will likely be able to provide credible evidence that that the inability to pay the rent was caused by the COVID- 19 pandemic. If, at a later stage, the tenant will advance the argument that his notification was an abatement, the landlord may be at risk, to not only losing the liquidity provided by the rent through the relevant time period for which the moratorium lasted, but to lose part or all of its claims for the period in which his tenant was subject to the restriction order.
Therefore, it might be advisable, in order to respond to the tenant’s notification of non-payment of a lease with a reference to the COVID-19 pandemic, to understand whether the non-payment is based on the moratorium or a request for abatement, and further seek a discussion about mutually acceptable contractual provisions to address the specific needs of the landlord and the tenant.
In this context, it is important to keep in mind that the mutually agreed provisions may not provide for less favorable provisions for the tenant than provided in the moratorium. However, finding a mutually acceptable solution will definitely be preferable to ensure stability and a clear path forward.
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All those of you that have lived through prior crises have seen, ad hoc legislative measures prepared under stress and without extensive public debate come with many uncertainties caused by inconsistent terminology, sloppy drafting, or well-intentioned programs that ultimately fail to address the core of the problem. Clearly, this package demonstrates the Federal Government’s determination to be bold in face of the crisis. The next weeks and months will show whether this approach represented the right strategy. We hope for the best.
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[1] http://dip21.bundestag.de/dip21/btd/19/181/1918110.pdf
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client update: Markus Rieder, Finn Zeidler, Annekathrin Schmoll, Sebastian Schoon, Alexander Klein, Ferdinand M. Fromholzer, Silke Beiter, Wilhelm Reinhardt, Peter Decker, Daniel Gebauer, Benno Schwarz, Andreas Dürr, and Carla Baum. Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19.
Please feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the team in Frankfurt or Munich:
Gibson Dunn in Germany:
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Sebastian Schoon (+49 69 247 411 505, [email protected])
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Lutz Englisch (+49 89 189 33 150), [email protected])
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Dirk Oberbracht (+49 69 247 411 503, [email protected])
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Michael Walther (+49 89 189 33 180, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
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Michael Walther (+49 89 189 33 180, [email protected])
Richard Roeder (+49 89 189 33 180, [email protected])
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Hans Martin Schmid (+49 89 189 33 110, [email protected])
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Mark Zimmer (+49 89 189 33 130, [email protected])
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Peter Decker (+49 89 189 33 115, [email protected])
Daniel Gebauer (+49 89 189 33 115, [email protected])
Technology Transactions / Intellectual Property / Data Privacy
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
Corporate Compliance / White Collar Matters
Benno Schwarz (+49 89 189 33 110, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Mark Zimmer (+49 89 189 33 130, [email protected])
Finn Zeidler (+49 69 247 411 504, [email protected])
Markus Rieder (+49 89189 33 170, [email protected])
Ralf van Ermingen-Marbach (+49 89 18933 130, [email protected])
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By: Eduardo Gallardo, Partner, New York
The public health crisis caused by COVID-19 has had a dramatic economic impact on the trading prices of U.S. companies across all industries. As boards of directors and management teams work to stabilize their operations and deal with the myriad issues caused by the pandemic, we have witnessed a number of opportunistic shareholder activists accumulating stakes in publicly traded targets. In the current environment, boards and their advisors should take, and several already have taken, a fresh look at the implementation of a shareholder rights plan (aka “poison pill”).
Rights plans were a permanent fixture in most public companies’ defensive profile until the turn of century, when various governance and proxy advisory groups began an effective campaign to pressure companies into letting expire, or terminating, their rights plans. This is reflected in the fact that, according to SharkRepellent, only approximately 1% of companies in the S&P 500 had an active rights plan in place as of March 1, 2020, while around the year 2000 approximately 60% of the S&P 500 had one. Instead of maintaining standing long-term rights plans as a general defensive measure, many companies have kept rights plans in draft form “on the shelf”—ready for implementation if needed. Under the existing extraordinary market conditions, companies in particularly affected sectors should evaluate the advisability of activating on-the-shelf plans.
In assessing whether to activate a rights plan, companies should consider the following:
- Presence of Activist: Companies that already have an activist in their stock should closely monitor for potential accelerated accumulations. We recommend that boards take prompt action in the event there is a clear indication that the activist is proceeding with any aggressive accumulation of additional shares.
- Schedule 13D: Federal securities rules and regulations require an activist or hostile bidder to publicly file a Schedule 13D within ten days after crossing the 5% ownership threshold. However, after the initial threshold is crossed, accumulations can continue during the ten-day filing window, such that the buyer could launch its public campaign after having acquired an ownership stake well over the 5% threshold. This is particularly important to consider for companies that are seeing increased trading volumes that might facilitate rapid accumulations of large blocks of stock. Companies should also keep in mind that currently SEC rules do not require the aggregation of certain derivative instruments in computing whether the 5% threshold has been crossed, a loophole often used by professional activists to conceal their economic exposure to a target.
It is important to note that, following the filing of an initial Schedule 13D, an activist will be required to file an amendment within one or two business days after each time it acquires an additional one percent of the class of securities. For a company with an existing activist, this amendment might be a good early-warning indicator of when to activate a rights plan.
- HSR Filing Obligation: The Hart-Scott-Rodino Antitrust Improvements Act of 1976 generally requires a filing with the Federal Trade Commission and U.S. Department of Justice (with notice to the target company) and subsequent observation of the statutory waiting period before a person can acquire and, as a result of the acquisition, hold more than $94 million in shares for non-passive purposes. Although somewhat peculiar, for larger publicly traded companies, this antitrust rule generally establishes a more effective warning system against aggressive stock accumulations than Schedule 13D does under federal securities laws. However, the HSR filing obligations may not apply to groups of fund vehicles, as well as many derivative instruments, some of which are specifically designed with this purpose in mind. As a result, the HSR filings may not always provide the advance notice of an activist.
- ISS Considerations: One of the main deterrents against adoption of rights plans in recent years has been the fact that the proxy advisory firm Institutional Shareholder Services (ISS) will generally recommend votes against incumbent director nominees at annual meetings where the company has recently adopted a rights plan with a term of more than one year. However, for plans with a duration of less than a year, ISS will make its recommendations on a case-by-case basis taking into account the disclosed rationale for adopting the plan and other relevant factors (such as a commitment to put any renewal of the pill to a shareholder vote).
We believe that existing market conditions should be strongly considered and taken into account by ISS when reviewing cases, particularly where the board articulates a clear rationale for implementation of the rights plan. Companies should also consider whether they previously adopted a governance policy promising to seek stockholder approval prior to adopting a rights plan unless the board, in the exercise of its fiduciary duties, determines that it is in the best interests of the company and stockholders to do so before seeking approval. Such policies should not deter adoption but typically also provide that any rights plan adopted without shareholder approval will expire unless approved by shareholders within the next year.
- Duration: As a general matter, we believe that most companies that implement a plan in the coming weeks should consider an expiration date between six and nine months of adoption, and we have recently advised clients to adopt plans that expire on December 31, 2020. We believe that date strikes the right balance between adopting an instrument that protects shareholder value in this uncertain environment and mitigating against the potential criticism from governance groups. Of course, the board will always have the power to accelerate the term if it deems it in the best interests of the company and its shareholders.
- Net Operating Losses (“NOLs”): For companies with NOLs, a deemed “ownership change” under Internal Revenue Code Section 382 can materially impair or eliminate NOLs. The complex Section 382 test is dependent on shifts of ownership of 5% or greater holders over a rolling three-year period. NOL rights plans have acquisition triggers of 5%—much lower than the customary rights plans—but otherwise are substantially identical to a traditional rights plan. In light of ongoing market volatility and changes in investor positions, for companies with both material NOLs and demonstrable ownership shift percentage under Section 382, an NOL rights plan may make sense.
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Under the current extraordinary circumstances, companies in particularly vulnerable industries should actively assess the advantages and disadvantages of implementing a rights plan to ensure that all stockholders receive fair and equal treatment in the event of any proposed takeover of the company and to guard against creeping accumulations of control.
For more information, please contact the author Eduardo Gallardo. To view more insights regarding the COVID-19 pandemic, visit our COVID-19 Resource Center.
Yesterday, the U.S. Senate passed (96-0) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus package designed to mitigate the effects of the novel coronavirus (“COVID-19”). The legislation includes relief for businesses and individuals, assistance to states, and key protections for workers. It is expected that the U.S. House of Representatives will swiftly pass the CARES Act, and that the President, in turn, will promptly sign the measure. At $2.2 trillion in emergency stimulus aid, the bill is the largest emergency stimulus package in United States history.
Last week, Senate Majority Leader Mitch McConnell (R-KY) introduced a bill responding to the economic impact of COVID-19 by providing $1.6 trillion in aid for individuals, small businesses, and businesses operating in impacted industries, such as the hotel industry, as well as providing increased resources for the health care industry. Given concern among Democratic Senators that the bill failed to include enough pro-worker protections, the Senate twice failed to clear procedural hurdles and advance the bill. After the Senate bill stalled, House Democrats introduced their own $2.5 trillion COVID-19 stimulus bill. Late Tuesday evening, however, Congress and the White House announced a bipartisan deal, which is the subject of this alert.
The revised CARES Act provides, among other things, economic assistance to millions of Americans and small and distressed businesses. For businesses, the legislation–
- Extends $500 billion in loans and loan guarantees to blunt the coronavirus’ economic impact, including $454 billion to businesses, states, and cities especially impacted by the coronavirus and not receiving loans through other provisions in the Act; $50 billion to passenger airlines; and $17 billion to businesses in the national security industry; and
- Establishes a $350 billion loan guarantee program to help small businesses keep employees on the payroll and cover necessities such as rent and utilities. If certain conditions are met, the loans are forgivable.
The bill passed after the White House reportedly agreed to: (1) $150 billion for a “state stabilization fund,” which would provide key resources to state and local governments combatting the virus and almost $130 billion for the health care system; (2) additional aid for the airline industry; and (3) additional restrictions on stock buybacks and executive compensation.
In this client alert we focus on key provisions within the CARES Act, as follows:
- A forgivable, “paycheck protection”, Small Business Administration loan program under Title I;
- Provisions for direct rebates and other tax relief for individuals and employers under Title II;
- Increased funding and other resources for education and health care under Title III; and
- An economic stabilization loan program for businesses under Title IV.
Title I: Keeping American Workers Paid and Employed
The CARES Act would authorize the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program (the SBA’s primary program for providing financial assistance to small businesses), funding a new “paycheck protection” program.[1]
SBA Loan Eligibility
Under existing law, a small business must meet size requirements to be eligible for an SBA loan. The SBA size standards vary by industry and are generally based on the average number of employees or average annual receipts. Under the CARES Act, small businesses would continue to be eligible under these standards. However, the CARES Act expands eligibility for loans authorized by the legislation (a “covered loan”) to all businesses with no more than 500 employees. Additional exceptions further expand the reach of the CARES Act.
Businesses in the accommodation and food services industries, for example, may still qualify for loans if they are assigned a North American Industry Classification System (“NAICS”) code beginning with 72 and have not more than 500 employees per physical location.
A key provision in the CARES Act for many companies is a waiver of SBA affiliation rules. Employees or annual receipts of domestic and foreign affiliates, in some cases under the CARES Act, may not count when considering whether a business, including portfolio companies owned by private equity funds, satisfies the SBA’s size requirements. Under the affiliation rule, the SBA ordinarily counts the total number of employees or annual receipts of a business’s domestic and foreign affiliates when determining whether the business qualifies as a small business, and Section 121.103 of Title 13 of the Code of Federal Regulations sets forth the general principles the SBA uses to determine affiliation. The CARES Act provides that this regulation is waived with respect to eligibility for a covered loan for any business:
- With not more than 500 employees that is assigned a NAICS code beginning with 72;
- Operating as a franchise that is assigned a franchise identifier code by the SBA; or
- Receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
SBA Loan Terms
An eligible business may receive one covered loan, which the recipient may use for payroll costs; continuation of group health care benefits during periods of paid sick, medical or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. Generally, the maximum loan amount is the lesser of (1) $10 million, or (2) 2.5 times the average total monthly payments by the applicant for payroll costs—only payroll costs, not the other costs the loan proceeds may cover—incurred during the one-year period before the date of the loan. The CARES Act does not require collateral or personal guarantees for a covered loan.
SBA Loan Forgiveness
The CARES Act allows for covered loan forgiveness under certain conditions. The loan forgiveness amount, which is excluded from taxable income, is equal to the payroll costs, mortgage interest payments, rent, and utility payments incurred or paid by a recipient during the covered period.
The loan forgiveness amount is reduced if the recipient (1) reduces the average number of full-time equivalent employees per month during the covered period below the lesser of (a) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (b) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020, or (2) reduces the salary or wages of any employee in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. There is no reduction if a borrower re-hires the employees who earlier were terminated.
Applications
To participate in the program, an eligible business must submit an application to the lender that originated the covered loan that includes: (1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; (2) state income, payroll, and unemployment insurance filings; and (3) documentation verifying payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, and transcripts of accounts. More detail on how to apply and the criteria the SBA will use to determine who will receive loans is expected within 15 days of enactment, when the Administrator is required to issue guidance and regulations implementing the program.
Additional Relief Through Reorganization
The CARES Act modifies the provisions of the Bankruptcy Code dealing with small business reorganizations (embodied in 11 U.S.C. §1182 et seq) to allow companies with more outstanding debt (total noncontingent, liquidated, secured and unsecured debt of $7.5 million vs. $2.19 million, excluding insider and affiliate debt) to reorganize as a small business, thereby allowing additional small businesses to take advantage of truncated reorganization procedures and simpler confirmation standards.
Title II: Assistance for American Workers, Families, and Businesses
Expanded Unemployment Insurance
One of the last negotiated provisions in the bill, which almost held up the bill’s passage, was the bill’s significant investment in unemployment insurance. Under Section 2104, individuals who receive unemployment insurance will be eligible for an additional $600 per week for up to four months. In addition, recognizing that many states have a one-week waiting period for unemployment compensation, if states choose to pay recipients as soon as they become unemployed, under Section 2105, the federal government will fund the cost of the first week of benefits. Further, under Section 2107, if individuals remain unemployed after state employment benefits are no longer available, the federal government will fund up to 13 weeks of unemployment benefits.
Additional Relief for Individuals: Direct Rebates
The CARES Act provides direct aid in the form of a refundable tax credit rebate of up to $1,200 for individuals and $2,400 for married couples. Households that earn $99,000 or less (individuals) and $198,000 or less (married couples) may be eligible for an additional $500 per child. Individuals and married couples that earn greater than $75,000 (but not more than $99,000) or $150,000 (but not more than $198,000), respectively, are eligible for a lesser amount—reduced by $5 for each additional $100 of income above $75,000 and $150,000, respectively.
At the request of Democratic Senators, the final bill eliminated minimum earnings requirements. Accordingly, all taxpayers that filed tax returns in either 2018 or 2019 are eligible for a tax credit rebate, which will only be reduced for individuals and households with earnings above the respective $75,000 and $150,000 thresholds. In addition, eligibility and benefit amounts are based on 2019 income tax filings (or 2018 income tax filings if 2019 filings are unavailable). The bill requires all refunds or credits to be made on or before December 31, 2020.
Increased Flexibility Under Retirement Plans
Section 2202 of the CARES Act provides plan sponsors with the ability to make available to participants additional opportunities to take distributions and request loans from tax-qualified retirement plans. The CARES Act further provides relief from required loan repayments to tax-qualified retirement plans. These new provisions can be implemented immediately following the enactment of the CARES Act, so long as such tax-qualified retirement plans are amended to retroactively provide for such provisions on or before the last day of the first plan year beginning on or after January 1, 2022.
Coronavirus-Related Distributions
Individuals may make withdrawals from a tax-qualified retirement plan of up to $100,000 in 2020 as a “coronavirus-related distribution,” without such distributions being subject to the 10 percent additional tax that would typically apply to early distributions. Such distributions will, however, be taxable as ordinary income to the extent not repaid in the manner described below. Under the CARES Act, an employer would need to apply the $100,000 cap on such distributions to all distributions to an individual from all plans maintained by any member of the employer’s “controlled group” (in general, all 80 percent affiliates).
“Coronavirus-related distributions” are broadly defined to include distributions made during the 2020 calendar year to individuals:
- Who are diagnosed with SARS-CoV-2 or COVID-19;
- Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
- Who experiences adverse financial consequences as a result of (1) being quarantined, furloughed, or laid off or having work hours reduced because of SARS-CoV-2 or COVID-19; (2) being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or (3) closing or reducing hours of a business owned or operated by such individual due to SARS-CoV-2 or COVID-19.
Plan administrators may rely on an employee’s certification that such employee’s distribution qualifies as a coronavirus-related distribution.
Individuals who receive coronavirus-related distributions will have the right to repay such distributions by making contributions to the plan from which the distribution was received over the three-year period beginning on the day after such coronavirus-related distribution was received. For any amounts that are repaid, the coronavirus-related distribution will be treated as an eligible rollover distribution (meaning that it will not be taxable to the individual), and the repayment will be treated as a transfer to the plan in a direct trustee-to-trustee transfer within 60 days of the distribution, even if the time-period for repayment extends beyond 60 days.
To the extent coronavirus-related distributions are not repaid, any amount required to be included in gross income for the tax year of the distribution as a result of a coronavirus-related distribution will generally be included ratably over the three taxable years beginning with the tax year of the distribution.
Loans from Qualified Retirement Plans
For the 180 days following the date of the enactment of the CARES Act, for individuals who would qualify for distributions as noted above, the limit on loans from qualified retirement plans will be increased to the lesser of (1) $100,000 (from $50,000), or (2) 100 percent of the present value of the vested accrued benefit of the employee under the plan (under current law, loans cannot exceed 50 percent of such value).
Additionally, for loans from a qualified retirement plan made to individuals who would qualify for coronavirus-related distributions as noted above that are outstanding on or after the date of enactment of the CARES Act:
- Any due date for repayment that occurs during the period beginning on the date of enactment and ending on December 31, 2020 shall be delayed for one year;
- Any subsequent repayments shall be appropriately adjusted to reflect the due date delay and any interest accruing during such delay; and
- Any such delay shall be disregarded in satisfying the requirement that loans be repaid within five years.
Waiver of Minimum Distribution Rules
Section 2203 of the CARES Act provides that minimum required distribution rules under Section 401(a)(9) of the Internal Revenue Code will not apply to certain defined contribution plans and individual retirement plans where the individual attained age 70-1/2 in 2019 and, therefore, the required beginning date is in 2020.
Employee Retention Credits for Employers
Facing difficult decisions about closures, employers should be aware that, under Section 2301, they may be eligible for a refundable payroll tax credit for 50 percent of “qualified wages” paid to employees during the COVID-19 crisis. This credit is available to employers whose (1) operations were fully or partially suspended because of a COVID-19-related shut-down order, or (2) gross receipts have declined by more than 50 percent when compared to the same quarter in 2019, until the business recovers to 80 percent of gross receipts relative to the same quarter. Like the tax credits created in the Families First Coronavirus Response Act (“FFCRA”), signed into law on March 18, 2020 (see Gibson Dunn’s March 26, 2020 Client Alert), excess credits are refundable. The calculation of “qualified wages” depends on the number of employees (determined by taking the average number of employees in 2019), and is subject to an aggregate $10,000 cap per eligible employee for all calendar quarters, including health benefits.
