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To aid and address the effects of the coronavirus pandemic in the U.S., on Friday, March 27, 2020, Congress passed and the president quickly signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The CARES Act is reported to be twice as large as any relief ever signed and to provide $2.2 trillion in relief to U.S. families, workers, and businesses. The CARES Act provides a number of provisions to protect and provide relief for small businesses.

Paycheck Protection Program (PPP)

The CARES Act includes provisions expanding the authority of the Small Business Administration (SBA) to insure loans to help small businesses cope with the COVID-19 pandemic. The SBA currently provides partial guarantees of loans made under the SBA’s Section 7(a) loan program, including loans for disaster assistance. Under the CARES Act, the SBA is authorized to guarantee a new category of loans originated under the Act’s Paycheck Protection Program (PPP). PPP loans are intended to help small businesses fund certain payroll, loan interest, rent and utility expenses. Demand for PPP loans will be high, so time is of the essence when applying for PPP loans. The Act requires the Treasury Secretary to implement regulations for administration of the PPP, which will include loan terms and conditions, interest rates, underwriting standards and the SBA guarantee percentage. PPP loans will be 100% guaranteed, and the SBA will reimburse lenders for any forgiven loan amounts. Borrowers who may be interested should immediately take steps to pull together their payroll and other financial information and seek out a lender participating in the PPP program to determine eligibility.

Key takeaways

The act commits $349 billion to the PPP, which will provide loans of up $10 million to eligible small businesses to cover qualified costs. Loan amounts equal to up to eight weeks of payroll and other qualified costs may be forgiven if the business retains its employees and maintains compensation levels. All SBA loan fees also will be waived for PPP loans. All PPP loans will be non-recourse to individual shareholders, members, and partners of a borrower so long as the loan proceeds are used for permissible purposes.

Unlike traditional SBA loans, applicants need not show that credit is unavailable elsewhere, nor will they have to provide personal guarantees or collateral to receive a PPP loan.

Who is eligible for PPP loans?

Businesses that have already qualified as “small business concerns” under the Small Business Act, 501(c)(3) nonprofit entities, as well as businesses, veterans organizations, and tribal businesses that employ no more than the greater of either: (i) 500 employees; or (ii) the standard size established by the SBA for their industry are all eligible for PPP loans. Sole proprietors, independent contractors, and self-employed individuals are also eligible for PPP loans. In addition, certain businesses with more than one physical location that have been assigned a North American Industry Classification System (NAICS) code beginning with 72, and which have 500 or fewer employees per location are eligible for PPP loans. In addition, the borrower’s business must have been in operation on February 15, 2020 to be eligible to apply for and receive these loans. Lastly, businesses applying for a loan must also certify that they have been negatively affected by current economic conditions.

The number of employees employed by a business’s affiliate(s) will be counted towards its total number of employees for small business size calculation in most cases. In determining eligibility for PPP loans, the act waives the affiliation rules under 13 C.F.R. 121.103 for businesses of 500 employees or less that are in the accommodation and food services industry, franchises assigned a franchise-identified NAICS code, and businesses receiving financing through the Small Business Investment Company Act.

What are PPP loan dollar amounts and payment terms?

The maximum PPP loan amount is the lesser of (i) $10 million or (ii) 2.5 times the average monthly payroll for the prior one-year period (or for certain seasonal businesses, the average monthly payroll for certain periods specified in the Act). The interest rate on PPP loans is not to exceed 4%. Loan amounts not forgiven (as discussed below) will have a loan maturity not to exceed 10 years.

Payroll costs that may be covered by the loan include salaries, wages, commissions, payments for certain other benefits such as vacation, health insurance and retirement benefits, and state and local employment taxes. Payroll costs can include certain compensation or other income to a sole proprietor or independent contractor.

Payroll costs excluded from the loan include certain compensation in excess of $100,000 per year, taxes under Federal Insurance Contributions Act, Railroad Retirement Tax and Unemployment Taxes, compensation for employees residing outside the United States, certain qualified sick leave wages, and certain qualified family leave wages.

Circumstances under which the PPP loan may be forgiven

The SBA will forgive PPP loan amounts equal to up to eight weeks of qualified costs of the business, including payroll costs, interest payable on secured debt incurred before February 15, 2020, rent due on leases in place before February 15, 2020, and utility payments for service that began before February 15, 2020. The amount of PPP loan forgiveness that a business is eligible for cannot exceed the loan principal. Additionally, the amount of loan forgiveness will be reduced proportionally by the reduction in number of employees compared to the prior year and by the reduction in pay of any employee beyond 25% of their compensation the year prior.

