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Analysis of PPP Borrowers: Who Returned Funds?

While a lot has been written and said about the “need” certification when it comes to the Paycheck Protection Program, particularly for public companies, the SBA and Treasury have been relatively quiet about how many borrowers that received PPP funds elected to to take advantage of the government’s subsequent safe harbor to return funds. In connection with the forgiveness process, the SBA has indicated that it will review all loans in excess of $2 million, but will deem all borrowers of $2 million or less to have made the required certification concerning the necessity of the loan request in good faith.

Based on our analysis below, 88% of public borrowers that received PPP loans elected to retain their PPP proceeds, and 75% of borrowers approved for PPP loans of between $5 and $10 million did the same. Based on our discussions with PPP borrowers throughout the country, we think this is consistent with the economic uncertainty that was created by the coronavirus.

SEC Filings

Based on a review of SEC filings, Bryan Cave Leighton Paisner identified over 850 borrowers who indicated that they had received PPP loan approvals. 107 of these borrowers, or roughly 12 percent, subsequently indicated that they either ultimately did not accept the loan, or returned the loan proceeds. About 25% of public companies who returned their loans had PPP borrowings that were less than the $2 million threshold for review indicated above.

Of the 759 public companies that elected not to return their PPP funds, approximately 73% received $2 million or less, while the remaining 27% had PPP loans of more than $2 million. About 8% of the public company recipients received less than $100,000, while over 55% received less than $1 million.

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Guidance for Public Company PPP Recipients

On April 23, 2020, the U.S. Treasury published FAQ #31 for the Paycheck Protection Program, providing a safe harbor for return of funds by May 7, 2020 in cases of insufficient need by recipients of PPP funds by public companies with liquidity alternatives.

With this background, I joined several of my securities law and litigation colleagues to publish guidance for public company Paycheck Protection Program loan recipients.

PPP applications require certification that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations.”  To the extent that public companies may have had other reliable, accessible sources of capital markets funding, the borrower’s certification of economic need could be called into question. Public companies are clearly not all in the same sitaution with regard to their ability to obtain other sources of funding, and face a number of difficult decisions.

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SEC Adopts Rules Allowing Shareholder Access to Company Proxy Materials

On August 25, 2010, the Securities and Exchange Commission voted to adopt new rules that will require companies to include in their proxy materials nominations for election as directors submitted by eligible shareholders, subject to certain conditions. The proposal was adopted by a divided 3-2 vote at an SEC open meeting. Commissioners Casey and Paredes dissented, viewing the rules as intruding on substantive corporate affairs traditionally regulated by state law.

The new rules will apply to all companies subject to SEC proxy rules, including investment companies and controlled companies, except:

  • Companies subject to such rules solely due to debt registered under Section 12 of the Securities Exchange Act of 1934; and
  • Where state or foreign law or governing documents prohibit shareholders from nominating a candidate for director.

Foreign private issuers are not covered, as they are exempt from SEC proxy rules.

The new rules will be effective 60 days after publication in the Federal Register, with shareholder access permitted no earlier than 150 days and no later than 120 days prior to the anniversary date of the mailing of prior year’s proxy materials. The rules will be available if the window remains open after their effective date. Accordingly, if the new rules were to become effective on November 1, 2010, they would apply to companies that mailed their 2010 proxy statements after March 1.

Effectiveness of the new rules will be delayed for three years for smaller reporting companies, to allow the SEC time to monitor implementation and make adjustments, if desired.

The text of the new rules is available online as is a print-friendly version of this client alert.

Executive Summary

Eligible shareholders can require a company to include one or more nominees in the company’s proxy materials, unless applicable laws or governing documents prohibit nominations by shareholders. Companies will only be required to include up to the greater of (i) 25% of the company’s directors or (ii) one nominee. The rule sets priorities in case of multiple nominations.

To be eligible, the nominating shareholder or group must, among other requirements, (i) own at least 3% of the total voting power (which may be aggregated among shareholders), (ii) have held such securities for at least three years, and continue to hold them through the shareholder meeting, (iii) not have intent to change control of the company or to gain more board seats than permitted by the rule, and (iv) not have any agreement with the company regarding the nomination.