Modifications for Net Operating Losses
The CARES Act temporarily suspends a number of the business loss limitations established by the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (“TCJA”). Under current law, net operating losses (“NOLs”) are subject to limitations based on taxable income and cannot be carried back to prior tax years.
The CARES Act would modify current law to allow a taxpayer to carry back NOLs from tax years beginning in 2018, 2019, or 2020 up to five years. The NOLs cannot be carried back to offset the untaxed foreign earnings transition tax added to the Code in 2017; however, taxpayers can elect to exclude any tax years in which the foreign earnings are included into gross income from the calculation of the five-year carryback period. In addition, for taxable years beginning before January 1, 2021, the CARES Act removes a limitation on NOLs that prevents taxpayers from offsetting in excess of 80 percent of taxable income with NOLs. Real estate investment trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year (regardless of whether the taxpayer incurring the loss is currently a REIT).
The CARES Act would also modify the excess business loss limitation applicable to non-corporate taxpayers for 2018, 2019, and 2020, providing a benefit for these companies similar to that provided to corporations by the change to the NOL carryback rules. The limitations on excess farm losses under Code section 461(j) are suspended through the end of 2025.
Modifications of Limitations on Business Interest
Generally, the business interest allowable as a deduction is limited to 30 percent of adjusted taxable income (“ATI”), which currently is calculated in a manner similar to EBITDA, subject to certain modifications. The CARES Act would, for the 2019 and 2020 tax years, increase the limit from 30 percent to 50 percent of ATI.
Further, taxpayers may elect to use their 2019 ATI in place of their 2020 ATI for purposes of determining business interest deductibility in 2020.
Special provisions apply in the case of a partnership.
Employer Payroll Tax Extension
Certain employer payroll taxes for the period of the date of enactment until the end of the year would be deferred by the CARES Act. Fifty percent of those taxes could be deferred until December 31, 2021, and the remaining 50 percent could be deferred until December 31, 2022.
Exclusion of Employer-Funded Student Debt Relief from Employee Taxable Income
The CARES Act would add employer payments made prior to January 1, 2021, to an employee or lender for student loan principal and interest to the list of employee education assistance programs that an employee can exclude from his or her taxable income. The total amount of payments from employee education assistance programs that an employee can exclude from income remains capped at $5,250 per calendar year. These employee education assistance exclusions are unavailable for (1) programs that discriminate in favor of highly compensated employees or (2) programs where more than five percent of amounts paid are provided to five percent or greater owners.
Additional Title II Tax Relief
Excise Tax Holiday. Under the CARES Act, a federal excise tax holiday would apply to alcohol and distilled spirits in the production of hand sanitizer.
$300 Charitable Deduction. The CARES Act allows an “above the line” charitable deduction of up to $300 for individuals who do not itemize.
Refundable AMT Credit Modification. The corporate alternative minimum tax (“AMT”) was repealed by the TCJA. However, corporate AMT credits were made available as refundable credits over several years, ending in 2021. Section 2305 of the CARES Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Title III: Supporting America’s Health Care System in the Fight Against the Coronavirus
Title III and the related appropriations provisions of the CARES Act provides an extensive program to support the health care system in its immediate response to COVID-19. The bill also includes provisions and investments intended to improve preparation for future disease outbreaks.
In addition, Title III provides relief for education institutions and students.
Immediate Funding for the Healthcare System
In Division B of the CARES Act, Congress has provided substantial immediate funding for hospitals and other facilities in the healthcare system, through direct appropriations and availability of payments through Medicare and other federal healthcare programs.
Congress appropriated $100 billion for the Public Health and Social Services Emergency Fund to support hospitals and other health care providers “for health care related expenses [not otherwise reimbursable] or lost revenues that are attributable to coronavirus” in Division B, Title VIII of the CARES Act. The funds are available to “eligible health care providers,” which “means public entities, Medicare or Medicaid enrolled suppliers and providers, and such for-profit entities and not-for-profit entities . . . as the Secretary may specify . . . that provide diagnoses, testing, or care for individuals with possible or actual cases of COVID–19.” In terms of process, “to be eligible for a payment . . . an eligible health care provider shall submit to the Secretary of Health and Human Services an application that includes a statement justifying the need of the provider for the payment.” Congress directs the Secretary to make payments on a rolling basis and the Secretary has flexibility to make advance payments or reimbursements. Recipients of these funds must comply with documentation requirements established by the Secretary, and the Secretary must provide reports to Congress every 60 days detailing the payments made. In addition, Division B, Title VII, provides more than $1 billion for the Indian Health Services to respond to the coronavirus outbreak.
Funding For Countermeasures
Congress designated $80 million in emergency funding for use by the Food and Drug Administration (“FDA”) in fighting the coronavirus, including to support “the development of necessary medical countermeasures and vaccines, advanced manufacturing for medical products, [and] the monitoring of medical product supply chains” in Division B, Title I. The emergency appropriations also include extensive funding for the Centers for Disease Control and Prevention, the National Institutes of Health, and other agencies for research, health surveillance programs, and other resources to respond to the crisis in Division B, Title VII. Building on earlier COVID-19 legislation, the emergency funding also includes investments in research for diagnostics, vaccines, and treatments for the virus, and for personal protective equipment (“PPE”) and other supplies for health care professionals administering countermeasures, including $16 billion in funding for these supplies as part of the Strategic National Stockpile addressed in Title III of the CARES Act, discussed below.
Supporting Health Care Providers
Measures to support health care providers on the front lines include payments in the form of increased Medicare reimbursements, such as increasing Medicare payments to hospitals for treating COVID-19 patients by 20 percent (Section 3710); extending Medicare advance payments for the duration of the public health emergency (Section 3719); temporarily lifting the so-called Medicare sequester, which has the effect of increasing payments to providers by 2 percent (Section 3709); and freeing up critical emergency resources in hospitals by increasing Medicare payments for coronavirus patients after they are discharged from the hospital and by providing what would otherwise be home-based services in the hospital (Sections 3708, 3711 and 3715). The provisions encourage the use of “technologies during the emergency period, including remote patient monitoring and broadening the range of providers who can provide telehealth” (Sections 3701-3707). The measures also extend coverage for treatment and prescription benefits under certain Medicare and Medicaid programs.
The bill also reauthorizes or extends certain programs aimed at the education and development of healthcare professionals, including programs focused on health care for the elderly (Section 3403) and nurses (Section 3404).
Insurance Provisions
Regarding insurers, the bill provides for coverage of diagnostic tests for COVID-19 at “the cash price for such service as listed by the provider on a public internet website” or a lower negotiated rate, unless the insurer has negotiated a different rate with the provider prior to the start of the current public health emergency (Sections 3201-3202). In addition to COVID-19 tests that have not been approved or authorized by the FDA, the provisions include COVID-19 tests that have not yet received emergency use authorization, tests that are authorized by a State that has notified FDA of its intent to review the diagnostic tests, and the other tests that the FDA identifies by guidance. Health plans will also be required “to cover (without cost-sharing) any qualifying coronavirus preventive service,” which is “an item, service, or immunization that is intended to prevent or mitigate” COVID-19 (Section 3203).
Limitations on Liability
The CARES Act provides a limitation on liability for health care professionals. In general, “a health care professional shall not be liable under Federal or State law for any harm caused by an act or omission of the professional in the provision of health care services during the public health emergency with respect to COVID-19” if “the professional is providing health care services in response to such public health emergency, as a volunteer.” (Section 3215). There are certain limitations and exceptions. Notably, the bill includes a provision preempting state laws, “unless such laws provide greater protection from liability.”
The CARES Act, in Section 3103, includes an important amendment to specifically recognize liability immunity under federal and state law for National Institute for Occupational Safety and Health (“NIOSH”)-approved respiratory protective devices that the Department of Health and Human Services (“HHS”) determines to be “a priority for use during a public health emergency.” The definition of “covered countermeasure” has included “devices,” “drugs,” and “biologics,” as these terms are defined in the federal Food, Drug and Cosmetic Act (“FDCA”), and some other defined categories. Many NIOSH-approved respirators, however, are not usually regulated as medical devices by FDA because they are not intended for medical applications. The CARES Act amends the definition of “covered countermeasures” that receive liability protection to specifically include these NIOSH-approved respiratory devices.
Modernizing Regulation of Over-The-Counter Drugs
The CARES Act also includes comprehensive reforms to the regulation of over-the-counter (“OTC”) drugs mirroring recently-proposed legislation. These provisions include speeding up the process for OTC monograph review with a more streamlined “administrative order” process in place of full notice-and-comment rulemaking proceedings, which can be lengthy and resource-intensive (Section 3851). To incentivize companies to invest in the research and development of innovative OTC drug products, Section 3851 also provides for an 18-month period of marketing exclusivity for OTC drug products with new active ingredients or conditions of use. Another significant reform establishes an OTC drug user fee program similar to the programs for prescription drugs and medical devices (Section 3862). The proceeds from the fee program will fund the FDA’s OTC monograph oversight and approval activities—a measure intended to address the resource challenges that the FDA has faced in implementing its OTC monograph program (Section 3861).
Other OTC drug reforms include amending the FDCA to make explicit that the failure to comply with an applicable monograph renders an OTC drug “misbranded” and illegal to market in the United States (Section 3852); a clarification that the OTC monograph reforms do not apply to drugs the FDA previously excluded from the OTC monograph program (Section 3853); a provision permitting sponsors of sunscreen ingredients that have pending submissions with the FDA to seek review under the new monograph review process or in accordance with the Sunscreen Innovation Act (Section 3854); and a provision requiring the FDA to report annually to Congress on its progress in evaluating the pediatric indications for OTC cough and cold medications for children under six due to the potential safety risks such drugs may pose to young children (Section 3855).
Planning For Future Crises
The CARES Act includes a number of provisions aimed at improving the nation’s preparedness for public health emergencies.
Section 3101 commissions a study by the National Academies of Sciences, Engineering and Medicine of the medical product supply chain. The resulting report and recommendations should include the input of relevant government agencies and outside stakeholders. COVID-19 has highlighted the fact that the manufacturing and supply chains for many pharmaceutical and device products have moved largely, if not entirely, overseas. Thus, if countries block the export of these products or of the critical ingredients or components, or there is some other disruption of this overseas supply, the United States is hampered in its ability to quickly manufacture and distribute critical medical supplies. This has become particularly apparent with the shortage of PPE for healthcare workers.
In response to the recognized shortfall of critical medical supplies, Section 3102 requires the Strategic National Stockpile to include “personal protective equipment, ancillary medical supplies, and other applicable supplies required for the administration of drugs, vaccines and other biological products, medical devices and diagnostic tests in the stockpile.” As discussed above, the emergency appropriations designate $16 billion in funding for the Strategic National Stockpile.
Section 3111 strengthens the mandate to the FDA to expedite the approval of drug applications for life-saving drugs in response to a discontinuance or manufacturing interruption that is likely to lead to a meaningful disruption in the supply of the drug. While the FDCA has stated that the FDA “may” expedite the review of an application and an inspection to mitigate or prevent such a drug shortage, the CARES Act provides that the FDA “shall, as appropriate” do so and that FDA will “prioritize” these actions.
The CARES Act includes provisions to expand and establish reporting requirements for product discontinuations and manufacturing interruptions to the supply of drugs and medical devices. The provisions expand the existing manufacturer reporting requirements for drugs, including expansions for reporting about active pharmaceutical ingredients and for drugs that are critical during a public health emergency. Manufacturers of drugs, active pharmaceutical ingredients, or medical devices used to prepare or administer the drugs must develop risk management plans to address supply risks. Notably, the provisions establish a new framework of manufacturer reporting for medical devices that are “critical to public health during a public health emergency, including devices that are life-supporting, life-sustaining, or intended for use in emergency medical care or during surgery” and for medical devices for which HHS determines that the reporting is needed for a public health emergency (Sections 3112, 3121). The FDA has not had the authority to require medical device manufacturers to notify the agency when they became aware of a circumstance that could lead to a device shortage or meaningful disruption in the device supply. The CARES Act would establish this authority over certain medical devices and permit the FDA to expedite inspections and the review of device applications that may mitigate or prevent the device shortage.
Increased Flexibility Under Health Plans
Section 3701 of the CARES Act provides that, for plan years beginning on or before December 31, 2021, high deductible health plans may waive the deductible for telehealth and other remote care services without jeopardizing their status as a high deductible health plan. This amendment does not require that any such telehealth or other remote health care services for which there is no deductible be related to COVID-19.
Expanded Coverage Under the Family and Medical Expansion Leave Act
Section 3605 of the CARES Act broadens the definition of “eligible employee” in the Family and Medical Leave Expansion Act to give credit for prior service for employees who were laid off on March 1, 2020, or later; had previously worked for the employer for at least 30 of the last 60 days; and were later rehired by the same employer.
Advance Refunding of Tax Credits
Under last week’s Families First Coronavirus Response Act, certain employers are entitled to tax credits for Paid Sick and Paid Family and Medical Leave. Section 3606 will amend these provisions to allow the refundable portion of these credits to be advanced, subject to regulation and guidance.
Additional Relief for Education
Title III Subtitle B of the CARES Act—titled COVID-19 Pandemic Education Relief Act of 2020—includes several provisions aimed at providing emergency assistance related to elementary, secondary and higher education.
Postsecondary Vocational Institutions.
The legislation relaxes restrictions on the use and allocation of federal funds and grants provided during a declared emergency related to COVID-19; the legislation is primarily designed to allow higher education institutions to reallocate resources toward initiatives fighting the pandemic.
- Under Section 3503, for the years 2019-2020 and 2020-2021, the Secretary of Education will waive an institution’s obligation to match federal grants for campus-based aid programs with an equivalent amount. This will only apply to non-profit organizations. Institutions will also be permitted to allocate funds previously assigned to work-study programs to supplemental grants.
- Similarly, under Section 3504, institutions will be permitted to award additional emergency financial aid funds to students that have been impacted by COVID-19.
- Under Section 3505, institutions will be allowed to issue work-study payments, for example, in the form of lump sums, to students who are not able to carry out their work under work-study schemes in light of workplace closures for the period of the declared emergency.
- In addition, under Section 3518, the Secretary of Education will have authority to waive or modify current allowable uses of funds for institutional grant programs if so requested by an institution.
- Institutions will also be able to request waivers from the Secretary of Education for financial matching requirements in competitive grant and other Minority Serving Institution (“MSI”) grant programs in the Higher Education Act. Both of these efforts are aimed at allowing colleges to deploy institutional resources to COVID-19 efforts.
- Under Section 3510, during a declared emergency, certain foreign institutions will be permitted to offer distance learning to U.S. students that are receiving federal funds pursuant to title IV of the Higher Education Act of 1965.
- Under Section 3512, the Secretary of Education will be empowered to defer payments on current Historically Black Colleges and Universities (“HBCU”) Capital Financing loans for the duration of the emergency related to COVID-19.
- Similarly, under Section 3517, the Secretary of Education will receive the authority to waive certain outcome requirements for grant programs for HBCU and other MSI for the financial year 2021.
Relief for Student Loan Recipients. The CARES Act also includes a number of provisions related to individuals who have received study-related funding from the federal government. These provisions seek to both alleviate financial burdens on students and ease requirements usually associated with the receipt of these funds.
- Under sections 3506 and 3507, terms affected by the declared emergency are excluded from counting towards lifetime subsidized loan eligibility and lifetime Pell Grant eligibility.
- Under Section 3508, students are not required to return monies received pursuant to Pell Grants or federal student loans for a particular period if a student withdraws from the institution of higher education as a result of a qualifying emergency. Relatedly, institutions will not be required to calculate the amount of grant or loan assistance that the institution would otherwise have had to have returned to the government.
- Under Section 3509, any grades and attempted credits that were not completed as a result of the declared emergency will not be counted towards a student’s federal academic requirements and eligibility to continue to receive Pell Grants or federal student loans.
- Under Section 3513, student loan payments, including the payment of principal and interest of federally-owned student loans, are deferred for six months until September 30, 2020 without any penalty to student loan borrowers. $62 million of the stimulus package will be dedicated to this effort.
- Under Section 3514, participants in National Service Corps programs that were due to receive educational awards before their duties were suspended or placed on hold as a result of the declared emergency related to COVID-19 will still receive that educational award. Age limits and terms of service will be extended to allow such individuals to continue participating in such programs after the declared emergency ends.
- Under Section 3519, teachers who, barring COVID-19, would have finished their year of teaching service, will receive full credit for their partial year of service toward their TEACH grant obligations or Teacher Loan Forgiveness. The CARES Act also waives the requirement that teachers have to serve consecutively to be eligible for Teacher Loan Forgiveness if a teacher’s service is not consecutive as a result of coronavirus.
In addition, under Section 3515, local workforce boards will receive more flexibility in the allocation of funds received under the Workforce Innovation and Opportunity Act and state governors will be permitted to dedicate reserved workforce funds to rapid response activities to address coronavirus.
Elementary and Secondary Education. Under Section 3511, the Secretary of Education is given authority to provide waivers to state and local education agencies from certain provisions, including testing requirements and reporting obligations of academic standards, pursuant to the Elementary and Secondary Education Act of 1965, which regulates funding of primary and secondary education.
Education Stabilization Fund. The CARES Act provides $30.75 billion to the Department of Education’s Education Stabilization Fund to provide emergency support to local school systems and higher education institutions to continue to provide educational services to their students and support the on-going functionality of school districts and institutions. In addition, $69 million will be made available to tribal schools, colleges and universities through the Bureau of Indian Education.
Single-Employer Defined Benefit Plans
Under Section 3608 of the CARES Act, any minimum required contributions due for a single-employer defined benefit plan during the 2020 calendar year will not be required to be made until January 1, 2021 (with interest accruing through that date). Additionally, plan sponsors may treat the last plan year’s adjusted funding target attainment percentage as the percentage applicable to plan years which include the 2020 calendar year for purposes of applying the funding-based limitation on shutdown benefits and other unpredictable contingent event benefits.
Federal Contractor Authority
The bill includes a key provision to address the many federal government contractors whose contract performance has been impacted by the closure of their work sites as a result of COVID-19 mitigation measures. Section 3610 of the bill permits agencies to modify the terms and conditions of their government contracts to continue to pay contractors who cannot perform work at their work site, and cannot telework because of the nature of their jobs, due to COVID-19. Notably, reimbursement authorization is limited to any paid leave, including sick leave, that a contractor provides to “keep its employees or subcontractors in a ready state” “at the minimum applicable contract billing rates not to exceed an average of 40 hours per week,” and “in no event beyond September 30, 2020.” In addition, any reimbursement will be reduced by any credits otherwise allowed under the Act, or under the FFCRA.