Businesses that have already laid off employees due to COVID-19 may still be eligible for PPP loan forgiveness if the business re-hires employees and/or eliminates the salary reductions by June 30, 2020.

PPP loan debt forgiveness will not be included in the borrower’s taxable income; however, businesses that have PPP loan debt forgiven are not eligible for the payroll tax deferment provided under Section 2303 of the Act. Any PPP loan balance not forgiven will have a maximum maturity date of 10 years.

Where to obtain a PPP loan

In order to cut down on processing time, the Act eliminates the need to apply through the SBA and provides for delegating the authority to make and approve PPP loans to qualified lenders. For eligibility purposes, the Act limits a lender’s consideration only to whether the business was in operation on February 15, 2020, and had employees to whom it paid salaries and payroll taxes, or paid independent contractors.

Who is a qualified lender?

All existing SBA lenders and other lenders approved by the SBA are eligible to issue PPP loans. Existing SBA loans (other than PPP loans) made between January 31, 2020 and the date PPP loans become available under the CARES Act may be refinanced with PPP loan proceeds. The SBA will reimburse lenders for processing fees associated with issuing PPP loans (rates vary by loan amount).

PPP loans are guaranteed by the SBA and may be sold in the secondary market. The SBA will reimburse lenders for any loan amount which is forgiven within 90 days of the date the amount of forgiveness is determined.

The SBA may issue guidance requiring lenders to prioritize loans to businesses in underserved and rural markets.

Other Changes to the SBA Loan Program

Emergency Economic Injury Disaster Loans (EIDLs)

The Act appropriates an additional $562 million for SBA disaster loans, including Emergency Economic Injury Disaster Loans (EIDLs). For the covered period of January 31, 2020 through December 31, 2020, EIDL eligibility is expanded to include sole proprietors, independent contractors, cooperatives, ESOPs, and tribal businesses with less than 500 employees.

For EIDLs less than $200,000, the personal guaranty requirement is waived for the covered period. Federally-declared emergencies also now qualify as a trigger for the EIDL program, making EIDLs available nationwide.

During the covered period, the SBA can approve EIDLs based solely on the credit score of the applicant or an alternative method appropriate for determining creditworthiness; the time in business and credit elsewhere test requirements have been waived for the covered period.

Emergency Economic Injury Grants

The Act includes $10 billion for emergency EIDL grants to be provided by the SBA through December 31, 2020. Emergency EIDL grants are $10,000 advances to small businesses applying for the EIDL program. The $10,000 advance will be provided within three days of the business applying for the EIDL. Businesses will not be required to pay back the advance, even if they are ultimately denied the EIDL grant.

Subsidies for Certain Other Small Business Loan Payments

$17 billion is appropriated for payment of certain other small business loans.

For loans in regular service, whether or not on deferment, made under 7(a) of the Small Business Act, Title V of the Small Business Investment Act, and loans under 7(m) of the Small Business Act made by an intermediary before enactment of the Act, the SBA will pay the principal, interest, and fees owed for the 6-month period commencing with the first payment due following the date of enactment (March 27, 2020) or for loans on deferment, commencing with the next payment due after the deferment period. The SBA shall also pay the first 6 months of principal, interest, and fees owed on any such loans made during the period beginning on March 27, 2020 and ending on the date which is 6 months after the date of enactment (September 27, 2020).

The Act waives the maximum loan maturity limits for those loans under deferment, and extends the lender site visit requirement to within 60-days of a non-default adverse event and 90-days for a default.

State Trade Expansion Program

Federal grant funds appropriated for the State Trade Expansion Program (STEP) from fiscal years 2018 and 2019 will remain available to provide grants through the end of fiscal year 2021.

Entrepreneurial Development

The Act appropriates $275 million towards funding and resources to small business development centers, women’s business centers, and minority business centers. These centers must use the funds to provide education, training, and advising on surviving the COVID-19 crisis to covered small businesses, especially those in impoverished or rural areas.

Resources and Services in Languages other than English

Notably, the Act requires that SBA resources and services relating to the Act’s relief provisions be provided in the ten most commonly spoken languages, other than English, in the United States, including: Mandarin, Cantonese, Japanese, and Korean.

