On April 30, 2020, the Federal Reserve System, in conjunction with the U.S. Department of the Treasury, released updated guidance outlining the parameters of a program to support lending to small- and mid-sized businesses by eligible lenders. The April 30 guidance expands on and, in several areas, supersedes prior materials published on April 9.
Known as the Main Street Lending Program (the Program), this initiative establishes new loan facilities for entities (1) with up to 15,000 employees or (2) whose 2019 annual revenue was less than $5 billion, regardless of employee headcount. The Program’s loan facilities can take the form of either new loans (a Main Street New Loan Facility or a Main Street Priority Loan Facility) or expansions to existing loans (a Main Street Expanded Loan Facility). These facilities are “designed to provide support to small and medium-sized businesses and their employees across the United States during the current period of financial strain by supporting the provision of credit to such businesses.”
In its current form, the Program implicates a slew of workplace-related considerations. U.S. businesses contemplating whether to apply for a loan under the Program, therefore, should bear in mind the following employment considerations under, and strings attached to, the Program:
- There is no employee floor for Program eligibility. Initially, it was anticipated that businesses with fewer than 500 employees would be ineligible to participate in the Program. This was because such businesses are already eligible to participate in the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
The Federal Reserve’s guidance makes clear, however, that any borrower with 15,000 or fewer employees – including those with fewer than 500 – is eligible for the Program (as are businesses with more than 15,000 employees, so long as their 2019 annual revenue was below $5 billion).
- Businesses can seek both PPP and Main Street loans. In a related vein, the Federal Reserve has confirmed that a business that has received PPP loans, or that has affiliates that have received PPP loans, is indeed permitted to also borrow under the Program, provided that the business meets all Program eligibility criteria.
- Employee headcount and 2019 annual revenue must be carefully calculated. In determining employee headcount for Program eligibility purposes, the Federal Reserve explains that businesses “should count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. Businesses should count their own employees and those employed by their affiliates. In order to determine the applicable number of employees, [b]usinesses should use the average of the total number of persons employed by the [borrower] and its affiliates for each pay period over the 12 months prior to the origination or upsizing of the Main Street loan.”
And to calculate 2019 annual revenues for purposes of determining Program eligibility, a business may use its (and its affiliates’) (1) annual “revenue” per its 2019 Generally Accepted Accounting Principles-based audited financial statements or (2) annual receipts for the fiscal year 2019, as reported to the IRS. If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.
- Affiliates count too. As noted above, to determine how many employees a business has or in calculating a business’s 2019 annual revenue, the employees and revenues of the business must be aggregated with the employees and revenues of its affiliated entities. The evaluation of whether an entity qualifies as an affiliate in this regard is not necessarily intuitive. Rather, it is governed by highly technical guidance – 13 C.F.R. § 121.301(f) – which provides in part that “concerns and entities 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. It does not matter whether control is exercised, so long as the power to control exists.”
- Only businesses with significant operations and a majority of their employees based in the U.S. are eligible. To be eligible for a Program loan, borrowers must, in addition to other eligibility criteria, be created or organized in the U.S., or under the laws of the U.S., with significant operations in and a majority of their employees based in the U.S. The Federal Reserves does not, however, clarify what specifically is meant by the term “significant operations.”
- Specific types of businesses are automatically ineligible. Various types of businesses are automatically ineligible for the Program, including businesses established on or after March 13, 2020, financial businesses engaged in the business of lending (such as banks, finance companies, and factors), life insurance companies, businesses located in a foreign country, and private clubs and businesses that limit the number of members for reasons other than capacity. At present, non-profit organizations are also ineligible for Program loans.
- The government will not be forgiving Program loans. Unlike PPP loans, which may be forgiven if employee headcount and compensation levels are maintained, loan facilities under the Program are not forgivable.
- Borrowers must make efforts to maintain employee headcount and compensation levels for the duration of the loan term. In applying for a Program loan, businesses must certify that they will make commercially reasonable efforts to maintain their payroll and retain their employees during the time the loan is outstanding. More particularly, the Federal Reserve’s guidance provides that a borrower “should undertake good faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.”
- Borrowers must follow strict compensation restrictions for highly-compensated employees. Program participants are subject to the executive compensation limitations set forth in Section 4004 of the CARES Act. This means that any borrower’s employee who earned over $425,000 in 2019 may not, during the loan term, receive (i) an increase in annual compensation for any 12-month period or (ii) severance payments in excess of two times their 2019 total compensation.
In addition, any employee who earned compensation in 2019 exceeding $3 million is limited, during the loan term, to total annual compensation equal to (i) $3 million plus (ii) 50 percent of the amount by which the employee’s 2019 total compensation exceeded $3 million.
- Borrowers must also follow strict stock repurchase and capital distribution restrictions. In entering into the Program, participants must agree, generally speaking, to not repurchase equity securities that are listed on a national securities exchange of the participant or any parent company. Participants also may not pay dividends or make other capital contributions with respect to the common stock of the company. These restrictions both last until 12 months after the loan is repaid. Notwithstanding, the Federal Reserve’s guidance explains that the foregoing restrictions on dividends and other capital distributions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
The above is current as of the date of publication – however, it is anticipated that the federal government will disseminate additional guidance concerning the Program in the coming days and weeks. Some or all of the above items, therefore, may be subject to change. Because of this, any business considering applying for a loan under the Program should consult with counsel on a continuing basis as further developments unfold.