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What Non-Bank Public Companies Need to Know About Dodd-Frank

Included in the Dodd-Frank Act – aimed primarily at the reform of financial institutions – are provisions that will apply to all publicly traded companies, including provisions relating to “say on pay” shareholder votes, proxy access, executive compensation disclosure and compensation committees. Some of these provisions are effective immediately. Most will become effective only upon rule-making by the Securities and Exchange Commission (SEC or the Commission). These provisions are summarized below (and also available as a printer-friendly Client Alert).

“Say on Pay” and Golden Parachutes (Section 951)

The Act requires that shareholders be given the opportunity – at least once every three years – to approve the compensation paid to the CEO, the CFO and the named executive officers as disclosed pursuant to Item 402. In addition, shareholders must be given the opportunity – at least once every six years – to vote on whether this “say-on-pay” vote will occur every one year, two years or three years.

Public companies must include shareholder resolutions on both of these matters in the proxy statement for the first shareholder meeting held after January 21, 2011 – the six-month anniversary of the enactment of the Act. This means that these provisions will be effective for the 2011 proxy season.

The Act provides that the shareholder votes relating to the say-on-pay matters must be set out in separate proposals and will be non-binding. A “rule of construction” set out in the Act provides that the votes will not be construed as overruling a board decision or creating or implying any change or addition to directors’ fiduciary duties.

In addition, in any proxy or consent solicitation in connection with a shareholder vote on an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of the assets of a company, the Act requires the soliciting public company to provide disclosure of compensation payments triggered by the transaction, referred to as golden parachute payments, which may be made to its named executive officers. Then, in a separate resolution in that proxy statement, the issuer must provide shareholders with the opportunity to approve those golden parachute payments, unless the golden parachute payments were previously approved by the shareholders. Like the say-on-pay provisions, the golden parachute payment disclosure and approval provisions are applicable to shareholder meetings occurring after January 21, 2011.

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Conference Committee Approves Sarbanes-Oxley 404(b) Exemption

On June 16, 2010, the conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include in the final reform legislation the House provision that provides an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization.

Under the provisions of SOX 404, publicly reporting companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting.  Section 404(a) requires all public companies to assess the effectiveness of their internal control over financial reporting, while Section 404(b) requires independent auditors to report on management’s assessment.  On October 2, 2009, the Securities and Exchange Commission (SEC) granted its latest deferral for compliance with SOX 404(b), providing non-accelerated filers, those companies with a public float below $75 million, with a reprieve from the auditor attestation until annual reports for fiscal years ending on or after June 15, 2010 are filed.  At the time of that deferral, the SEC was adamant that it would not be granting any further extensions for compliance with SOX 404(b).

The inclusion of the exemption in the final reform legislation would permanently exempt the auditor attestation requirement and significantly reduce the anticipated compliance burdens of smaller reporting companies.  Disclosure of management attestations on internal control over financial reporting would continue to be required for smaller reporting companies.

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SEC Extends Deadline for Sarbanes-Oxley 404(b) Compliance

On October 2, 2009, the Securities and Exchange Commission (SEC) announced a nine-month deferral on Sarbanes-Oxley Act (SOX) Section 404(b) compliance for the smallest publicly reporting companies. Under the provisions of SOX 404, public companies and their independent auditors are each required to report on the effectiveness of company internal controls.  All publicly reporting companies are currently required to disclose a report on management’s assessment of internal controls; however, only reporting companies with a public float of $75 million or above are required to disclose an attestation report provided by an independent auditor.  The extension granted by the SEC will provide non-accelerated filers, those companies with a public float below $75 million, with a reprieve from independent auditor attestations until annual reports for fiscal years ending on or after June 15, 2010 are filed.  Although the SEC has not published the final rule providing for the extension, based on prior extensions, we believe the extended deadline only applies to independent auditor attestations.  Consequently, disclosure of management attestations on internal control continues to be required.

Prior to the October 2 announcement, the deadline for the independent auditor disclosure in annual reports for the smallest publicly reporting companies was fiscal years ending on or after December 15, 2009.  The previous extension, granted in January 2008, was put in place to allow the SEC’s Office of Economic Analysis to complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance.  This study was published recently, less than three months before the December 15 deadline, and, as a result, the SEC determined that additional time was appropriate and reasonable so the smallest publicly reporting companies and their auditors could better plan for the required attestation.

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