Increased Bankruptcy Eligibility for Small Business

Prior to the CARES Act, the unrelated Small Business Reorganization Act (SBRA) became effective on February 19, 2020. SBRA created a new subchapter (Subchapter V) under Chapter 11 of the Bankruptcy Code specifically to assist small businesses reorganize. The stated purpose of SBRA is to lower the costs and burdens for small businesses to reorganize under the new Subchapter V of the bankruptcy code. Although the benefits to small business under SBRA are significant and numerous, SBRA had a low debt limit threshold which would have prevented many small businesses from taking advantage of the new SBRA provisions. Fortunately, the CARES Act amends Section 1183(1) of Title 11 to redefine “debtor” in order to increase the eligibility threshold for a small business to file under Subchapter V of Chapter 11 of the Bankruptcy Code.

The definition of “debtor” is amended to include persons engaged in commercial or business activities and their affiliates (excluding persons whose primary activity is the business of owning single asset real estate) that, as of the date the petition is filed, have aggregate non-contingent liquidated secured and unsecured debts of $7,500,000 or less (excluding debts owed to one or more affiliates or insiders) where not less than 50% of those debts arose from the commercial or business activities of the debtor. Members of a group of affiliated debtors that have aggregate non-contingent liquidated secured and unsecured debts greater than $7,500,000 are excluded from the new definition, but remain eligible to file for bankruptcy protection under the traditional Chapter 11 provisions of the bankruptcy code.

COVID-19 related payments from the federal government will not be treated as income during bankruptcy for one year.

Debtors that have experienced a material financial hardship due to COVID-19 will be allowed to modify a plan under Chapter 13 if approved after notice and hearing, but only if the debtor’s modified plan doesn’t provide payments more than seven years after the first payment was due under the original Chapter 13 plan, and the modified plan follows the requirements of Sections 1322(a)-(c) and 1325(a).

For more information on the small business provisions in the CARES Act, please contact the authors of this article. If you have specific questions about PPP loans, please contact a member of Stinson’s PPP loan team, Susan Warshaw Ebner, Gerald Weidner, Jack Bowling, Adam Maier, Mike Lochmann, David Jenson, Judith Araujo, or the Stinson LLP contact with whom you regularly work.

If you’re looking for a single place to find information concerning the federal government’s response to the coronavirus that impacts contractors, the General Services Administration (GSA) recently uploaded a webpage on the acquisition.gov website that aims to deliver: https://www.acquisition.gov/coronavirus. While it is not a comprehensive source, the site includes selected links to guidance and memoranda issued by the Office of Management and Budget (OMB), Department of Defense, Department of Homeland Security and the National Aeronautics and Space Administration, as well as links to other helpful sites.

Notably, the site contains a link to the portal for submitting questions to OMB and the Office of Federal Procurement Policy on the current national emergency.

This is a fluid and changing situation. We are tracking developments closely and have formed a Task Force, comprised of members of our various practice groups and teams, to track, report on, and advise on these developments. If you have questions about this blog, or the current situation, please contact the Stinson Coronavirus Task Force, the Government Contracts & Investigations Practice group, or your Stinson counsel.

At the end of December, China acknowledged the existence of the coronavirus, and this burgeoning heath crisis is becoming a supply chain problem. China, a major manufacturing hub for materials, products and components being used around the world, has been significantly impacted. 

Facing the fast spread of the virus, China took a number of steps–delaying the return to work of millions following the Lunar New Year celebration, blockading entire cities where the virus is found to be most prevalent, and transporting those with the virus to isolation camps. 

In addition, travel, transportation and shipping services to and from China have been cancelled or restricted. Certain airlines have stopped flying to locations in China. Countries are instituting screening and isolation protocols to prevent those persons with symptoms from entering their countries and further spreading the virus.

Workers have been unable to get to factories to produce materials, products and components. Supplies have been delayed or prevented from transport to their destinations. This has impacted sales, the manufacturing of additional products, and the delivery of services elsewhere. Given the expanding reach of the virus, further impacts to the global supply chain are likely.

What Should Businesses Be Doing Now?