Title IV: Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy
The CARES Act provides $500 billion to the Treasury Department’s Exchange Stabilization Fund (“ESF”) to provide loans and loan guarantees for eligible businesses, states, and municipalities. Specifically, the CARES Act provides $25 billion for passenger air carriers; $4 billion for cargo air carriers; $17 billion for “businesses critical to maintaining national security”—though the legislation does not define this term; and $454 billion in support of the Federal Reserve’s lending facilities to eligible businesses, states, and municipalities. The Secretary of the Treasury will determine the terms and conditions of loans provided by the ESF.
Accessing Funds
The CARES Act further directs the Secretary of the Treasury to publish application procedures and additional requirements no later than 10 days after enactment of the legislation. The exact method for application and additional requirements for receiving funds will, therefore, remain uncertain until that date.
Still, the CARES Act itself enumerates certain requirements for borrowers. Specifically, it provides that applicants will be eligible for a loan or loan guarantee only if the Secretary of the Treasury determines the following requirements are met:
- The borrower certifies that it is a U.S.-domiciled business and it has significant operations and a majority of its employees in the United States;
- For passenger air carriers, cargo air carriers, and businesses critical to national security, the Secretary of the Treasury determines the business has incurred, or is expected to incur, losses that jeopardize the continued operations of the business;
- Credit is not otherwise reasonably available to the business;
- The intended obligation by the applicant “is prudently incurred”;
- The loan or loan guarantee is sufficiently secure or made at a rate that both reflects the risk of the loan or loan guarantee and is, if possible, no less than a comparable interest rate pre-COVID-19; and
- The loan or loan guarantee’s duration is as short as practicable, but no longer than 5 years.
Restrictions On Borrowers
The CARES Act places significant restrictions and obligations on businesses that borrow from the ESF. Specifically, from the date the loan agreement is executed until one year after the loan is no longer outstanding:
- Borrowers are prohibited from engaging in stock buybacks, unless contractually obligated, or paying dividends until one year after the loan is no longer outstanding;
- Borrowers must, to the extent practicable, maintain employment levels as of March 24, 2020, and retain no less than 90 percent of employees as of that date, until September 30, 2020;
- Borrowers are prohibited from increasing the compensation of any employee whose compensation exceeds $425,000 or from offering them significant severance or termination benefits; and
- Borrowers’ officers and employees whose total compensation exceeded $3 million in 2019 cannot receive compensation greater than $3 million, plus 50 percent of the amount over $3 million that the individual received in 2019.
Potential borrowers should carefully consider these restrictions before applying for ESF funds.
Oversight Of Borrowers
The CARES ACT provides the government with two significant ways to oversee borrowers’ use of ESF funds.
First, the CARES Act creates a Special Inspector General For Pandemic Recovery (“Special Inspector General”) within the Department of the Treasury. The Special Inspector General is charged with overseeing and auditing the making, purchasing, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury pursuant to the legislation. To that end, the Special Inspector General is charged with keeping detailed financial records of the funds dispersed.
The CARES Act requires the Special Inspector General to submit reports to “the appropriate committees of Congress” every quarter. These reports must include detailed information on loans, loan guarantees, and investments made under the legislation.
Second, the CARES Act creates a Congressional Oversight Commission (“Commission”) that is charged with overseeing the implementation of the legislation. The Commission will consist of five members. The majority and minority leaders of the Senate as well as the Speaker and minority leader of the House of Representatives will each appoint a member. The chairperson of the Commission will be appointed by the Speaker of the House of Representatives and the majority leader of the Senate.
The Commission must release reports every thirty days and is empowered to hold hearings, take testimony, and receive evidence.
Together, these two oversight mechanisms will subject borrowers to significant—and public—scrutiny regarding their use of ESF funds. Indeed, future congressional hearings at which borrowers testify are foreseeable. When making decisions regarding the use of ESF funds, borrowers should expect these decisions to be carefully and publicly examined through a political lens.
Provisions Relating to Government Contracting
The CARES Act provides key emergency appropriations of interest to government contractors and businesses that supply, or may begin supplying, products and services that the support the national defense in response to the COVID-19 pandemic. The CARES Act provides an additional $1 billion for purchases under the Defense Production Act (“DPA”), and in doing so, waives for a two-year period certain restrictions on the loan authorities reflected in sections 301 and 302 of the DPA, in addition to the other requirements waived pursuant to Section 4017 of the CARES Act. While the Trump Administration has not definitely announced whether it intends to issue orders under the DPA following the President’s March 18 Executive Order on Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of COVID-19, the bill indicates that Congress, at least, foresees significant usage of the DPA in the coming months.
The emergency appropriations also include $80 million for, and authorizes the creation of, a new oversight committee called the Pandemic Response Accountability Committee to promote transparency and oversight of CARES ACT appropriated funds. The Pandemic Response Accountability Committee, described in section 15010, was established within the Council of the Inspectors General on Integrity and Efficiency and comprised of various agency Inspector Generals in order to “(1) prevent and detect fraud, waste, abuse, and mismanagement; and (2) mitigate major risks that cut across program and agency boundaries.” The Committee’s functions include auditing or reviewing covered funds, including a comprehensive audit and review of charges made to Federal contracts pursuant to authorities provided in the CARES Act, to determine whether wasteful spending, poor contract or grant management, or other abuses are occurring. The Committee is also charged with referring appropriate matters to the Inspector General for the agency that disbursed the funds, conducting randomized audits to identify fraud, and reviewing whether contract competition requirements have been satisfied, among other functions.
The Committee is empowered to conduct its own independent investigations, can issue subpoenas to compel testimony, and has the authorities provided under Section 6 of the Inspector General Act of 1978, including the power to subpoena documents. Within 30 days of the enactment of the CARES Act, the Committee is required to establish and maintain “a user-friendly, public-facing website to foster greater accountability and transparency in the use of covered funds and the Coronavirus response. . . .” The website is required to provide “detailed data on any federal awards that expend covered funds, including a unique trackable identification number for each project, information about the process that was used to award the covered funds, and for any covered funds over $150,000, a detailed explanation of any associated agreement, where applicable.” The creation of this Committee complements the efforts of the Justice Department and other agencies in combating fraud and other wrongdoing related to the coronavirus crisis.
Additional Title IV Provisions
In addition to establishing the ESF, Title IV includes provisions affecting debt, lending, financial institutions, and mortgages. It also grants government agencies additional power to temporarily guarantee debt or ease lending restrictions.
Section 4008, for example, authorizes the Federal Deposit Insurance Corporation (“FDIC”) to establish a debt guarantee program to guarantee debt of solvent insured depositories and depository institution holding companies. This program (and any guarantees) must terminate no later than December 31, 2020. And Section 4011 permits the Office of the Comptroller of the Currency (“OCC”) to exempt any transaction from lending limits if the OCC finds an exemption would be “in the public interest consistent with the purposes of this section.”
Other sections temporarily ease regulatory requirements on financial institutions. For instance, Section 4012 requires the “appropriate Federal banking agencies”—that is, FDIC, OCC, or the Board of Governors of the Federal Reserve System—to issue an interim final rule that (1) lowers the Community Bank Leverage Ratio (“CBLR”) to 8 percent and (2) provides a “reasonable grace period” if a community bank’s CBLR falls below this level.
Similarly, Section 4013 allows financial institutions to suspend requirements under United States Generally Accepted Accounting Principles for loan modification related to the COVID-19 pandemic that would otherwise constitute a troubled debt restructuring. It also permits financial institutions to suspend determinations of loan modifications related to the COVID-19 pandemic.
Additionally, a federal excise tax holiday would apply to federal taxes applicable to aviation kerosene, including at the refineries, terminals, or importation facilities.
Foreclosure Provisions
Sections 4022 and 4023, the relevant provisions of the CARES Act pertaining to residential and multifamily properties secured by “federally backed mortgages”, memorialized the announcements earlier this week from the Department of Housing and Urban Development as well as the Federal Housing Administration with respect to certain eviction restrictions, forbearance and foreclosure relief for owners of single-family and multi-family assets secured by federally insured mortgages. Generally, multi-family borrowers (assets designed for occupancy of 5 or more families) as distinct from other borrowers, are entitled to a shorter forbearance period and subject to certain other criteria, including temporary suspension of evictions regardless of any forbearance.
Borrowers for Residential Real Property designed principally for the occupancy of 1-4 Families
Section 4022(b)(1) provides, in general, that, during the “covered period” a borrower with a “Federally backed mortgage loan” experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency may request forbearance on the Federally backed mortgage loan, regardless of delinquency status, by (A) submitting a request to the borrower’s servicer and (B) affirming that the borrower is experiencing a financial hardship during the COVID-19 emergency. The duration of such forbearance granted shall be up to 180 days and shall be extended for an additional period of up to 180 daysat the request of the borrower, and during such time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full will accrue (Section 4022(b)(2) and (3)). Section 4022(c)(2) further imposes upon services of such federally backed mortgages a moratorium on foreclosure, as follows: “Except with respect to a vacant or abandoned property, a servicer of a Federally backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, for more for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60 day period beginning on March 18, 2020.”
For purposes of Section 4022, a “Federally backed mortgage loan” includes any loan which is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from 1-4 families that is (A) insured by the Federal Housing Administration under title II of the National Housing Act (12 U.S.C. § 1707 et seq); (B) insured under Section 255 of the National Housing Act (12 U.S.C. § 1715z-20); (C) guaranteed under Section 184 or 184A of the Housing and Community Development Act of 1992 (12 U.S.C. §§ 1715z-13a, 1715z-13b); (D) guaranteed or insured by the Department of Veterans Affairs; (E) guaranteed or insured by the Department of Agriculture; (F) made by the Department of Agriculture; or (G) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
Multi Family Borrowers (5 or more families)
Section 4023, by contrast, provides that, during the “covered period” a “multi-family borrower” with a “federally backed multifamily mortgage loan” that was current on its payments as of February 1, 2020 may submit an oral or written request for forbearance under Section 4023(a) to the borrower’s servicer affirming that the multifamily borrower is experiencing a financial hardship during the COVID-19 emergency.
Section 4203 defines the “covered period” as the period beginning on the date of enactment of the CARES Act and ending upon the sooner of “(A) the termination date of the national emergency concerning the novel coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. § 1601 et seq.) or (B) December 31, 2020.” Section 4203 defines “multifamily borrower” as “a borrower of a residential mortgage loan that is secured by a lien against a property comprising 5 or more dwelling units.”
For purposes of Section 4023, a “federally backed multifamily mortgage loan” includes any loan, other than temporary financing, such as a construction loan, that “(A) is secured by a first or subordinate lien on residential multifamily real property designed principally for the occupancy of 5 or more families, including any such secured loan the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and (B) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or a housing or related program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.”
Upon receipt of an oral or written request from a multi-family borrower, a servicer shall (A) document the financial hardship; and (B) provide the forbearance for up to 30 days; and (C) extend the forbearance for up to 2 additional 30 day periods upon the request of borrower, provided that the borrower’s request for an extension is made during the covered period and, at least 15 days prior to the end of the forbearance period described under sub-paragraph (B).
Renter Protections (Multi-Family Borrowers)
A multifamily borrower receiving forbearance under Section 4023 may not, for the duration of the forbearance, do any of the following: (1) evict or initiate the eviction of a tenant from a dwelling unit located in or on the applicable property solely for nonpayment of rent or other fees or charges; (2) charge any late fees, penalties or other charges to a tenant described at clause (1) for late payment of rent; (3) require a tenant to vacate a dwelling unit located in or on the applicable property before the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate; and (4) may not issue a notice to vacate until after the expiration of the forbearance (Section 4023(d) and (e)).
Section 4024 further imposes a temporary moratorium on eviction filings for a 120 day period beginning on the date of the enactment of the Act, regardless of whether such lessor is the subject of any forbearance granted under the Act. 4024(b) provides, in pertinent part, that “the lessor of a covered dwelling[2] may not “make, or cause to be made, any filing with the court of jurisdiction to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent or other fees or charges” or take any of the other actions prohibited in the immediately preceding paragraph for the duration of the moratorium.
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[1] We will issue a more detailed description of this program, including tips for what companies interested in the program can do now, in a future client alert.
[2] Covered Dwelling is defined as a dwelling that (A) is occupied by a tenant (i) pursuant to a residential lease or (ii) without a lease or with a lease terminable under State law; and (B) is on or in a covered property. Covered Property is, in turn, defined to mean any property that (A) participates in a covered housing program under the Violence Against Women Act, or the rural housing voucher program under the Housing Act; or (B) has a federally backed mortgage loan or federally backed multifamily mortgage loan, as these terms are defined earlier in this Alert.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please feel free to contact the Gibson Dunn lawyers with whom you usually work, any member of the firm’s Tax Group, Public Policy Group, Corporate Transactions Group, Government Contracts Group, Labor and Employment Group, Business Restructuring and Reorganization Group, FDA and Health Care Group, International Trade Group, Real Estate Group, or other groups (view practice groups), or the following authors:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
James Chenoweth – Houston (+1 346-718-6718, [email protected])
Catherine A. Conway – Co-Chair, Labor & Employment Practice Group, Los Angeles (+1 213-229-7822, [email protected])
Stuart Delery – Washington, D.C. (+1 202-887-3650, [email protected])
Sean C. Feller – Century City (+1 310-551-8746, [email protected])
Marian J. Lee – Washington, D.C. (+1 202-887-3732, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Michael A. Rosenthal – New York (+1 212-351-3969, [email protected])
Jason C. Schwartz – Co-Chair, Labor & Employment Practice Group, Washington, D.C. (+1 202-955-8242, [email protected])
Greta B. Williams – Washington, D.C. (+1 202-887-3745, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Benjamin K. Belair – Washington, D.C. (+1 202-887-3743, [email protected])
Virginia Blanton* – Washington, D.C. (+1 202-887-3587, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Mark Dreschler – Orange County (+1 949-451-4342, [email protected])
Sarah E. Erickson-Muschko – Denver (+1 303-298-5910, [email protected])
Gina Hancock* – Dallas (+1 214-698-3357, [email protected])
Megan B. Kiernan – Washington, D.C. (+1 202-955-8542, [email protected])
William Lawrence III – Washington, D.C. (+1 202-887-3654, [email protected])
Allison Lewis – Washington, D.C. (+1 202-887-3693, [email protected])
Amanda C. Machin – Washington, D.C. (+1 202-887-3705, [email protected])
Elizabeth M. Niles* – Washington, D.C. (+1 202-887-3754, [email protected])
Samantha Ostrom – Washington, D.C. (+1 202-955-8249, [email protected])
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, [email protected])
Caroline Ziser Smith – Washington, D.C. (+1 202-887-3709, [email protected])
Luke Sullivan – Washington, D.C. (+1 202-955-8296, [email protected])
JeanAnn Tabbaa* – Washington, D.C. (+1 202-955-8690, [email protected])
Blair Watler* – Washington, D.C. (+1 202-955-8248, [email protected])
Please also feel free to contact any of the following practice group leaders:
Tax Group:
Jeffrey M. Trinklein – Co-Chair, London/New York (+44 (0)20 7071 4224 /+1 212-351-2344), [email protected])
David Sinak – Co-Chair, Dallas (+1 214-698-3107, [email protected])
James Chenoweth – Houston (+1 346-718-6718, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Eric B. Sloan – New York (+1 212-351-2340, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Benjamin Rippeon – Washington, D.C. (+1 202-955-8265, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Paul S. Issler – Los Angeles (+1 213-229-7763, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Scott Knutson – Orange County (+1 949-451-3961, [email protected])
Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Corporate Transactions Group
Alisa Babitz – Washington, D.C. (+1 202-887-3720, [email protected])
Executive Compensation and Employee Benefits Practice Group:
Stephen W. Fackler – Co-Chair, Palo Alto/New York (+1 650-849-5385, [email protected])
Michael Collins – Co-Chair, Washington, D.C. (+1 202-887-3551, [email protected])
Krista P. Hanvey – Dallas (+1 214-698-3425, [email protected])
Government Contracts Group:
Joseph D. West – Washington, D.C. (+1 202-955-8658, [email protected])
Karen L. Manos – Washington, D.C. (+1 202-955-8536, [email protected])
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, [email protected])
Erin N. Rankin – Washington, D.C. (+1 202-955-8246, [email protected])
Labor and Employment Group“Catherine A. Conway – Co-Chair, Labor & Employment Practice Group, Los Angeles (+1 213-229-7822, [email protected])
Amanda C. Machin – Washington, D.C. (+1 202-887-3705, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Jason C. Schwartz – Co-Chair, Labor & Employment Practice Group, Washington, D.C. (+1 202-955-8242, [email protected])
Greta B. Williams – Washington, D.C. (+1 202-887-3745, [email protected])
Business Restructuring and Reorganization Group
Michael A. Rosenthal – New York (+1 212-351-3969, [email protected])
FDA and Health Care Group
Marian J. Lee – Washington, D.C. (+1 202-887-3732, [email protected])
John D. W. Partridge – Denver (+1 303-298-5931, [email protected])
Jonathan M. Phillips – Washington, D.C. (+1 202-887-3546, [email protected])
International Trade Group
Judith Alison Lee – Washington, D.C. (+1 202-887-3591, [email protected])
Real Estate Group
Danielle A. Katzir – Los Angeles, CA (+ 1 213-229-7630, [email protected])
* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In a warning of things to come, the co-directors of the SEC Enforcement Division took the unusual step of issuing a cautionary statement on March 24, 2020, emphasizing “the importance of maintaining market integrity and following corporate controls and procedures” during this crisis. The SEC cited as examples the heightened risk of insider trading (“in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances”) and the need to be mindful of disclosure controls (“protect against the improper dissemination and use of material nonpublic information”).[1]
History teaches us that unprecedented market volatility, fast moving economic events, and dislocations create substantial challenges for compliance, and that there is a significant increase in the risk of an investigation. Today, this heightened investigative risk is compounded by unique challenges of remote work arrangements and the diminished ability for direct oversight and interaction.
In an effort to help our clients navigate the latest enforcement challenges, we have compiled below a list of potential issues to be considered in the coming weeks in light of the SEC Enforcement Division’s notice and past experience on how the SEC has investigated matters in the midst of and following a crisis.
General Guidance
- Businesses should be prepared to operate under these conditions for at least the next three-to-six months.
- Businesses should maintain centralized communications with employees, clients, and investors, ensuring that even in the face of rapidly moving events that such communications are accurate and complete. Once statements are made, updates and modifications may become appropriate.
- Given the compliance and operational challenges of supervising employees and service providers remotely, it is helpful to have a plan in place for such supervision.
Business Continuity and Disaster Recovery Plans
Firms should follow, and modify as necessary, their business continuity and disaster recovery plans. During and after past crises, the SEC’s Office of Compliance Inspections and Examinations, FINRA, and the CFTC have jointly and separately reviewed the business continuity and disaster recovery planning of firms, especially in the event of a problem experienced during the crisis.