Because of the global nature of the supply chain, these problems are likely to impact businesses in the United States, delaying delivery of both raw and finished materials sourced from China and potentially other origins. This is likely to disrupt manufacturing, construction and other businesses that depend on such materials. For some, the disruption could interfere with the ability to comply with contractual commitments. For others, inventory shortages could lead to a reduction in sales revenues, which in turn, could have a material impact on performance and trigger reporting obligations. Apple reported that the virus would negatively affect iPhone production—and revised its forecasts.
These supply chain problems are not just the province of large multinational businesses. On February 9, Bridgewater, NJ-based Valeritas Holdings, a medical technology company specializing in the manufacture of insulin patches sought bankruptcy protection. The company blamed supply chain problems exacerbated by the coronavirus epidemic as the triggering cause of its bankruptcy filing. 
In these situations, there are several proactive steps that businesses should be taking now to avoid or mitigate problems in the long run.
Identify Alternative Sources: Businesses should identify vulnerabilities in their supply chain and alternative sources to which they can turn. In identifying vulnerabilities, look beyond Chinese-sourced goods. As the virus spreads to other countries, so too could the supply chain disruption.
Review Contracts: Businesses that have contractual commitments that depend on foreign-sourced goods (or goods that include foreign-sourced components) should review those contracts to identify any rights and requirements under those contracts.

  • Are there schedule and performance requirements?
  • Does the contract address under what circumstances delay or non-performance may be excusable?
  • Are there notice requirements if items are delayed or unavailable?
  • Is there a force majeure provision and does it apply to your situation?
  • Are you required to deliver in accordance with an established bill of materials or to use only qualified products, or can you substitute products or components if items are delayed or unavailable?
  • Do you have any rated orders under the Defense Production Act? If so, you have an obligation to deliver what is required under the set schedule. You also may have a duty to notify the government or your higher tier contractor if there are performance and schedule risks.
  • Are the increased costs of performance recoverable?
  • Is your schedule impacted and can you obtain relief?

Communicate: Early and open communication with counterparties can help parties avoid or reduce problems as well as reduce the risk of litigation. This communication extends to businesses with lines of credit determined by a borrowing base formula. Generally, that formula considers a company’s current accounts receivables or finished inventory as the collateral for ongoing loan advances. Advising your lender of the supply chain disruption in advance may avoid an unfortunate conversation later in the quarter. Similarly, lenders should check on borrowers and anticipate potential defaults resulting from these supply chain issues.

Document, Document, Document: If you do have to declare force majeure or otherwise excuse performance, you may need to be able to show not just disruption to the supply chain, but that the disruption prevented or delayed performance under the contract. This may require a showing of the efforts that you took to obtain product from other sources. It is critical not just to engage in such efforts, but to document those efforts contemporaneously.

Reporting Obligations: Prior forecasts and projections may be looking a little overly optimistic at this point. You may consider whether restating forecasts is warranted. Similarly, you should consider additional disclosures in annual reports or in reports to lenders. Disclosure and disclaimers may also be added in connection with representations in new financing or transaction documents entered into during this period.

These issues may also be applicable to your own supply chain members and further impact your performance. Businesses should be urging all of their vendors and subcontractors to take the actions recommended above. Consider developing a plan to identify and address these concerns. Being proactive and strategic now may help you to avoid problems down the road.

The title of this article is based on a line in an old song, “Everybody’s Crying Mercy,” by Mose Allison. As modified, the couplet captures the cognitive dissonance that many are feeling as a result of the federal government’s conflicting approach to trade with Huawei Technologies Co. Ltd. (Huawei) and its non-United States affiliates. In the most recent step in this halting “evolution,” the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced it is seeking public comments by March 25, 2020 on the continuing need for, and scope of, possible future extensions of the Temporary General License (TGL) authorizing certain exports to Huawei and 114 of its non-United States affiliates on BIS’s Entity List. In connection with this request for input, BIS extended—for the fourth time—the TGL for Huawei and those affiliates through May 15, 2020.

The TGL was initially published on May 22, 2019, several days after BIS added Huawei and 68 of its non-United States affiliates to the Entity List after determining “that there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States” and “those affiliates pose a significant risk of involvement in activities contrary to the national security or foreign policy interests of the United States.” (BIS subsequently added another 46 affiliates to the list.) As a result, BIS imposed a license requirement for all items subject to the Export Administration Regulations and a license review policy of presumption of denial. Similarly, the action provided that, with limited exceptions for certain shipments already en route, no license exceptions are available for exports, reexports, or transfers (in-country) to the persons added to the Entity List.

Despite the findings that motivated Huawei’s addition to the Entity List, the initial TGL and the three previous extensions of it have allowed: (i) continued operation of existing networks and equipment; (ii) support to existing handsets; (iii) cybersecurity research and vulnerability disclosure; and (iv) engagement as necessary for development of 5G standards by a duly recognized standards body. BIS has explained that the TGL and extensions were intended to allow time for companies and persons to shift to alternative sources of equipment, software, and technology (e.g. those not produced by Huawei or one of its listed affiliates). In addition, under applicable Entity List rules, non-U.S. manufacturers are still allowed to export items to Huawei so long as the items do not have more than de minimis—here, 25%—U.S. origin content.