Material Contracts
It is important to review material contracts to understand what would happen if your business or a counterparty cannot perform due to the current crisis. In particular, we recommend focusing on the (i) default, (ii) force majeure, (iii) termination and (iv) indemnification provisions in material contracts. For more information, see our alerts: Force Majeure Clauses: A 4-Step Checklist and Flowchart[2] and Coronavirus and Force Majeure: Addressing Epidemics in LNG and Other Commodities Contracts.[3]
Regulatory Disclosures
As always, consider if the current crisis has materially affected your business and if, when and how those events may need to be disclosed and if any recent statements need to be updated. There is an enhanced investigative risk that regulators will in hindsight review a business’ public statements and disclosures to determine whether a firm intentionally and materially overstated, understated, failed to correct prior statements, and/or made misleading or incomplete statements, in light of crisis-related events
Public Company Considerations
Fair Disclosure, Regulation FD
Pursuant to Regulation Fair Disclosure (“Regulation FD”), in general, issuers cannot selectively disclose material, nonpublic information to stock analysts, investment advisors, security holders, or other market participants, and must disclose such information to that audience by means of simultaneous broad public dissemination.[4] Given that this crisis may have a short-term, material impact on an issuer’s finances and business operations, among other things, it is important to make sure that the process of communicating these developments with shareholders, analysts, media and other stakeholders is consistent with public disclosures and monitored with Regulation FD in mind. Sensitivity to the requirements of Regulation FD is critical in light of the extreme market volatility and the desire of market participants for information during the current COVID-19 crisis.
Insider Trading and Trading Windows
Public issuers should evaluate and potentially modify established trading windows during this crisis as rapidly evolving materials events may render historical trading windows inadequate. For example, during the exigency of evolving events, material nonpublic information may quickly arise outside of the traditional blackout periods, requiring the imposition of immediate restrictions on trading for certain groups of employees, executives and directors. Moreover, media reporting on notable stock sales by corporate executives heightens the exposure to regulatory inquiry. In limited instances, blackout periods might be shortened if it is in the best interests of the company and its shareholders to enable trading, and there is no material, nonpublic information due to uncertainty around how the situation is affecting the company; however, during a crisis such as this, care should be taken not to improperly restrict the communication of material information, particularly to directors and others that may need to know such information in order to perform their duties. Any changes to blackout periods must be based on the specific facts and circumstances, and should be communicated in writing with appropriate guidelines. As a general matter, public companies should exercise care in allowing corporate insiders to trade in its securities (both buying and selling) during the current crisis.
10b5-1 Plans
Pursuant to Rule 10b5-1, corporate insiders frequently set up passive investment plans at a time when they do not have material, nonpublic information, in order to provide a mechanism to purchase and sell securities of their company when they have material, nonpublic information.[5] In a time of crisis, there is risk that any changes to such plans which continue to involve trading in the issuer’s securities will be scrutinized carefully by regulators, the media, and others as to whether they were made while in possession of material, nonpublic information about the effect of the crisis on the relevant issuer and to take advantage of such knowledge. Terminating a Rule 10b5-1 plan so as to cease any trading of securities in this time of crisis does not in and of itself violate the insider trading laws, and there may be very good reasons to do so. While the extraordinary changes in the markets and economy resulting from the COVID-19 situation may provide a basis for defending past transactions under a Rule 10b5-1 plan as having been made in good faith, terminating a Rule 10b5-1 plan may bear on the timing of any future decision to set up a new plan. Before making any changes to and/or stopping such a plan, corporate insiders and companies should consult their general counsel’s office and consider the best practices under the circumstances.
Investment Adviser Considerations
Insider Trading
During a crisis, reminding investment professionals about the policies and procedures to prevent insider trading is critically important. There is a heightened investigative risk that communications with management and investor relations, which are a standard and proper part of an investment professional’s analyses of companies, regarding COVID-19 will be reviewed, in hindsight, for any disclosures of material, nonpublic information. There is also a heightened investigative risk that communications with political experts, members of federal and state executive branches and their agencies, and the staff of public representatives regarding ongoing executive and legislative actions, and the application of new laws and regulations, will be reviewed, in hindsight, for any disclosures of material, nonpublic information in violation of a fiduciary and/or other duty of confidentiality. Finally, there is a heightened investigative risk that communications with other asset managers regarding their analyses of the impact of COVID-19, which include communications, directly or indirectly, with management, investor relations, political experts, members of the executive branch, and staffs of public representatives, will be evaluated, in hindsight for any disclosures of material, nonpublic information.
Investment Strategy Changes
Certain investment strategies may be materially impaired by this current crisis or advisers may find unique opportunities outside of their traditional strategies. Under such circumstances, it is important to, among other things, review the documents governing the strategies to identify what changes fall within and outside such strategies, and what steps, if any, should be taken to make modifications to those strategies.
Unique Opportunity Allocations
Given market volatility during a crisis, unique investment opportunities may arise. Investment advisers may have to consider how to allocate unique opportunities amongst their funds, accounts and potential co-investors. As always, an adviser’s personnel will need to follow the adviser’s policies and procedures designed to ensure that they do not personally take investment opportunities away from funds and accounts managed by the adviser.
Form ADV/Form PF Limited Relief
For investment advisers, limited SEC relief for Form ADV/Form PF filing deadlines is available for those advisers experiencing crisis-related issues. Updated SEC guidance issued on March 25, 2020, provided that advisers “must notify the [SEC] staff and/or investors, as applicable, of the intent to rely on [such] relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur.” We nonetheless encourage advisers to file timely unless they are experiencing serious crisis-related issues, and to the extent an adviser must seek deadline relief, internally document reasons for failing to timely file.[6]
Custody Rule Relief
The SEC has not yet granted specific relief to the audited financial statement delivery requirement under the Rule 206(4)-2,[7] and advisers should try to meet their delivery requirements. Notably, in March 2010, an SEC Division of Investment Management FAQ stated that it would not recommend enforcement if an adviser “reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances.”[8] It is not clear whether the Staff would consider this interpretive guidance to apply to a failure to deliver financial statements on time due to disruptions relating to COVID-19. Nevertheless, in the absence of relief related to the specific crisis, the Staff might be less inclined to bring an action against advisers making reasonable efforts to comply with the delivery requirement.
Investor Communications
Approaches will vary, but consider proactively advising investors of the steps you are taking to maintain operations and whom to contact with questions or concerns. Performance and investment risk discussions should include discussions of the impact this current crisis may have on investments. Under any approach, advisers should continue to maintain records of communications with investors and other stakeholders, together with any secondary support for information distributed. For funds raising capital or that permit redemptions, updates to offering materials may be appropriate. Selective disclosure to investors should be avoided.
Valuation
Throughout this crisis, advisers should continue to follow their valuation policies, and this could be a good time to remind relevant personnel of the details of such policies. While following existing policies is important, personnel should consider reassessing valuation assumptions and methodologies in consideration of the current environment. Decisions about changes to valuations relating to distressed asset sales should be made in consultation with experts and compliance.[9] Finally, we recommend taking additional time for the valuation process (i.e., starting earlier) and potentially conducting valuations more frequently.
Liquidity Management
Certain open-ended funds may experience a high volume of requests for redemptions, and advisers may have challenges in satisfying all requests in a timely fashion. An adviser facing this type of risk should carefully assess options under the applicable fund or account documents, including the possibility of imposing redemption gates, side pockets or suspensions. Implementing these types of measures may draw regulatory scrutiny in retrospect, and should be handled with care.
If an adviser intends to seek liquidity through a related party transaction or a forced sale, the adviser should carefully consider the legal and regulatory issues that can be raised by these actions.
Side Letter and Strategic Partnership Obligations
Side letters or strategic partnership agreements may have notice or redemption rights that are implicated by the current crisis, and should be reviewed carefully.
Crisis-Related Fund Expenses
As with other expense allocation decisions, prior to allocating crisis-related expenses between funds or between a fund and an adviser, carefully consider the language in the operative fund documents.
Record-Keeping
After major market events in the past, the SEC has conducted sweep examinations seeking to understand how investment advisers respond to financial and operational challenges. Each adviser should maintain appropriate contemporaneous records that document how it assessed and responded to the financial and operational challenges posed by the current crisis for business continuity and to assist with responding to potential regulatory scrutiny.
__________________
- Public Statement, “Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity” (March 23, 2020), available at, https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity
- Force Majeure Clauses: A 4-Step Checklist & Flowchart, Gibson, Dunn & Crutcher LLP (March 24, 2020) https://www.gibsondunn.com/wp-content/uploads/2020/03/force-majeure-clauses-a-4-step-checklist-and-flowchart.pdf.
- Coronavirus and Force Majeure: Addressing Epidemics in LNG and Other Commodities Contracts, Dunn & Crutcher LLP (February 14, 2020), available at, https://www.gibsondunn.com/coronavirus-and-force-majeure-addressing-epidemics-in-lng-and-other-commodities-contracts/.
- 17 CFR § Part 243 – Regulation FD, available at, https://www.govinfo.gov/content/pkg/CFR-2012-title17-vol3/pdf/CFR-2012-title17-vol3-part243.pdf.
- 17 CFR § 240.10b5-1 Trading “on the basis of” material nonpublic information in insider trading cases, available at, https://www.govinfo.gov/content/pkg/CFR-2013-title17-vol3/pdf/CFR-2013-title17-vol3-sec240-10b-3.pdf.
- Press Release, U.S. Securities and Exchange Commission, Division of Investment Management, “SEC Takes Targeted Action to Assist Funds and Advisers, Permits Virtual Board Meetings and Provides Conditional Relief from Certain Filing Procedures” (March 13, 2020), available at, https://www.sec.gov/news/press-release/2020-63; Press Release, U.S. Securities and Exchange Commission, Division of Investment Management, “SEC Extends Conditional Exemptions From Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected By Coronavirus Disease 2019 (COVID-19)” (March 25, 2020), available at, https://www.sec.gov/news/press-release/2020-73.
- 17 CFR § 275.206(4)-2 – Custody of funds or securities of clients by investment advisers, available at, https://www.govinfo.gov/content/pkg/CFR-2011-title17-vol3/pdf/CFR-2011-title17-vol3-sec275-2064-2.pdf.
- Staff Responses to Questions About the Custody Rule, U.S. Securities and Exchange Commission, Division of Investment Management (March 2010), available at, https://www.sec.gov/divisions/investment/custody_faq_030510.htm.
- See Accounting Standards Update No. 2011-04 (May 2011), available at, https://asc.fasb.org/imageRoot/00/7534500.pdf.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Enforcement Group, or the authors:
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Reed Brodsky – New York (+1 212-351-5334, [email protected])
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Gregory Merz – Washington, D.C. (+1 202-887-3637, [email protected])
C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, [email protected])
Mary Beth Maloney – New York (+1 212-351-2315, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Tina Samanta (+1 212-351-2469, [email protected])
Chris Hamilton – New York (+1 212-351-2495, [email protected])
Nicholas C. Duvall – Washington, D.C. (+1 202-887-3781, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In an ongoing effort to address the challenges presented by the novel coronavirus (“COVID-19”) pandemic, the federal government enacted the Families First Coronavirus Response Act (the “FFCRA”) on March 18, 2020. Among other things, the FFCRA, which applies to private employers with fewer than 500 employees, expands paid leave for covered employees in certain circumstances related to COVID-19 and creates corresponding tax credits. On March 24, 2020, the Wage and Hour Division (the “Division”) of the U.S. Department of Labor issued additional guidance for employers and employees relating to the two paid leave provisions of the FFCRA: the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act.[1] These provisions will become effective on April 1, 2020, and will apply to leave taken between April 1, 2020 and December 31, 2020. Leave provided before April 1, 2020 will not count toward the requirements.[2] Below, we provide an overview of the two leave provisions, along with a discussion of which employers they cover.
The Emergency Paid Sick Leave Act
The Emergency Paid Sick Leave Act requires that covered employers provide employees two weeks of paid sick leave at the employee’s regular rate of pay (up to $511 per day and $5,110 in the aggregate) if the employee is unable to work (or telework) because:
(1) the employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
(2) the employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
(3) the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.[3]
The Act also entitles employees to two weeks of paid sick time at two-thirds of the employee’s regular rate of pay (up to $200 per day and $2,000 in the aggregate) if the employee is unable to work (or telework) because:
(1) the employee is caring for an individual who is subject to a Federal, State, or local quarantine order or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
(2) the employee is caring for his or her child (under 18 years old) because the child’s school or place of care has been closed, or the child care provider is unavailable, due to COVID-19 precautions; or
(3) the employee is experiencing any other condition “substantially similar” to those described above, as specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.[4]
Full-time employees are entitled to up to 80 hours of paid leave, while part-time employees are eligible for leave equal to the number of hours that the employee works on average over a two-week period.[5] For hourly employees whose schedules vary, employers may use a six-month average of the employees’ working hours to calculate the average daily hours. If the employee did not work in the preceding six-month period, e.g., if the employee just began working for the employer, employers may use the number of hours the employer and employee agreed the employee would work upon hiring.[6] If no such agreement exists, employers may calculate the appropriate number of hours of leave based on the average hours per day the employee was scheduled to work over the entire term of his or her employment.
Paid sick time under the Emergency Paid Sick Leave Act must be granted in addition to any pre-existing paid leave benefits the employer provides, and must be made available for immediate use by employees, regardless of the length of the employees’ employment.[7] Employers are also prohibited from requiring employees to exhaust other paid leave benefits before using the benefits available under Emergency Paid Sick Leave Act.[8] Benefits under the Emergency Paid Sick Leave Act are not retroactive, and employees may not carry over paid sick time under the Act from one year to the next.[9]
Employers may not discharge, discipline, or otherwise discriminate against any employee for taking leave under the Emergency Paid Sick Leave Act, or for filing a complaint related to the Act. Employers who violate any provision of the Emergency Paid Sick Leave Act will be subject to the penalties and enforcement described in Sections 16 and 17 of the Fair Labor Standards Act, 29 U.S.C. 216, 217, including payment of back wages, liquidated damages, and attorneys’ fees and costs.[10]
The Emergency Family and Medical Leave Expansion Act (the “Emergency FMLA Expansion Act”)
The Emergency FMLA Expansion Act amends the existing Family and Medical Leave Act (the “FMLA”) to provide covered employees with the ability to take up to 12 weeks of job-protected leave if the employees have a “qualifying need related to a public health emergency.”[11] A “qualifying need” is when an employee “is unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable,” due to an emergency related to COVID-19.[12] This provision applies only to the need to care for a minor child; employees cannot utilize leave under the Emergency FMLA Expansion Act to care for other family members who may be affected by COVID-19, such as spouses or parents. (Note, however, that regular FMLA leave may be available if the employee or his or her family member has COVID-19 symptoms that rise to the level of a serious health condition.)
The first 10 days of leave under the Emergency FMLA Expansion Act may consist of unpaid leave, but employees can choose to substitute any accrued vacation leave, personal leave, or sick leave (including paid sick leave provided by the Emergency Paid Sick Leave Act) for these 10 days of unpaid leave. The remainder of the 12 weeks of leave must be paid at a rate of two-thirds of the employee’s regular rate of pay for 40 hours per week for full-time employees, or, for part-time employees, the number of hours the employee is normally scheduled to work over that period.[13] However, for both full-time and part-time employees, the amount is capped at $200 per day and $10,000 in the aggregate.
Eligible employees who take leave under the Emergency FMLA Expansion Act are entitled to be restored to the position they held when the leave commenced, or to an equivalent position, subject to certain exceptions outlined in the FMLA. However, employers with fewer than 25 employees may not need to return employees to their same or similar positions if (1) the position does not exist due to changes in the employer’s economic or operating conditions caused by the COVID-19 emergency; (2) the employer makes reasonable efforts to restore the employee to an equivalent position; and (3) if those efforts fail, the employer makes a reasonable effort to contact the employee if an equivalent position becomes available within a one-year period after the employee’s leave ends.[14]
Employees must have worked for the employer for at least 30 days to be eligible for benefits under the Emergency FMLA Expansion Act, which is significantly lower than the normal FMLA threshold. In addition, the FMLA’s normal requirement that the employee must work at an employment site with at least 50 employees within a 75-mile radius does not apply.
Because the Emergency FMLA Expansion Act is an amendment to the FMLA, the language of the FMLA that is unchanged, including prohibitions on discrimination and retaliation against employees for taking FMLA leave, will apply to any leave taken under this provision.
Special Considerations when Employees Could Seek Multiple Types of Leave
In its guidance, the Division addresses the common question of whether an employee may take multiple types of FFCRA leave. For the types of leave covered by the Emergency Paid Sick Leave Act, an employee may take a total of 80 hours paid sick leave (or the part-time equivalent) “for any combination of qualifying reasons,” but that does not increase the cap on leave.[15] Furthermore, parents who qualify for leave under both the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act “may be eligible for both types of leave, but only for a total of twelve weeks of paid leave.” In other words, the employee may elect to use the Emergency Paid Sick Leave Act to cover the first ten days of leave that would otherwise be unpaid under the Emergency Family and Medical Leave Expansion Act.[16]
Employers Covered by the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act
The Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act apply only to private employers with fewer than 500 employees in the United States, to certain public employers, and to certain self-employed individuals. The Division’s guidelines clarify that the number of employees is measured as of the time the leave is to be taken: “You have fewer than 500 employees if, at the time your employee’s leave is to be taken, you employ fewer than 500 full-time and part-time employees within the United States . . . .”[17] In counting employees to determine coverage under the Acts, employers should include full-time and part-time employees and employees who are on leave. Employers should also count day laborers supplied by a temporary agency. Independent contractors are not considered employees for purposes of the 500-employee threshold although, as self-employed individuals, they may be able to seek tax relief under the act.
Neither the Emergency Paid Sick Leave Act nor the Emergency FMLA Expansion Act specifies whether employees on furlough or layoff who have not been terminated should count toward the 500-employee threshold, or whether such employees would be entitled to leave. Unfortunately, the guidelines issued by the Division do not shed any light on this question. We expect the regulations that the Division anticipates issuing in April may provide additional guidance on this issue.
In considering whether they are covered by the Acts, employers should pay particular attention to whether they may be considered “joint employers” or “integrated employers,” as this can have a significant impact on the number of employees that the employer must count. According to the Division guidance, “two corporations are separate employers unless they are joint employers under the FLSA with respect to certain employees,” in which case all “common employees must be counted in determining whether sick leave must be provided . . . .”[18] Separately, “[i]f two entities are an integrated employer under the FMLA, then employees of all entities making up the integrated employer will be counted in determining employer coverage” under the FFCRA.[19]
Joint Employers: If an employer is a joint employer under the FLSA, all of the employees it holds in common with the other joint employer must be counted toward 500-employee threshold for purposes of the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act. This includes temporary employees who are jointly employed by the employer and another employer (regardless of whether the jointly-employed employees are maintained on another employer’s payroll).
In January 2020, the Department of Labor announced a final rule revising its regulations interpreting joint employer status under the Fair Labor Standards Act (the “FLSA”).[20] The final rule continued to recognize two scenarios where an employee may have two or more joint employers: (1) where one company or individual has an employment relationship with the worker, but another company or individual simultaneously benefits from that work (such as a company who uses a staffing agency); and (2) where one employer employs a worker for one set of hours in a workweek, and another employer employs the same worker for a separate set of hours in the same workweek (for example, two restaurants with the same owner who employ the same line chef).
In the first scenario, joint employer status turns on whether the potential joint employer is directly or indirectly controlling the employee. This is evaluated using a four-factor balancing test that assesses whether the joint employer (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. No single factor is determinative, and joint employer status will depend on the facts of each particular case.
In the second scenario, joint employer status turns on how closely associated the two employers are. Employers will generally be sufficiently associated to establish a joint employment relationship if there is an arrangement between them to share the employee’s services; the employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or they share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer. Again, no single factor is determinative in evaluating joint employer status under this second scenario.
Integrated Employers: Under the FMLA, companies can be considered so interrelated that they constitute a single employer. The factors generally considered in evaluating integrated employer status include (1) common management; (2) interrelation between operations; (3) centralized control of labor relations; and (4) degree of common ownership or financial control. No single factor is determinative; rather, the entire relationship between the entities is considered. As with joint employers, if two or more entities are considered an integrated employer under the FMLA, employees of each of the entities making up the integrated employer will be counted in determining employer coverage under the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act.
Employers may be weighing whether to rely on the joint employer theory or the integrated employer theory to argue they are not subject to the Emergency Paid Sick Leave Act or the Emergency FMLA Expansion Act. Employers should carefully consider this option before invoking it, as relying on these theories could have ripple effects across a host of federal and state laws, including the FMLA, FLSA, ERISA, and state workers compensation and unemployment compensation rules. It may also affect eligibility for benefits under future COVID-19 relief legislation. Therefore, employers should conduct a detailed assessment of their operations and consult with counsel regarding any attendant risks before relying on these theories.
Exemptions
Both the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act give the Secretary of Labor the ability to exclude certain health care providers and emergency responders from being eligible for benefits under the Acts.[21] The Acts also allow employers of health care providers or emergency responders to elect to exclude such employees from the paid leave provisions. The guidelines issued by the Division do not provide additional parameters for how or when employers of health care providers or emergency responders may avail themselves of this exclusion.
The Secretary is also empowered to exempt small businesses with fewer than 50 employees from the paid leave requirements if compliance would jeopardize the viability of the business as a going concern.[22] The guidance issued by the Division directs businesses wishing to utilize this small business exemption to document why the business “meets the criteria set forth by the Department, which will be addressed in more detail in forthcoming regulations.”[23] However, businesses are not supposed to send any of this documentation to the Division at the current time.[24]
Tax Credits
Covered employers will qualify for a dollar-for-dollar reimbursement through tax credits for all qualifying wages paid under the FFCRA. Employers may also take a tax credit for the amount of the employers’ qualified health plan expenses that may be properly allocated to employees’ COVID-19-related leaves. In its recently-issued guidance, the Division noted that “every dollar of expanded family and medical leave (plus the cost of the employer’s health insurance premiums during leave) will be 100% covered by a dollar-for-dollar refundable tax credit available to the employer.”[25]
Notice
Each covered employer must post in a conspicuous place on its premises a notice of the requirements of the FFCRA, including the Emergency Paid Sick Leave Act and the Emergency FMLA Expansion Act. A model notice issued by the Department of Labor is available here. In separate guidance regarding the notice, the Department has stated that, “[a]n employer may satisfy th[e notice-posting] requirement by emailing or direct mailing this notice to employees, or posting this notice on an employee information internal or external website.”[26]
Stakeholders Dialogue
The Division is hosting a “national online dialogue” to provide an opportunity for employers and workers to “play a key role in shaping the development of the Department of Labor’s compliance assistance materials and outreach strategies related to the implementation of the FFCRA.”[27] The Division stated that it will use the comments gathered from this dialogue to “develop compliance assistance guidance, resources and tools” and to help employers and workers understand their responsibilities and rights under the paid leave provisions of the FFCRA.[28] The public can participate in this national online dialogue through Sunday, March 29, 2020. Those wishing to participate in the online dialogue can register here.
_______________________
[1] See Department of Labor, Families First Coronavirus Response Act: Questions and Answers, https://www.dol.gov/agencies/whd/pandemic/ffcra-questions; Families First Coronavirus Response Act: Employer Expanded Family and Medical Leave Requirements, https://www.dol.gov/agencies/whd/pandemic/ffcra-employer-paid-leave; Families First Coronavirus Response Act: Employee Expanded Family and Medical Leave Rights, https://www.dol.gov/agencies/whd/pandemic/ffcra-employee-paid-leave.
[2] See Department of Labor, Families First Coronavirus Response Act: Questions and Answers, https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.
[3] H.R. 6201, Division E, §§ 5102, 5110(5).
[4] Id. § 5102. The Division’s current guidance does not elaborate on what circumstances would qualify as “substantially similar” to those described in the Emergency Paid Sick Leave Act. As the pandemic develops, there may be joint guidance on this topic from Departments of Health and Human Services, Labor, and Treasury.
[11] H.R. 6201, Division C, §3102.
[13] Id. If an employee’s schedule varies from week to week, employers may calculate an employee’s average number of hours using the same methods as those used to calculate average employee hours under the Emergency Paid Sick Leave Act.
[15] See Department of Labor, Families First Coronavirus Response Act: Questions and Answers, https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.
[20] 85 Fed. Reg. 2858 (Jan. 16, 2020).
[21] H.R. 6201, Division C, §§ 3102, 3105, Division E, §§ 5102, 5111.
[22] Id. Division C, § 3102, Division E, § 5111.
[23] See Department of Labor, Families First Coronavirus Response Act: Questions and Answers, https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.
[25] See Department of Labor, Families First Coronavirus Response Act: Employer Expanded Family and Medical Leave Requirements, https://www.dol.gov/agencies/whd/pandemic/ffcra-employer-paid-leave. The Department of Treasury, IRS, and the Department of Labor have also issued joint guidance regarding the tax credit component of FFCRA, and further guidance is expected this week from the Department of Treasury. See U.S. Department of the Treasury, IRS and the U.S. Department of Labor Announce Plan to Implement Coronavirus-Related Paid Leave for Workers and Tax Credits for Small and Midsize Businesses to Swiftly Recover the Cost of Providing Coronavirus-Related Leave, https://www.dol.gov/newsroom/releases/osec/osec20200320.
[26] See Department of Labor, Families First Coronavirus Response Act Notice – Frequently Asked Questions, https://www.dol.gov/agencies/whd/pandemic/ffcra-poster-questions.
[27] See Department of Labor, Updated: U.S. Department of Labor Invites Stakeholders to a National Online Dialogue on Paid Family and Medical Leave and Paid Sick Leave Under the Families First Coronavirus Response Act, https://www.dol.gov/newsroom/releases/whd/whd20200325..
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn attorneys regularly counsel clients on the compliance issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn attorney with whom you work in the Labor and Employment Group, or the following authors:
Catherine A. Conway – Co-Chair, Labor & Employment Practice Group, Los Angeles (+1 213-229-7822, [email protected])
Amanda C. Machin – Washington, D.C. (+1 202-887-3705, [email protected])
Michele L. Maryott – Irvine (+1 949-451-3945, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Greta B. Williams – Washington, D.C. (+1 202-887-3745, [email protected])
Jason C. Schwartz – Co-Chair, Labor & Employment Practice Group, Washington, D.C. (+1 202-955-8242, [email protected])
Zoë A. Klein – Washington, D.C. (+1 202-887-3740, [email protected])
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When negotiating a commercial contract, forum selection is often the least disputed issue. But given the daily expansion of COVID-19 court closures, now is the time to assess forum selection clauses in key contracts, before litigating a dispute in the chosen forum becomes indefinitely and prejudicially delayed.
For the first time since the Spanish influenza, Americans are being asked to stay home and non-essential businesses are being shuttered. Even essential businesses are losing staff, suppliers, vendors, and clients, and many of their key commercial relationships and contracts are in danger. In the face of this unprecedented epidemic, courts in a number of jurisdictions, including New York, have taken affirmative steps to restrict access to the courts to try to focus judicial resources on matters they deem “essential.” With COVID-19 still increasing in magnitude and severity, court closures may only increase and, at this point, are indeterminate.
The following are practical solutions that Gibson Dunn attorneys may be able to help you negotiate with contractual counterparties:
- Tolling Agreement. Parties with potential legal claims can enter voluntary tolling agreements to avoid claims being time-barred. Some states, including New York, have issued executive orders suspending the statute of limitations under the procedural laws of the state and extending the deadline for the commencement, filing or service of any legal action, notice, or other process or proceeding until April 19, 2020. See Executive Order 202.8.
- Expand Jurisdiction for Certain Remedies. Where equitable remedies, including immediate injunctive relief, are unavailable due to court closures in the chosen forum, such relief could be sought from any court that has sufficient contacts with the parties for that court to exercise personal jurisdiction over them. However, this option raises a number of other issues that you should discuss with your counsel, including the challenges created by travel restrictions.
- Add An Arbitration Option. For certain types of time-sensitive, commercial disputes, consider amending the forum selection provision to allow for resolution by arbitration for so long as the applicable jurisdiction is closed to non-essential disputes. Although not all types of disputes may be right for arbitration, for those that are, this option is designed to allow for the immediate adjudication of urgent disputes. Before you agree to arbitration in lieu of litigation, be sure to consider any specific requirements (e.g., insurance or lender requirements) that may restrict the forums available to resolve disputes.
The boilerplate template provision below may be helpful to you as you consider whether to provide for an alternative forum during the COVID-19 pandemic, and Gibson Dunn attorneys may be able to assist you in crafting a fallback forum selection provision tailored to your specific needs. Because all contracts are different, you should ensure that you carefully review the components of any forum selection provision to ensure that, among other things, it adequately addresses the scope of the issues to be arbitrated:
In light of the current COVID-19 pandemic, for so long as a state of emergency shall have been declared by, and remain in effect in, the state of the litigation forum, each of the parties irrevocably agrees that any legal action or proceeding [arising out of or relating to this Agreement or arising under this Agreement or involving enumerated items] shall be settled by binding arbitration administered by [insert arbitration institution] under its [insert rules] in effect as of the date [hereof or then-in effect], and judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. [Insert arbitrator selection mechanism; otherwise default arbitration rules will apply.] Either party may apply to the arbitrator(s) seeking any equitable relief, and the arbitrator(s) is/are empowered to award any and all equitable relief, including preliminary or permanent injunctive relief. Any legal action or proceeding that is initiated pursuant to this provision shall remain in binding arbitration until final resolution.
The following are some non-exhaustive, key points to consider when drafting your fallback forum selection clause:
- Scope of Arbitration Clause: Be clear on your intent. Consider specifying that the scope of the arbitration clause applies to all disputes “relating to” the contract. If that not your intent, however, you may wish to limit arbitrability to disagreements “arising under” the contract or to a range of specific types of disputes. Not all disputes may be right for arbitration, so before you incorporate any fallback arbitration provision in your agreement, you should decide that the nature of your potential dispute is well-suited for resolution by arbitration.
- Governing Rules and Procedures: Select a complete set of arbitral rules and procedures to govern the arbitration. This eliminates the need to spell out procedural matters in the agreement. If you prefer that all arbitrators be located in a specific jurisdiction, that should be noted in the arbitration clause. Consider the rules and procedures you select, including access to discovery and what types of documentary proof (and how much) you need, before agreeing to any set of rules for discovery in connection with an arbitration.
- Availability of Mediation: Consider whether you want to select rules that provide for a mediation option or whether you wish to incorporate mediation as part of a staged dispute resolution process.
- Time Limit on Arbitration Option: If the addition of arbitration is only to address the exigent circumstances of court closures caused by COVID-19, set a time limit on the applicability of the arbitration clause that is tied to the re-opening of court access.
- Provision for Equitable Remedies: Consider including a provision allowing for the provision of equitable relief, like injunctions. Consider whether the arbitration rules selected contain an emergency arbitrator provision that would enable you to seek this relief on an expedited basis. Not all arbitrators will issue injunctive relief.
- Enforcement: Consider including a provision for enforcement of the arbitral award. If you desire for the arbitration determination to be final, binding, and enforceable, consider including an “entry of judgment” provision that will allow the arbitration award to be enforced in any court having jurisdiction, once the courts are open. If timing of confirmation is of concern, the parties may be able to agree that the order will be deemed final and non-appealable and will treat it as deemed confirmed as of the date of entry by the arbitrator/panel.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn regularly counsels clients on issues raised by this pandemic in the commercial context. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Litigation, Real Estate, or Transactional groups, or the authors:
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Nathan C. Strauss – New York (+1 212-351-5315, [email protected])
Please also feel free to contact any of the following practice leaders and members:
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Randy M. Mastro – Co-Chair, Litigation Group, New York (+1 212-351-3825, [email protected])
Mylan L. Denerstein – Co-Chair, Public Policy Group, New York (+1 212-351-3850, [email protected])
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The significant decline in sales or even temporary close downs of businesses in the last couple of weeks already led to a massive shortfall in liquidity available to entrepreneurs while the cost level remains largely the same. In a joint effort to back the economy the European Central Bank as well as the German Federal Government (Bundesregierung) and the State Governments (Landesregierungen) implemented several programs to counteract a break-down of companies from large multinationals to sole entrepreneurs.
The below describes the measures available at the date hereof (or in the near future). Additional measures such as a federal emergency fund for small and medium sized enterprises are being discussed but details remain vague at this stage.
European Union Measures
In an effort to reduce interest rates, the European Central bank announced a program to acquire bonds including also corporate bonds in a volume of up to EUR 750 billion either directly from issuers or on the secondary market. Regional and sector specifics of the bonds targeted by the ECB are currently still open at this time.
The European Union, acting through the European Commission is also involved in the authorization of support measures by the Member States. Generally, to the extent Member State measures constitute State aid under European State aid laws, these measures require notification by the respective Member State to, and approval by, the European Commission (unless e.g. pre-existing programs are used or de minimis exceptions apply). In this context, the European Commission has signaled a high degree of willingness to allow the use of State aid measures by Member States to salvage the European economy in the present circumstances and to decide quickly on any notifications from Member States in this respect.
In particular, and following a similar temporary framework in 2008 in response to the global financial crisis, the European Commission has adopted a “Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the COVID-19 outbreak”. Together with many other support measures that can be used by Member States under the existing State aid rules, the Temporary Framework is intended to Member States to ensure that sufficient liquidity remains available to businesses of all types and to preserve the continuity of economic activity during and after the COVID-19 outbreak. For further details, please refer to our March 20, 2020 client alert “European Commission Adopts Initiatives to Support the Real Economy Amid the COVID-19 Outbreak”.
German Federal Support Programs
The measures adopted by the German Federal Government include the extension in volume and scope and the lowering of access conditions for pre-existing programs as well as the introduction of new programs. At federal level, support measures are generally granted through the involvement of KfW (Kreditanstalt für Wiederaufbau), Germany’s state-owned development bank, and require the cooperation of (and on-lending by) the relationship bank of the relevant applicant. Applications for support also have to be made through the applicant’s relationship bank. Details of the measures can be accessed on the KfW homepage. In the below sections, certain key preconditions and specifics are summarized.
The support measures outlined below are open to companies and sole entrepreneurs who face financial issues as a consequence of the COVID-19 crisis. Thus, applicants have to show that they (i) were in a stable financial condition on December 31, 2019 (i.e. no payment defaults, no covenant breaches under existing financing occurred) and that (ii) assuming a return to a normal economic environment, there is a positive continuation prognosis (positive Fortführungsprognose) until year end 2020. Further, companies can only apply if a controlling majority is privately held. Thus, it seems that companies held by (foreign) state owned funds are excluded.
The KfW’s Special Program 2020 (“KfW Sonderprogramm 2020 für Investitions- und Betriebsmittelfinanzierung”), which includes two measures for subsidized interest rates for loans, has been notified to the European Commission on 20 March 2020 under the under the “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” as set out above. The Commission approved the program on Sunday, March 22, 2020 (cf. State aid case SA.56714) and found that the program is in line with the conditions set out in the Temporary Framework. Similarly, on March 24, 2020, the Commission has also approved a loan guarantee scheme on the temporary provision of guarantees, counter-guarantees within the territory of the Federal Republic of Germany in relation to the outbreak of COVID-19 (“Bundesregelung Bürgschaften 2020”) (cf. State aid case SA.56787).
- KfW Entrepreneur Loan (KfW Unternehmerkredit)
An entrepreneur loan can be granted for investments and general working capital purposes, but also for the acquisition of other companies. Companies doing business in excess of five years are eligible for this program. In the case of large enterprises (in excess of either 250 employees, or EUR 50 million annual sales, or a balance sheet amount (Bilanzsumme) of EUR 43 million), KfW can assume a credit risk of up to 80%. In case of small and medium sized companies (SME) below such thresholds, the risk assumption by KfW is increased to up to 90%. Thus, the exposure of the relationship bank can be reduced to as little as 20% or 10%, respectively.
The maximum permissible loan amount is EUR 1 billion per group of companies (i.e. the applicant and its affiliates) but the amount is, in addition, limited to (i) a maximum of 25% of annual sales, (ii) two times the cost of labor in 2019, (iii) the amount of the liquidity required for the next 18 months (for SMEs) or the next 12 months (in respect of large enterprises), and (iv) loans in excess of EUR 25 million may not exceed 50% of the aggregate debt.
The term of loans varies between five years (in which case quarterly repayments as of year two will have to be made) and a two year term with a repayment in full at the end of the term. The interest rate will be determined on the basis of the credit rating of the applicant and the available collateral.
- ERP Start-Up Loan – Universal (EPR Gründerkredit – Universell)
For entrepreneurs doing business for three years (and up to five years) the program is comparable to the KfW Entrepreneur Loan provided that the interest rate can, in addition, be subsidized through funds of the EPR Special Fund (EPR Sondervermögen).
It seems that there will be specific programs for SMEs and large entrepreneurs in business for less than three years but it seems that specifics are not yet publicly available.
- KfW Special Program Syndicated Lending (KfW Sonderprogramm “Direktbeteiligung für Konsortialfinanzierung“)
Under this program, KfW participates in syndicated lending either directly as one of several lenders or indirectly through a sub-participation.
It is envisaged that the KfW loan portion is in excess of EUR 25 million but is limited to (i) a maximum of 80% of the aggregate loan amount and 50% of the aggregate debt of the applicant, (ii) a maximum of 25% of annual sales, (iii) two times the cost of labor in 2019, (iv) the amount of the liquidity required for the next 12 months.
This program is also available to foreign companies (if a controlling majority is privately held) in respect of projects in Germany.
- Immediate Corona Support Program for small(est) enterprises and sole entrepreneurs (Corona Soforthilfe für Kleinstunternehmen und Soloselbstständige)
This program is designed for small(est) enterprises, sole entrepreneurs and members of the free professions with up to ten employees who have no access to regular bank financing.
In deviation from the general precondition for SMEs and large enterprises, applicants have to show that they were financially stable prior to March 2020 and are now in financial distress due to the COVID-19 crisis. Amounts are limited to EUR 9,000 and EUR 15,000 respectively in the individual case.