When BIS floated closing that loophole in late 2019, proposing that the de minimis figure be reduced to 10%, the Department of Defense (DoD) initially pushed back. The Pentagon argued that the additional limits would cost U.S. chip manufacturers so much revenue that their research spending would suffer and they would not be able to keep up with global rivals, which could threaten the American military’s technological edge. Last month, however, after challenges from influential Republican Senators and lobbying from the Department of Commerce, DoD dropped its opposition to the further crack down on Huawei proposed by the Department of Commerce. A cabinet-level meeting to discuss the potential new U.S. restrictions was supposed to follow, but that meeting has since been postponed twice.

Against this background, BIS explains that the recent 45-day extension and request for public comment demonstrates the Department of Commerce is trying to find a permanent solution. BIS hopes the responses will help it better evaluate the need to extend the TGL, determine whether any other changes may be warranted to the TGL, and identify any alternative authorization or other regulatory provisions that may more effectively address what is being authorized under the TGL. Only time will tell how the BIS and the rest of the federal government will resolve the vexing issues raised by Huawei, its connection with the People’s Republic of China, and its position in the technology industry. Until then, it’s arguably “business first.”

Not being included, or being purposely excluded, may remind some of adolescence, and may remind others of the Federal Acquisition Regulation (FAR) simplified acquisition procedures. The recent Government Accountability Office (GAO) decision in Phoenix Environmental Design, Inc. (Phoenix), B-418304 (March 2, 2020) deals with facing the latter form of disappointment.

The underlying purchase order in this matter was issued by the Department of the Interior, United States Fish and Wildlife Service to address the Southeast Idaho National Wildlife Refuge Complex’s (NWRC’s) urgent need for herbicide. The Southeast Idaho NWRC’s need was compounded by an unplanned wildfire, which provided soil conditions that would facilitate the elimination of “cheatgrass,” an invasive species in the area. The Southeast Idaho NWRC expressed its need for fifteen gallons of herbicide to the agency on October 10, 2019, stating that it needed the herbicide by October 25 because of concerns that a freezing event would occur and eliminate the efficacy of the herbicide.

To respond to the pressing request, the agency solicited quotations as a small business set-aside pursuant to FAR §§ 13.003 and 13.104, which provide for simplified acquisition procedures in lieu of full and open competition. The agency solicited quotations from three vendors – one was a local vendor and the other two vendors were businesses that had submitted the lowest prices in response to a prior solicitation for herbicides. Phoenix had also submitted a bid for this prior solicitation, though it had quoted the second highest price. While Phoenix had, throughout the years, repeatedly notified the agency that it was interested in all of the agency’s herbicide requirements, the agency did not solicit a quotation from Phoenix.

The formal purchase order was issued to Wilbur-Ellis Co. on October 17 and on October 18 the Southeast Idaho NWRC picked up the herbicide from the vendor’s facilities. On October 22, Phoenix requested that the contracting officer cancel the award, and after being informed that such would not occur, on October 25, Phoenix filed a protest at the agency level. Following the denial of that protest, Phoenix filed the instant protest with the GAO.

Phoenix protested on two grounds: that it was unreasonably excluded from the solicitation, particularly as it had expressed interest numerous times in competing for the agency’s herbicide requirements, and that the agency improperly awarded the purchase order to a large business.

The GAO was unconvinced on both grounds, noting that simplified acquisition procedures permit an agency to forego full and open competition and generally allow an agency’s soliciting quotations from three sources. However, an agency cannot unreasonably exclude an offeror that has expressed an interest in competing. Here, according to the GAO, the agency was not unreasonable in excluding Phoenix since, despite Phoenix’s request to compete, the agency was on a tight deadline and Phoenix had previously submitted a high-priced offer.

Further, the GAO clarified that its review of an agency’s size determination, which is typically in the purview of the Small Business Administration, is limited to situations where the awardee’s quotation, on its face, demonstrates that the awardee is not eligible for award as a small business. Such was not the case here where, at least facially, the awardee represented and certified that it was a small business.

The important takeaway: simplified acquisition procedures are, indeed, simple and allow the agency a lot of leeway, including the ability to exclude an offeror based on one prior high offer (at least in an urgent situation). Though unsuccessful here, Phoenix’s tactic of putting itself out there and reminding the agency that it wants to compete may be the best way to convince the agency to invite it to participate in future procurements.