While the funds are provided by the German Federal Government, this program will be administered by the federal states or possibly local communities.
Federal and State Guarantees
For guarantees, competencies vary between federal and state level, usually depending on the guaranteed amount and/or underlying loan amount.
- Large Guarantees Programs (Großbürgschaftsprogramme)
Such guarantees were in the past available to companies to secure general working capital and investment financing in structurally disadvantaged regions but are now open to companies generally. Generally, the federal states (Bundesländer) are in in charge, but for guarantees in excess of EUR 50 million the federal government is competent. The guarantees may cover up to 80% of the underlying debt.
In respect of guarantees by state guarantee banks (Bürgschaftsbanken) the guarantee limit has been extended and doubled to EUR 2.5 million.
State Support Programs
Programs at federal state (Bundesländer) governmental level are equally important. Typically, these cover the aforementioned guarantees as well as support for medium sized and small companies and sole entrepreneurs. For example, in Bavaria state measures include a so called Immediate Loan Program (Akkutkredit) for medium sized commercial enterprises with a loan amount of up to 2 million, and an Emergency Relief “Corona” (Soforthilfe Corona) for sole entrepreneurs and small enterprises. It is also contemplated to set up a State Funds (Bayernfonds) for (larger) medium sized enterprises aimed at providing the liquidity for (state) participations in companies which are considered of “systemic importance” which are hit hard by the COVID-19 crisis but were previously financially healthy.
Generally, for all these programs and support initiatives, the key factor for making them successful is the speed in making funds available to companies in need of emergency liquidity. This will be a challenge for the governmental bodies (and state banks) administering the programs as well as for the relationship banks involved who still need to make appropriate risk assessment as a certain – albeit considerably more limited – exposure remains in most cases. In addition, other existing lenders of an applicant may have to be involved if waivers allowing for additional debt and/or intercreditor agreements are necessary. Consequently, the time period between the application for support measures and the actual funding will take a number of weeks. The backing of the support measures by the relief granted to debtors in respect of insolvency filings outlined below will thus be important.
Changes to German Insolvency Law
The German legislator has on March 25, 2020 passed a law to make certain temporary adjustments to German insolvency laws. These measures aim at mitigating the effects of the Corona pandemic on German companies. Previous obstacles and pitfalls for lenders granting bridge loans or rescue financings to distressed companies shall be eliminated to a large extent. Together with the above liquidity programs this can be an effective way to support (dis)stressed companies in Germany. The obligation on directors to file for insolvency will be suspended for scenarios caused by COVID-19.
- Filing requirement
With effect from March 1, 2020 until September 30, 2020 German companies do not have to file for insolvency in case of cash flow insolvency unless it is not caused by the Corona pandemic or there is no prospect that the cash flow insolvency will be remedied. To give directors comfort that there is no obligation on them to file, it will be assumed that an illiquidity is caused by the Corona pandemic where the company was not already cash flow insolvent on December 31, 2019.
- Payments by companies in a crisis
As a consequence the company can make payments in the ordinary course of business without management risking personal liability. This shall stabilize stressed companies and enable them to continue business with its contractual partners.
- Lender liability
The new law also eliminates legal risks in connection with the provision of financing in a crisis. Potential lender liability due to a delayed filing for insolvency is suspended. Also, claw-back risks relating to loans granted between March 1 and September 1, 2020 and repaid until September 30, 2023 or the granting of security for such financing have been minimized for all customary scenarios of financing in a crisis. This shall assist lenders in quickly making a decision to support stressed borrowers.
- Shareholder financing
Last but not least also shareholders can benefit from this new law. A shareholder shall be able to may make available financing to its subsidiary between March 1 and September 30, 2020 without running the risk of legal subordination of such a loan in insolvency proceedings of the debtor until September 30, 2023. Legal subordination of shareholder loans had in the past often been an obstacle in many rescue financings attempted by shareholders.
Governmental support programs in combination with the relaxation in respect of insolvency filings and the improved protection of lenders, other creditors and also funding shareholders aim to set a viable framework for rescue financings and, ultimately, may help to avoid mass insolvencies.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the team in Frankfurt or Munich, or the authors:
Sebastian Schoon (+49 69 247 411 505, [email protected])
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Kai Gesing (+49 89 189 33 180, [email protected])
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Gibson Dunn in Germany:
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The COVID-19 pandemic has been extremely challenging for everyone, changing day-to-day life in unprecedented ways. On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Act”). Many employers have been providing assistance to employees whose working schedules have been reduced or who have been temporarily laid off by continuing some or all of their pay for a period of time. Payments in the form of salary or wage continuation, while certainly welcome, are treated as taxable income to the employee. However, the President’s national emergency declaration under the Act gives employers a means to provide tax-free financial assistance to employees who are affected, directly or indirectly, by COVID-19, while preserving the employer’s ability to deduct the payments of financial assistance.
Section 139 (“Section 139”) of the United States Internal Revenue Code (the “Code”) provides, in relevant part, that “Gross income shall not include any amount received by an individual as a qualified disaster relief payment”. The term “qualified disaster relief payment” means “any amount paid to or for the benefit of an individual…to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster”. Section 139 applies to both federal income and employment taxes. With the President’s declaration of a national emergency, the COVID-19 pandemic is a “qualified disaster”.
Given the likely significant financial burdens that many employees will bear as a result of quarantines and/or limited or ceased business operations in the coming days and weeks, employers who are able may want to consider providing tax-favored financial assistance to affected employees. As noted, this form of financial assistance will not be treated as taxable wages/income to the employee. Furthermore, it should be fully deductible to the employer as a business expense.
- Employers May Provide Non-Taxable Financial Assistance Directly.
Under Section 139, employers may provide direct financial assistance to employees affected by COVID-19. The assistance provided will not be treated as income/wages to the employees, and the employer should be able to deduct those payments as business expenses. There is no ceiling on the amount of assistance that may be provided to an employee under Section 139 other than it must be “reasonable and necessary” and must not be for an expense reimbursable by the employee’s insurance. This means that employers cannot provide across-the-board assistance to all employees or group of employees under Section 139. Rather, the employer will need to set up a process for accepting and evaluating applications for financial assistance. The employer should also ensure that its payroll function treats any such payments as separate from wages so that the amounts paid are not inadvertently characterized as taxable to the recipients. There are no requirements to report qualified disaster relief payments to the Internal Revenue Service (“IRS”).
Other forms of assistance that may be provided to employees who incur a financial hardship as a result of COVID-19 include:
- Employees Helping Employees: Employee Leave Transfer Programs.
An employer may establish an employee leave transfer program. An employee leave transfer program allows employees to help their co-workers by donating some of their available vacation, sick pay or PTO hours into a “leave bank” for the purpose of aiding affected colleagues who do not have enough paid time off to cover an extended break from their job. Employees affected by COVID-19 (or other medical emergencies) who have exhausted, or will exhaust, their paid leave due to the medical emergency may then withdraw additional leave from the leave bank. The paid time off used from the leave bank is taxable income to the employee who receives the additional leave. So long as the donated leave is used for another employee’s “medical emergency”, the employee donating the leave is not taxed on the value of the donated leave. A “medical emergency” is defined as “a medical condition of the employee or a family member that will require the prolonged absence of the employee from duty and will result in a substantial loss of income to the employee because the employee will have exhausted all paid leave available apart from the leave-sharing plan”. Similar favorable tax treatment is also available for leave donation in the event of a “major disaster”, but as of the date of this Alert, the technical requirements of that definition have not been satisfied by the COVID-19 pandemic. Employees can also contribute funds to aid fellow employees, but unless those funds are contributed to a charitable organization, such as one of those described below, the employee donating the funds will be treated as making a gift with after-tax income and will not be able to claim an income tax deduction.
- Employer-Sponsored Charitable Organizations Classified as Public Charities.
Some employers have established tax-exempt charitable organizations under Section 501(c)(3) of the Code, one of the purposes of which may be to provide financial assistance to employees who face unexpected emergencies that have resulted in financial hardship. The type of financial assistance that may be provided by an employer-sponsored charity depends on how the charity is classified under the federal tax law regulating tax-exempt organizations. If the employer’s charitable organization is classified by the IRS as a “public charity”–generally because it receives contributions from a sufficiently broad number of donors–then the organization may provide financial assistance to any employee who experiences a financial hardship on account of COVID-19. The employee with the financial need must apply for assistance, and the organization must determine the extent of its support based on the nature and size of the need. Proper procedures are important. If they are followed, any financial assistance provided by the organization should not be taxable to the recipient employee. And because the organization is itself exempt from federal income taxation, it can apply all funds received (without the drag of income taxation) to achieve its charitable goals.
- Employer-Sponsored Charitable Organizations Classified as Private Foundations May Provide Assistance Following the Declaration of a National Emergency without the Risk of Incurring Certain Tax Liabilities.
If an employer-sponsored charitable organization is classified as a Section 501(c)(3) “private foundation” as opposed to a public charity–generally because most or all of the funding is provided by the employer—then providing financial assistance to employees presents a number of risks to the organization under the Code. First, and most importantly, providing support to employees could be treated as advancing the employer’s private interests and therefore risk the tax-qualified status of the organization. According to the IRS, a private foundation has to be “operated exclusively for exempt purposes”. Second, such financial support might be treated as “self-dealing” on the part of the employer and subject the employer and the foundation manager to substantial excise taxes. However, when financial assistance is provided in connection with a “qualified disaster” (which follows the same basic definition as Section 139, and, therefore, would cover the COVID-19 pandemic), payments by the private foundation, if properly made and documented in the same manner as described above in the section covering public charities, should not threaten the tax-qualified status of the organization or constitute proscribed acts of self-dealing under Section 4941 of the Code, among other benefits. Furthermore, the organization would not need to seek prior approval from the IRS to provide this form of assistance to individuals, although if not otherwise covered in the description of its purposes, the organization would need to disclose this program in its next annual filing with the IRS.
Note that if an employer is considering establishing a new private foundation to provide financial assistance to employees who suffer a financial hardship as a result of the COVID-19 pandemic, it will need to continue the foundation beyond the COVID-19 pandemic either to address other charitable purposes or to aid employees with future financial emergencies. The IRS requires that any tax-exempt charity serve a “charitable class” (which means that the covered group has to be “large or indefinite”), and, in the context of financial relief provided to employees by an employer-sponsored charitable organization, this requires at a minimum that the class of recipients be broadened to cover employees who incur financial hardships in the future. Furthermore, an independent person or group should be selected to make decisions regarding the delivery of aid to employees, as the IRS wants to see that “any benefit to the employer is incidental and tenuous”.
- Charitable Donations to a Donor-Advised Fund Administered by an Independent Public Charity.
An employer may not have previously established a charitable organization and does not wish to do so now. Some community foundations and public charities maintain separate funds or accounts to receive contributions from individual donors. These donors then receive advisory privileges over investment or distribution of the donated funds. While donor-advised funds generally may not make grants to individuals, an exception is made for funds or accounts established specifically to benefit employees and their family members who are victims of a qualified disaster.
In order for the employer-sponsored donor-advised fund to be able to give directly to employees, the fund must meet the following criteria. First, the fund must serve the single identified purpose of providing relief from one or more qualified disasters. Second, it must serve a “broad and indefinite” charitable class. Third, the recipients of the donations must be selected based on an objective determination of need, and the selection must be made either by (i) using an independent person or group or (ii) establishing adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. Fourth, no payment may be made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or any person who is selecting recipients. Fifth, the fund must maintain adequate records to demonstrate the recipients’ need for the disaster assistance provided.
- Charitable Contributions to a Relief Fund Established by Another Organization.
An employer may make charitable contributions to a disaster relief fund established by an independent charitable or governmental organization under which the other organization makes the decisions regarding who will receive aid. While the employer would receive a charitable contribution for its contributions, it would have limited or no ability to influence the selection of recipients. Therefore this Alert focuses on those approaches that allow an employer to have greater levels of influence over the selection over who benefits from the employer’s generosity.
Gibson Dunn’s lawyers are available to assist with any questions, as detailed below.
In addition, the IRS has set up a page on its website to address matters relating to Coronavirus tax relief. See https://www.irs.gov/coronavirus.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding the multitude of legal developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client update: Stephen Fackler and Allison Balick, with assistance from Dora Arash, Eric Sloan, Edward Wei, Jeffrey Trinklein and David Rubin. Gibson Dunn lawyers are working with many of our clients on their response to COVID-19 and are available to assist with questions about various types of employee assistance arrangements, including those that fall within the scope of Section 139. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Executive Compensation and Employee Benefits, Tax, or other practice groups, or the authors:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Allison Balick – Los Angeles (+1 213-229-7685, [email protected])
Please also feel free to contact any of the following practice leaders and members:
Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Michael J. Collins – Washington, D.C. (+1 202-887-3551, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+ 214-698-3425, [email protected])
Allison Balick – Los Angeles (+1 213-229-7685, [email protected])
Tax Group:
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Eric B. Sloan – New York (+1 212-351-2340, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0)20 7071 4224 /+1 212-351-2344), [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
David W. Rubin – Los Angeles (+1 213-229-7647, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On March 21, 2020, New York Governor Andrew Cuomo issued an Executive Order relating to 90-day forbearances for borrowers that are suffering financial hardship as a result of the COVID-19 pandemic. In part, this Executive Order called on the New York Department of Financial Services (DFS) to promulgate emergency regulations in furtherance of the Governor’s directive. On March 24, 2020, the New York Superintendent of Financial Services, Linda A. Lacewell, promulgated regulations implementing the Executive Order (Emergency Regulations). Importantly, the Emergency Regulations clarify ambiguities in the Executive Order and demonstrate a focus on consumer and individual forbearances.
The Executive Order (E.O.), Number 202.9, has three components, each of which is effective from March 21, 2020 until April 20, 2020, with the possibility of extension. First, the Executive Order modifies the New York Banking Law, Section 39, Subdivision two. Subdivision two provides that “[w]henever it shall appear to the superintendent [of Financial Services] that any [bank] in this state is conducting business in an unauthorized or unsafe and unsound manner, he or she may, in his or her discretion, issue an order directing the discontinuance of such unauthorized or unsafe and unsound practices[.]” New York Banking Law § 39.2. The Executive Order modifies this provision by declaring that “it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days.” E.O. 202.9.
The second and third components of the Executive Order authorize the Superintendent to take additional action in support of the forbearance directive. The second part of the Executive Order directs the Superintendent to ensure that banks provide opportunities for consumers to apply for forbearances, and to require that applications be made widely available for consumers and granted in all reasonable and prudent circumstances. The third part of the Executive Order empowers the Superintendent to restrict or modify banks’ ability to charge fees for ATM machines, overdraft, and late credit card payments. The Executive Order applies only to state-regulated banking institutions, and therefore not to national banks, federal savings associations, and federally licensed branches of non-U.S. banks.
The Emergency Regulations are published at 3 NYCRR § 119. Section 119 contains eleven subsections, and their contents are summarized below. They apply only to state-regulated institutions, that is, “any New York regulated banking organization as defined under New York Banking Law and any New York regulated mortgage servicer entity subject to the authority of the [DFS].” 3 NYCRR § 119.2(c). As a result, although they apply to New York-licensed banks, trust companies, savings and loan associations, savings banks, and credit unions, they do not apply to state-licensed branches and agencies of non-U.S. banks, which are not “banking organizations.”
- 119.3(a) requires New York banks to make forbearance applications widely available and to grant them for a period of 90 days, subject to safety and soundness requirements. The applications shall be directed only to forbearance of “payment due on a residential mortgage of a property located in New York” and need only be widely available “to any individual who resides in New York.” In addition, this requirement is not applicable to mortgage loan obligations that individuals may owe to bodies created by the federal government, including Government Sponsored Enterprises, Federal Home Loan Banks, and the Government National Mortgage Association.
- 119.3(b) provides that any “individual” who can demonstrate financial hardship flowing from the COVID-19 pandemic is entitled to have banks eliminate ATM fees, any overdraft fees, and any credit card late fees, “subject to the safety and soundness requirements” of the particular banking organization.
- 119.3(c) requires all banks to publish instructions for how customers may apply for COVID-19 relief within 10 days of the promulgation of the regulation, i.e. by April 7, 2020.
- 119.3(d) covers the qualifications banks should use to determine whether individuals are eligible to receive COVID-19 relief.
- 119.3(e) covers the manner in which banks must process applications for COVID-19 relief.
- 119.3(f) details the factors that DFS will consider in reviewing banks’ denials of forbearance applications as an “unsafe and unsound practice” per the Executive Order. These include the adequacy of the bank’s application-processing procedures; the thoroughness of the review afforded to the application; the payment history, creditworthiness, and the financial resources of the borrower; any state and federal laws or regulations that would prohibit the grant of a forbearance; and the safety and soundness requirements of the bank.
- 119.3(g) states that, during DFS examinations, DFS’s examiners will not criticize banks’ “prudent and reasonable efforts to grant forbearance of any payment due on a residential mortgage.”
- 119.3(h) requires banks to maintain copies of all files relating to implementation of these regulations for seven years from the date of creation, and to make the files available at the DFS’s next examination.
- 119.3(i) encourages banks to seek guidance from DFS regarding any aspect of these regulations.
- 119.3(j) states that § 119 supersedes the two guidance letters issued by DFS on March 19, 2020 (titled, (i) “Guidance to New York State Regulated and Exempt Mortgage Servicers Regarding Support for Borrowers Impacted by the Novel Coronavirus (COVID-19),” and (ii) “Guidance to New York State Regulated Financial Institutions Regarding Support for Consumers and Businesses Impacted by the Novel Coronavirus (COVID-19)”), to the extent there are any inconsistencies.
- Significantly, § 119.3(k) expressly states that, “for the sake of clarity,” these regulations do not apply to “any commercial mortgage or any other loans not described [t]herein.”
The effect of the Emergency Regulations is to clarify, until such time as other regulations are adopted, if at all, that the forbearance relief mandated by the Executive Order relates to residential mortgages and individual consumers. The Emergency Regulations therefore eliminate ambiguities in the Executive Order that could have implicated complex financial transactions. Moreover, the Emergency Regulations indicate that, at this time, the DFS does not intend to affect practices in the commercial real estate lending market.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client update: Mylan Denerstein, Matthew Biben, James Hallowell, Mitchell Karlan, Arthur Long and Emil Nachman. Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy, Financial Institutions, or other practice groups, or the following authors:
Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, [email protected])
Matthew L. Biben – Co-Chair, Financial Institutions Group, New York (+1 212-351-6300, [email protected])
James L. Hallowell – New York (+1 212-351-3804, [email protected])
Mitchell A. Karlan – New York (+1 212-351-3827, [email protected])
Arthur S. Long – Co-Chair, Financial Institutions Group, New York (+1 212-351-2426, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In response to emergency conditions presented by the COVID-19 pandemic, the need and opportunity to engage in legitimate competitor collaboration to overcome supply chain disruptions, ensure supply continuity, and better serve markets and customers can be expected to increase. While the antitrust laws are not lifted in these circumstances, they are flexible enough to enable competitors to collaborate where the result is improved supply and output, mitigation of market disruptions, enhanced efficiency, and enhanced customer welfare, provided that appropriate precautions are taken.[1] This Client Alert aims to provide practical guidance for companies considering competitor collaborations or discussing such plans with competitors. First, we discuss a statement issued jointly by the Antitrust Division of the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) on March 24, 2020 that details expedited antitrust review of those competitor collaborations related to the COVID-19 pandemic. Second, we provide practical antitrust guidance for companies exploring competitor collaborations during this time.
1. The DOJ/FTC Joint Statement
The DOJ and FTC have announced that each will issue expedited advisory guidance on whether a specific proposed collaborations between firms would face government antitrust scrutiny including investigations or legal challenges. In issuing their statement, the DOJ and FTC identified examples of likely permissible collaborations including partnerships between health care facilities to provide resources to communities lacking sufficient medical equipment (such as personal protective equipment), coordination of production facilities to manufacture COVID-19-related supplies, and coordination of competitor distribution or service networks to improve transportation and dissemination of medical equipment or health care services.
An applicant requesting guidance regarding a potential COVID-19 related collaboration must provide the following information:
- Nature of the proposed collaboration, including the duration and geographic scope;
- Rationale for the proposal;
- Products and/or services covered by the collaboration;
- Description of proposed contractual arrangements;
- Identity of potential customers;
- Explanation of the collaboration’s relationship to the COVID-19 pandemic; and
- Any available information on alternative providers for the product or service at issue.
Once receiving all required information, the agencies will provide a response within seven calendar days that describes whether the agency would take enforcement action regarding the proposed arrangement and the basis for the agency’s conclusion. The agencies’ response and related guidance would be effective for one year from the date of issuance. Potential applicants should not commence the collaboration before receiving a response from the agencies.
An affirmative response from the agencies should not be construed as a broad grant of immunity for the contemplated collaboration. Third parties, such as affected competitors or class action plaintiffs, may still attempt to challenge collaborations that harm competition. At the same time, however, it is not necessary for parties engaging in a collaboration to seek or secure government pre-approval for a collaboration, and there is no mandatory waiting period to allow for government review (unlike, for example, an HSR filing before a merger). Parties exploring a cooperative relationship, whether or not government pre-approval is sought, should observe the guidance in the following section to minimize potential antitrust risk from the arrangement.
The agencies’ press release can be found here: https://www.ftc.gov/news-events/press-releases/2020/03/ftc-doj-announce-expedited-antitrust-procedure.
The joint DOJ/FTC guidance can be found here: https://www.ftc.gov/system/files/documents/public_statements/1569593/statement_on_coronavirus_ftc-doj_3-24-20.pdf.
2. Practical Antitrust Guidance
The joint DOJ/FTC guidance sets out a revised process for reviewing COVID-19-related collaborations, but there are numerous cooperative situations that do not call for advisory guidance from the agencies. The agencies have longstanding guidance—the 2000 Antitrust Guidelines for Collaborations Among Competitors (the “Competitor Collaboration Guidelines”)[2]—that sets out the analytical framework and related antitrust considerations in these situations. Under the Competitor Collaboration Guidelines, proposed collaborations often do not raise substantial antitrust concerns provided that they are reasonably necessary to achieve procompetitive objectives and do not result in harm to competition. A proper evaluation of a proposed cooperative relationship requires the early and active involvement of antitrust counsel to assess the goals and effect of the proposed collaboration.
We recommend the following steps when considering a competitor collaboration, whether in response to COVID-19 or in non-public health contexts:
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- Before proceeding with any joint effort with a competitor, identify a legitimate objective for the collaboration. From an antitrust perspective, a legitimate objective is one that is competitively neutral (i.e., it neither enhances nor reduces competition, but serves some other goal), enhances efficiency or overcomes a market failure, or enhances competition. One example of a legitimate objective is the development of a product that neither participant could develop on its own, using its own assets and resources, but there are many others. On the other hand, if one of the goals of the collaboration is to reduce competition with a competitor, or to hinder other companies in their ability to compete, stop immediately and seek guidance from counsel.
- Once you identify a legitimate objective, make sure that all actions undertaken jointly with a competitor are limited to those that are reasonably necessary to achieve the objective. This includes limiting the activities by scope, geography, duration, and any other dimension. In some jurisdictions outside the U.S., there is an additional test which requires that there are no less restrictive means to achieve the same objective – or to put it another way, the parties have sought to achieve their objectives through the least restrictive means possible.
- Joint actions are more likely to be acceptable from an antitrust perspective if they are (i) voluntary (i.e., any party may choose to participate in its own independent discretion), (ii) non-exclusive (i.e., any party may participate jointly while retaining the discretion to compete independently), and (iii) short-term and limited in duration to the period necessary to achieve the legitimate objective.
- Conversations with competitors regarding any potential collaboration (or otherwise) should follow an agenda that is prepared in advance and reviewed by counsel.
- Once the objective of the joint effort is achieved, or once the emergency circumstances necessitating the joint effort have abated, the joint effort should be discontinued. Any long-term joint efforts should be reviewed by counsel in advance. Similarly, if a joint effort that is intended to be a short-term project extends for a longer term, counsel should review the project on an ongoing basis to ensure that antitrust compliance is not compromised by changed circumstances.
- Watch out:
- If any joint effort with a competitor is likely to have the effect of raising customer prices or decreasing supplier prices, reducing output, or reducing the quality of goods or services, stop immediately and seek guidance of counsel.
- Do not discuss product pricing, pricing strategies, margins, the terms or conditions upon which you will deal with others, allocating suppliers, customers or markets, or the impact any particular action may have on pricing. If a discussion of these subjects is necessary to achieve the legitimate objective of the joint effort, seek guidance of counsel before proceeding.
- Do not use the collaboration to discuss issues unrelated to the procompetitive objective, such as employee wages, layoffs, or hiring plans. If the collaboration will have its own employees, such as a joint venture, seek guidance of counsel before proceeding.
- Do not exchange competitively sensitive information, such as current or future prices, costs, or output. If an exchange of competitively sensitive information is necessary to achieve the legitimate objective of the joint effort, seek guidance of counsel before proceeding.
- It may be necessary and legitimate for participants in a collaboration to adopt a non-compete provision. If so, the non-compete should be limited in time and scope, and should not limit any participant’s ability to compete outside the scope of the collaboration. Any non-compete should correspond to the area where the participants are collaborating, and should end at the time the collaboration ends (or shortly thereafter). Again, seek legal guidance before proceeding.
- Do not agree not to do business with a third party, and do not agree on the terms on which you will do business with a third party. Likewise, do not agree on any joint effort that will hinder a third party in its ability to compete.
- If a joint effort may create a situation in which a supplier, customer, or competitor could claim that it is disadvantaged in its business as a result of the joint effort, seek guidance of counsel before proceeding. For example, if a joint effort will create “winners and losers” (e.g., competitors collaborate to jointly select a supplier) beware of the possibility that a “losing” company could pursue an antitrust claim.
- Beware of spillover effects – i.e., effects on other lines of business as a result of the joint effort. If a joint effort with a competitor could potentially have effects on another line of business or on other geographies or time periods outside the scope of the legitimate objective, stop and seek guidance of counsel before proceeding.
If you have any doubts about the propriety of any discussion or action, stop and seek guidance of counsel before proceeding with the discussion or action.
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[1] Department of Justice, Federal Trade Commissions, Antitrust Guidelines for Collaborations Among Competitors, April 2000, available at: https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
The following Gibson Dunn lawyers prepared this client update: Adam Di Vincenzo, Kristen Limarzi, Josh Lipton and Chris Wilson. Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the Antitrust and Competition Practice Group:
Washington, D.C.
D. Jarrett Arp (+1 202-955-8678, [email protected])
Adam Di Vincenzo (+1 202-887-3704, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
Kristen C. Limarzi (+1 202-887-3518, [email protected])
Joshua Lipton (+1 202-955-8226, [email protected])
Richard G. Parker (+1 202-955-8503, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
Jeremy Robison (+1 202-955-8518, [email protected])
Andrew Cline (+1 202-887-3698, [email protected])
New York
Eric J. Stock (+1 212-351-2301, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Christopher D. Dusseault (+1 213-229-7855, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])
San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])
Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Mike Raiff (+1 214-698-3350, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])
Brussels
Peter Alexiadis (+32 2 554 7200, [email protected])
Attila Borsos (+32 2 554 72 11, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
Lena Sandberg (+32 2 554 72 60, [email protected])
David Wood (+32 2 554 7210, [email protected])
Munich
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
London
Patrick Doris (+44 20 7071 4276, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])
Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Sébastien Evrard (+852 2214 3798, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The rapid spread of COVID-19, and increasingly stringent government orders regulating the movement and gathering of people issued in response, has raised concerns about parties’ ability to comply with contractual terms across a variety of industries. The most common term addressing parties’ obligations under such circumstances is a force majeure clause, which is often (but not always) included in commercial contracts. Such clauses generally set forth limited circumstances under which a party may terminate or fail to perform without liability due to the occurrence of an unforeseen event. Assessing applicability and enforceability of such clauses requires a highly fact-specific analysis.[1]
To assist clients in identifying issues they should evaluate in connection with their contractual obligations in the face of the pandemic, we have prepared a 4-Step Checklist and Flowchart to review and assess force majeure clauses.
STEP 1: Does COVID-19 trigger the force majeure clause? The first step is to review the triggering events enumerated in the force majeure clause.
Many force majeure clauses are triggered by an “act of God,” but do not specifically enumerate public health events.[2] If the force majeure clause covers only “acts of God,” the current pandemic may be outside its scope. If your force majeure clause specifically references an “epidemic,” “pandemic,” “disease outbreak,” or even “public health crisis,” the current situation relating to COVID-19 may fit within that clause. Where a force majeure clause does not explicitly reference disease or public health, it may still include a reference to government action as a force majeure event, including, “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation.” Where such clauses are present, recently adopted regulations and executive orders regulating, among other things, the size of gatherings or mandating the closure of certain establishments may qualify as force majeure events.
Many force majeure clauses also contain catch-all provisions (e.g., “any other cause whatsoever beyond the control of the respective party”) that may appear to cover any unforeseen event. However, courts generally interpret force majeure clauses narrowly and typically do not interpret a general catch-all provision to cover externalities unlike those specifically enumerated in the balance of the clause.[3] Where a contract contains a broad force majeure clause that does not enumerate any examples, but generally refers to events outside the performing party’s control, it may cover the current pandemic. If litigated, however, a party may have to prove that the clause, when drafted, was intended to cover a similar situation (a public health crisis as opposed to a natural disaster). A party may also be required to demonstrate that the event that triggered the force majeure provision was beyond its reasonable control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event.[4] Some force majeure clauses also specify that they only apply for the length of the event triggering the clause—in those instances, a party claiming relief under the force majeure clause may have the burden of demonstrating that it was actually prevented from performing for the length of time claimed.[5]
STEP 2: What is the standard of performance? The second step is to review what specifically the force majeure clause excuses.
Force majeure clauses may codify an impossibility standard and require that performance of contractual obligations be “impossible” before all obligations are excused. Others may be less stringent, requiring only that the performance, in light of the triggering event, would be “inadvisable” or “commercially impractical,” or may provide for relief only “to the extent that” performance is impaired. For example, if the applicable jurisdiction has adopted a ban on gatherings of more than 50 people through April 15, 2020, but the contract relates to an event in late April, the force majeure clause may not allow termination if it relies solely on an “impossibility” standard of performance but may cover a termination if the relevant performance standard is “inadvisable.” Finally, not all force majeure clauses provide for termination of an agreement; some only excuse delayed performance, providing that any failure to perform due to a triggering event will not constitute a breach under the relevant agreement.
STEP 3: When must notice be given? The third step is to review the contractual requirements, if any, for notice.
Force majeure clauses may require either (i) a minimum amount of notice ahead of an event contemplated by the contract, or (ii) notice within a certain number of days of the triggering event. Failure to provide timely notice may prohibit a party from obtaining the benefit of a force majeure clause in the agreement even when a triggering event is covered by the contract’s force majeure clause.[6] For example, a new government regulation (e.g., shrinking the maximum size of permitted gatherings from 500 to 50) may be a force majeure event under the particular language of an agreement and may start the clock on the notice period even though your event may be in the future.
STEP 4: Are there requirements for the form of notice? The fourth step is to review whether the contract requires a specific form of notice.
Notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Additionally, many agreements will require that notices given thereunder must provide sufficient specificity to make clear why the relevant triggering event applies to a given provision in a contract. Given the current work-from-home orders, it may be difficult to comply with all formal notice requirements in a contract, and clients may wish to propose alternative methods of providing notice with contract counterparties for so long as the current climate persists. Gibson Dunn may also be able to assist clients with mailings—either notices required to be given or responses to notices received—especially where the client does not have an operational mailroom.
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Step 1. Does COVID-19 trigger the force majeure clause?[7]
| Does the force majeure clause broadly cover events caused by conditions beyond the reasonable control of the performing party without enumerating specific events? | No ☐ | Yes ☐ |  | If yes, proceed to Step 2.
Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. |
| Does the force majeure clause specifically reference an “epidemic,” “pandemic,” “disease outbreak,” or “public health crisis”? | No ☐ | Yes ☐ | | If yes, proceed to Step 2.
Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. |
| Does the force majeure clause refer specifically to “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation”? | No ☐ | Yes ☐ | | If yes, proceed to Step 2.
Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. |
| Does the force majeure clause cover only “acts of God”? | No ☐ | Yes ☐ |  | If yes, under leading current case law, the force majeure clause may not have been triggered by the current pandemic. Many courts have interpreted the phrase “act of God” in a force majeure clause in a limited manner, encompassing only natural disasters like floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, and blizzards.
The common law doctrine of impossibility or commercial impracticability may still apply, depending on the jurisdiction. |
| Does the force majeure clause have a catchall provision that covers “any other cause whatsoever beyond the control of the respective party” and contains an enumeration of specific events that otherwise do not cover the current situation? | No ☐ | Yes ☐ | | If yes, the force majeure clause may not have been triggered because courts generally interpret force majeure clauses narrowly and will not construe a general catch-all provision to cover externalities that are unlike those specifically enumerated in the balance of the clause.
But depending on the jurisdiction, courts may look at whether the event was actually beyond the parties’ reasonable control and unforeseeable and the common law doctrine of impossibility or commercial impracticability may still apply, depending on the jurisdiction. |
Step 2. What is the standard of performance?
| Does the force majeure clause require performance of obligations to be “impossible” before contractual obligations are excused? | No ☐ | Yes ☐ | | If yes, the force majeure clause may have been triggered if the current government regulations specifically prohibit the fulfillment of contractual obligations. Proceed to Step 3. |
| Does the force majeure clause require only that performance would be “inadvisable” or “commercially impractical”? | No ☐ | Yes ☐ | | If yes, the force majeure clause may have been triggered due to the extreme disruptions caused by COVID-19. Proceed to Step 3. |
Step 3. When must notice be given?
| Does the contract require notice? | No ☐ | Yes ☐ | | If yes, proceed to Step 4.
Timely notice must be provided in accordance with the notice provision, or termination may not be available even though a triggering event has occurred. Some notice provisions required notice in advance of performance due. Others required notice within a certain number of days of the triggering event. |
Step 4. Are there requirements for the form of notice?
| Does the contract contain specific provisions for the method of notice? | No ☐ | Yes ☐ | | If yes, notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Specific notice language may also be required. |
| Does the contract require specific language to give notice of a force majeure event? | No ☐ | Yes ☐ | | If yes, determine whether required wording is present in any notice. Some contracts may even have form of notices attached as exhibits to the contract. |
| Does the contract specify a specific method for delivery of such notice? | No ☐ | Yes ☐ | | If yes, notice may be required by email, priority mail, or through use of a particular form addressed to specific people. |
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[1] Whether or not the contract contains a force majeure clause, the common law doctrines of impossibility or commercial impracticability may be available and legal analysis of such a claim should be conducted. See, e.g., Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902-03 (1987) (conducting independent analysis of impossibility doctrine and force majeure clause). The party asserting this defense will bear the burden of proving that the event was unforeseeable and truly rendered performance impossible, and the doctrine generally is applied narrowly. For example, assertions that the event rendered performance more expensive or difficult have been rejected under the impossibility doctrine and, as result, some states, like California, have enacted statutes to address the standard applicable. See, e.g., Gregory v. Haft, 2013 WL 12192616, at *3 (N.Y. Sup. Ct. Nassau Cty. Sept. 30, 2013) (defendant provided insufficient proof “that Hurricane Sandy delayed the permits for so long that it made it impossible . . . to perform”); see also, e.g., Cal. Civ. Code § 1511(2) (Excusing performance under a contract when: “it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”).
The analysis in the absence of a force majeure clause may also depend on the particular type of contract or industry involved. For example, in the real estate context, if the landlord closes a building, the landlord may arguably be in breach of the covenant of quiet enjoyment. However, the covenant to pay rent generally is considered an independent covenant, and the tenant may not be excused from paying rent just because the landlord has closed the building. On the other hand, closure may excuse the tenant from having to perform under a continuous operation covenant.
[2] An “act of God” is generally defined as an unusual or extraordinary natural event such as floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, blizzards, etc. See Gleeson v. Virginia Midland Ry. Co., 140 U.S. 435, 439 (1891); Carlson v. A. & P. Corrugated Box Corp., 364 Pa. 216, 219 (Pa. 1950); Cormack v. New York, N.H. & H.R. Co., 196 N.Y. 442 (N.Y. 1909).
[3] See, e.g., Kel Kim Corp., 70 N.Y.2d at 902–03. Expansion of the application of such clauses to COVID-19 by legislative action, executive order or judicial interpretation may be a response to the crisis.
[4] See, e.g., Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985); 30 Williston on Contracts § 77:31 (4th ed.). Similarly, a party may be unable to claim the protection of a force majeure clause if its actions were to blame for the occurrence of the force majeure event or if they made the event foreseeable. See Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 492 (1st Dep’t 2017) (holding that event space owner would not be entitled to protection of force majeure clause in lawsuit seeking damages for cancelled event if the triggering “order of the . . . City government,” which had required the event space to close, was triggered by the owner’s actions).
[5] See, e.g., Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 146 A.D.3d 557 (N.Y. App. Div. 2017) (holding that flooding due to Hurricane Sandy might excuse payment of certain minimum utility fees under a force majeure clause but requiring the defendant would have to prove that its abandonment of the property for the length of time at issue was “an unavoidable result of the storm”).
[6] See Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Is. Corp., 771 F. Supp. 63, 67–68 (S.D.N.Y. 1991) (noting that a force majeure notification outside the limits of a notice period may waive the applicability of the force majeure clause if the parties intended the notice period as a condition precedent to the clause).
[7] As noted above, if an agreement does not have a force majeure or “act of god” clause, an analysis under the doctrine of impossibility or commercial impracticability, depending on the jurisdiction, may be warranted.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn regularly counsels clients on issues raised by this pandemic in the commercial context. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Litigation, Real Estate, or Transactional groups, or the authors:
Shireen A. Barday – New York (+1 212-351-2621, [email protected])
Mary Beth Maloney – New York (+1 212-351-2315, [email protected])
Victoria R. Orlowski – New York (+1 212-351-2367, [email protected])
Nathan C. Strauss – New York (+1 212-351-5315, [email protected])
Please also feel free to contact any of the following practice leaders and members:
Andrew Lance – New York (+1 212-351-3871, [email protected])
Randy M. Mastro – Co-Chair, Litigation Group, New York (+1 212-351-3825, [email protected])
Mylan L. Denerstein – Co-Chair, Public Policy Group, New York (+1 212-351-3850, [email protected])
Lauren J. Elliot – New York (+1 212-351-3848, [email protected])
James P. Fogelman – Los Angeles (+1 213-229-7234, [email protected])
Mitchell A. Karlan – New York (+1 212-351-3827, [email protected])
Marshall R. King – New York (+1 212-351-3905, [email protected])
Robert L. Weigel – Co-Chair, Judgment & Arbitral Award Enforcement Group, New York (+1 212-351-3845, [email protected])
Avi Weitzman – New York (+1 212-351-2465, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On March 20, 2020, New York Governor Andrew Cuomo signed an executive order (Executive Order No. 202.8) requiring businesses—with the exception of those providing “essential” services—to keep 100 percent of their workforce at home, effectively shuttering any non-essential business whose workforce cannot work from home. The executive order took effect on Sunday, March 22, 2020, at 8 p.m., and will last until April 19, 2020.
The New York State Empire State Development Corporation (“ESD”) has prepared guidance available online, which is intended to assist businesses in determining whether or not the services they provide qualify as “essential” and are therefore exempted from in-person workforce restrictions. Through ESD’s website, businesses impacted by the executive order may now review frequently asked questions, which include detailed health-related best practices and guidelines for employers, and may submit their COVID-19-related questions directly to ESD. ESD has also provided additional resources for businesses impacted by the Governor’s order on its website, which include a resource guide to the U.S. Small Business Administration’s low-interest federal disaster loan program.
A prior client alert providing an overview of the executive order’s in-person workforce restrictions and ESD’s guidance on essential businesses exempt from the order may be accessed here.
Attorney General Urges Employees to File Complaints Against Employers Violating Governor Cuomo’s Executive Order.
In a press release issued this Saturday, March 21, New York Attorney General Letitia James urged employees who believe their employers to be acting in violation of Governor Cuomo’s executive order to file a complaint with the New York State Office of the Attorney General’s Labor Bureau. The Attorney General further announced that her office “is closely monitoring the treatment of employees across the state.”ESD has also provided a link to the Attorney General’s press release on its website.
Businesses that violate the executive order’s in-person workplace restrictions face stiff penalties. Specifically, the executive order decrees that any violation shall be punishable as set forth in Public Health Law Section 12. Section 12 imposes “a civil penalty . . . not to exceed two thousand dollars for every . . . violation.” While the current law includes higher penalties for subsequent or more serious violations, an amended version of Section 12—which goes into effect on April 1—limits all penalties to $2,000 per violation. See Pub. Health L. § 12-1. The amended law also authorizes the Health Commissioner to initiate court proceedings to recover that penalty and to release or compromise a penalty imposed. See Pub. Health L. §§ 12-2, 12-4. The Commissioner may request that the Attorney General bring an action for an injunction against a violating party. See Pub. Health L. § 12-5.
The additional penalties currently in effect include: (i) a maximum fine of $5,000 for any repeated violations, within a year of the first, that pose a serious threat to individuals’ health and safety and (ii) a maximum fine of $10,000 for any violation that causes serious physical harm to any patient(s). See Pub. Health L. § 12-1. Section 12 was not drafted originally to enforce the Governor’s executive order. As the reference to “patients” suggests, the penalties under the Public Health Law are typically applied to discrete violations of laws concerning the provision of medical services (e.g., violations of controlled substances laws). Accordingly, the precise contours of how fines will be assessed pursuant to the executive order is unclear, but it is clear that the New York State Office of the Attorney General will be closely following these issues.
Violations of the Executive Order Are Subject to Penalties.
It is not clear that under Section 12 a business will be able to avoid liability by pleading a good-faith mistake or similar defense. Section 12 does not limit the imposition of penalties to only “intentional,” “knowing,” “willful,” “reckless,” and/or “negligent” violations—instead, any violation can result in a penalty, based on Section 12’s plain text. One trial court has suggested the contrary by suggesting that a penalty under Section 12 is unwarranted if the underlying regulation that led to the violation was unclear (as one could argue is the case with the executive order’s “essential business” exception), see Mauceri v. Chassin, 156 Misc. 2d 802, 804 (Sup. Ct. Albany Cty. 1993) (finding that the “record simply does not support imposing a fine against the plaintiff under section 12 of the Public Health Law in view of the uncertainty prior to this opinion as to whether [the relevant regulation] applied to her”). However, the trial court provided no analysis on that point, and other courts may well take a different approach.
In assessing whether Section 12 imposes penalties irrespective of mens rea, a court is likely to consider Public Health Law Section 12-B, which the legislature created to impose separate penalties for willful violations. Under Section 12-B, if an individual willfully violates the Public Health Law the penalty is a maximum fine of $2,000 and/or imprisonment of up to a year. Courts typically interpret statutory provisions with reference to other similar provisions, especially when those provisions are part of the same law. Consequently, courts will likely read Section 12-B together with Section 12, suggesting that while the former was meant to penalize “willful” violations, the latter imposes strict-liability penalties.
Given the absence of a textual mens rea requirement in Section 12 and the inclusion of such a provision in Section 12-B, it is unlikely that a court will read any mens rea requirement into Section 12. Businesses that fail to comply with the executive order will likely be subject to strict liability for any such violations.
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Gibson Dunn is continuing to monitor the impact of Governor Cuomo’s March 20, 2020 executive order restricting non-essential business activity. Additional developments can be expected to follow in the coming days and weeks.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy Group, or the authors:
Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, [email protected])
Lauren J. Elliot – New York (+1 212-351-3848, [email protected])
Lee R. Crain – New York (+1 212-351-2454, [email protected])
Stella Cernak – New York (+1 212-351-3898, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Yesterday, in an unprecedented action, the Board of Governors of the Federal Reserve System (Federal Reserve) invoked its emergency lending authority under Section 13(3) of the Federal Reserve Act to create additional programs to stabilize important financial markets. It announced three facilities: the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF)
These facilities will provide up to $300 billion in new financing; the Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to them. The Federal Reserve also expanded two of the Section 13(3) programs it created last week, the Commercial Paper Funding Facility and Money Market Mutual Liquidity Facility. Today’s announcements provide only the basic terms of the new programs, with additional detail expected to be made available in the future.
Primary Market Corporate Credit Facility
The PMCCF is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion. If such deferral is chosen, borrowers may not make dividend payments or engage in stock repurchases.
The facility will make use of special purpose vehicle (SPV) in which the Treasury, using the ESF, will make an equity investment. The Federal Reserve Bank of New York (FRBNY) will commit to lend to the SPV on a recourse basis; the SPV will both purchase qualifying bonds directly from eligible issuers and provide loans to eligible issuers.
Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination:
- They must be issued by an eligible issuer (see below);
- The issuer must be rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and
- They must have a maturity of four years or less.
“Eligible issuers” are U.S. companies headquartered in the United States and with material operations in the United States, but they do not include companies that are expected to receive direct financial assistance under pending federal legislation. (Commercial airlines, for example, have been mentioned as potential recipients.)
There are per-issuer limits under the PMCCF that will affect participating issuers’ ability to incur additional indebtedness; the maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020:
- 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO;
- 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO;
- 120 percent for eligible assets/eligible issuers with a A/A rating from a major NRSRO; or
- 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.
The Federal Reserve announced that PMCCF interest rates will be “informed by” market conditions and that a 100 basis point commitment fee will be assessed, but has not yet provided further information regarding rates or calculation of the commitment fee. PMCCF bonds and loans will be callable by an eligible issuer at any time at par. The PMCCF will cease purchasing eligible corporate bonds and extending loans on September 30, 2020, unless the Federal Reserve extends the program.
The terms of the PMCCF are available here.
Secondary Market Corporate Credit Facility
The Federal Reserve also announced the creation of a companion program, the SMCCF, intended to support the secondary market for investment grade corporate debt, including certain corporate debt exchange-traded funds (ETFs). It has a similar structure, an SPV with equity from Treasury and an FRBNY loan secured by the assets of the SPV.
The SPV will purchase eligible individual corporate bonds as well as eligible ETFs in the secondary market. Eligible issuers are the same as in the PMCCF, as are the minimum ratings. Eligible bonds can have a remaining maturity of up to five years. ETFs must be U.S.-listed and intended to provide exposure to a broad section of the investment grade bond market.
The maximum amount of bonds that the SMCCF will purchase of any eligible issuer will be capped at 10 percent of the issuer’s maximum aggregate amount of bonds outstanding on any day between March 22, 2019 and March 22, 2020. The SMCCF will not purchase more than 20 percent of the assets of any particular ETF as of March 22, 2020. Bonds will be purchased at fair market value in the secondary market; the SMCCF will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio. The facility has the same term as the PMCCF.
The terms of the SMCCF are available here.
Term Asset-Backed Lending Facility
Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated asset-backed securities (ABS) backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS.
The TALF SPV will originally make $100 billion in loans available. The loans will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS.
Eligible borrowers under the TALF are all “U.S. companies” that own eligible collateral and maintain an account relationship with a primary dealer. A “U.S. company” is a U.S. business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a non-U.S. bank.
Eligible collateral includes U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible NRSROs and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. company, and eligible ABS must be issued on or after March 23, 2020. The credit exposures underlying the ABS must be one of the following:
- Auto loans and leases;
- Student loans;
- Credit card receivables (both consumer and corporate);
- Equipment loans;
- Floorplan loans;
- Insurance premium finance loans;
- Certain small business loans that are guaranteed by the Small Business Administration; or
- Eligible servicing advance receivables.
Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS.
The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS. This haircut schedule will be published in the TALF’s detailed terms and conditions and will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.
In terms of interest rates, for eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the 2-year LIBOR swap rate for securities with a weighted average life less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The pricing for other eligible ABS will be set forth in the Facility’s detailed terms and conditions. The SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
Loans made under the TALF are made without recourse to the borrower, and will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed. No new credit extensions will be made after September 30, 2020, unless the TALF is extended by Federal Reserve.
The terms of the TALF are available here.
Expansion of Previously Created Programs
In addition to creating the three new programs, the Federal Reserve expanded its Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities that could be used as collateral, including certain municipal variable rate demand notes (VRDNs) and bank certificates of deposit. The Federal Reserve also expanded its Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper (e.g., issued by states and municipalities) as eligible securities and reduced the facility’s pricing.
Conclusion
With the creation of the PMCCF and SMCCF, and expansion of existing programs, the Federal Reserve has, in a matter of days, moved beyond its use of Section 13(3) authority in the Financial Crisis. It would be surprising, at this point, if the Federal Reserve stops there. We will continue to monitor its actions as America’s Central Bank to stabilize financial markets in these unprecedented and all too interesting times.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
Gibson Dunn’s Capital Markets and Financial Institutions practice groups also are available to answer questions about the PMCCF, SMCCF, and the TALF. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the authors:
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
John McDonnell – New York (+1 212-351-4004, [email protected])
Please also feel free to contact any of the following practice leaders:
Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])
Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Coronavirus crisis will undoubtedly have an impact on competition enforcement, as companies face seismic shocks to their industries in light of mass lockdowns and supply chain issues. Co-operation between companies in certain industries is expected to increase significantly in order to address the challenges they, their suppliers and their customers face. Competition regulators across Europe have issued their initial responses to this unprecedented situation. Whilst the UK has, so far, taken more specific action than EU regulators to allow for increased co-operation, the overall message from both is that the competition rules will continue to be enforced during the Corona virus crisis.
The European Competition Network (ECN)
The ECN has released a statement giving guidance as to how it intends to apply the competition rules during the Corona crisis (https://ec.europa.eu/competition/ecn/202003_joint-statement_ecn_corona-crisis.pdf). The ECN is made up of the European Commission, the EFTA Surveillance Authority (ESA), and the national competition authorities of the EU/EEA Member States. It therefore covers the antitrust enforcement activities of the European Union, the twenty-seven Member States of the EU and the three countries which participate in the ESA.
By way of reminder, the European Commission is competent to apply EU competition law if the agreement or behaviour concerned has anticompetitive effects in the EU and where “it must be possible to foresee with a sufficient degree of probability […] that the practice may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States”. The ESA and the national competition authorities operate under the same rules.
The guidance issued by the ECN emphasises that the competition rules in their jurisdictions are flexible enough to cope with severe shocks to the economy and that actual administrative enforcement will be sensitive to these difficult times. In addition, it makes the following concrete points:
- The ECN will not intervene in cases of co-operation which is necessary to ensure the supply and fair distribution of scarce products to all consumers, provided the co-operation is temporary.
- In case of doubt about the legality of any given co-operation, the members of the ECN are available to give informal guidance.
- The members of the ECN are concerned about excessive pricing, where this is a result of horizontal price fixing or the abuse of a dominant position.
- The ECN reminds manufacturers that the existing rules allow them to include maximum prices in their contractual arrangements.
This guidance is not earth shattering – but is a helpful and straightforward reminder that European competition law is flexible enough to take into account both the purpose of measures which might otherwise be considered to be restrictive of competition, as well as the broadness of potential efficiencies justifying those measures. The offer of informal guidance is also welcome – although companies and their advisers will need to tread carefully to ensure that they limit their requests to questions where the facts are clear but the law is uncertain.
It is important to remember that the guidance is limited to administrative enforcement and does not bind the courts. Moreover, it is limited to antitrust enforcement falling within the scope of Articles 101 and 102 of the Treaty on the Functioning of the European Union (and their equivalents for the ESA and national competition authorities) and does not cover mergers or State aids (both of which have been the subject of previous Gibson Dunn Client Alerts).
The UK Competition and Markets Authority (CMA)
The UK is addressing the impact of the Corona crisis on food supply by amending the Competition Act 1998 to provide a “temporary relaxation” of the UK competition rules as they apply to grocery retailers in order to allow them to co-operate to deliver more food to retail outlets and customers. According to the UK government, the amended rules will allow retailers to share data with each other on stock levels, co-operate to keep shops open, or share distribution depots and delivery vans. They will also allow retailers to pool staff with one another to help meet demand. The UK government has made it clear that the relaxation is a very specific measure designed to deal with the extraordinary circumstances, noting that it will allow retailers “to keep their shops staffed, their shelves stocked, and the nation fed”.
However, it is clear that the temporary measures for groceries do not signal a wider intention to relax the enforcement of the competition rules during the Corona crisis. The CMA stated that whilst co-operation may be necessary to ensure the security of supplies of essential products and services, such as groceries, “the CMA will not tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation”.
More generally, the CMA has established a COVID-19 TaskForce to “to tackle negative impacts within its remit of the COVID-19 pandemic”. The TaskForce will scrutinise market developments to identify harmful sales and pricing practices as they emerge and take enforcement action as needed. The CMA has not ruled out seeking emergency powers from the government if it considers this necessary to address negative impacts on consumers, particularly the most vulnerable. In a public statement on its COVID-19 response, the CMA provided a specific form to be used to report concerns about business practices during the crisis. It should be borne in mind that the CMA has responsibilities to apply UK consumer protection laws as well as UK competition laws.
The CMA is also building flexibility into its working practices to allow it to address issues as they arise. For example, it is monitoring timetables in ongoing cases including, as permitted, extending statutory timeframes, and is reallocating resources to focus on the most urgent and critical workstreams. As a result, there will be some impact on less urgent projects – for example, the CMA’s planned “State of Competition” report will now be delayed and is not likely to be published until Spring 2021, as the CMA focuses its resources on merger control and critical advisory and monitoring work.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.
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Decided March 23, 2020
Comcast Corp. v. National Association of African American-Owned Media, No. 18-1171
Today, the Supreme Court held 9-0 that a plaintiff who sues for racial discrimination under 42 U.S.C. § 1981 must plead facts plausibly showing that the discrimination was a “but-for” cause of the challenged action.
Background:
The Civil Rights Act of 1866—codified, in relevant part, at 42 U.S.C. § 1981—prohibits discrimination in the making and enforcement of contracts. Entertainment Studios Network (ESN) sued Comcast, alleging that Comcast’s decision not to carry several ESN television channels was motivated by racial bias. The district court dismissed the complaint three times, the final time without leave to amend. The Ninth Circuit reversed, holding that ESN stated a claim under Section 1981 simply by alleging that race was a “motivating factor” in, rather than a but-for cause of, Comcast’s decision.
Issue:
Whether a plaintiff who brings a claim for racial discrimination under 42 U.S.C. § 1981 must allege that the challenged action would not have occurred but for the discrimination.
Court’s Holding:
Yes. To survive a motion to dismiss, a plaintiff suing for racial discrimination under 42 U.S.C. § 1981 must plead facts plausibly showing that race was the but-for cause of challenged action.
“[A] plaintiff bears the burden of showing that race was a but-for cause of its injury. And, while the materials the plaintiff can rely on to show causation may change as a lawsuit progresses from filing to judgment, the burden itself remains constant.”
Justice Gorsuch, writing for the unanimous Court
Gibson Dunn represented the winning party: Comcast Corporation
What It Means:
- The Court unanimously held that a Section 1981 plaintiff must plausibly allege but-for causation in the complaint. ESN conceded that a plaintiff ultimately must prove but-for causation to prevail on the merits at summary judgment or at trial, but argued that a less stringent, motivating-factor standard should apply at the pleading stage. The Court disagreed, holding that the same but-for standard applies at all stages of litigation for a Section 1981 claim, and remanded for the Ninth Circuit to determine whether ESN’s complaint met that standard.
- The Court reasoned that but-for causation is the default rule against which Congress is presumed to have legislated. Section 1981’s language, structure, and history, as well as the Court’s own precedent, persuaded the Justices that this default rule applies to Section 1981 claims. The Court also held that the burden-shifting framework of McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), does not alter the pleading standard for Section 1981 claims.
- The Court’s decision restores uniformity to the law interpreting Section 1981 and other federal anti-discrimination statutes. Before the Ninth Circuit’s opinion, no other court of appeals had held that a Section 1981 plaintiff could prevail without pleading but-for causation.
- The Court’s ruling also means that Section 1981 cannot be used to avoid the limits on the type of relief and damages that are available under Title VII for claims that are proven using a motivating-factor standard.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
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| Allyson N. Ho +1 214.698.3233 [email protected] | Mark A. Perry +1 202.887.3667 [email protected] |
| Miguel A. Estrada +1 202.955.8257 [email protected] | Bradley J. Hamburger +1 213.229.7658 [email protected] | Thomas G. Hungar +1 202.887.3784 [email protected] |