Your Daily Three: May 11

We are sharing again today some questions that we received from clients and how we are responding. 

 

Q1: “If a company obtains a PPP loan, is the company required to make offers to bring everyone back who was previously laid off and, if so, must you document the offer for re-hire?” Answered by Bill Schwartz

A: Forgiveness of your PPP loan can be affected if your average monthly FTE (full time equivalent) head count is reduced as compared against the period of time from either (i) February 15, 2019-June 30, 2019 or (ii) January 1, 2020-Feb. 29, 2020. Many borrowers under the PPP asked: “what happens if we furloughed employees and we ask them to come back and they say no, will this count against us for purposes of the FTE head count?” The SBA has issued guidance on this question by stating that if this scenario occurs, forgiveness of your loan will not be affected if you provide evidence that you made a written offer for the employee to return and you document the employee’s rejection of the offer. However, if you do not want to take advantage of this, or if you are not affected by this issue, you are not required to make offers to all former employees.

 

Q2: “I am under contract to purchase commercial real estate that has tenants whose businesses have been impacted by the COVID crisis and the resulting economic conditions and restrictions. The economics of the transaction have so drastically changed (or will) that I want to terminate the agreement. I have significant escrow monies on deposit with the title company, and there is nothing in the agreement that specifically addresses this issue. Do I have any basis for terminating?” Answered by Gary Blackman

A: Assuming the agreement does not allow you to terminate under non-Covid grounds, we are in unchartered territory in terms of reliable case law on when a party can terminate a contract under these circumstances. There are several “common law” or equitable theories that might apply that argue that a change in circumstances has essentially destroyed the underlying purpose of the transaction. These include the defense of commercial impracticability, legal impossibility, the impossibility of performance, frustration of purpose, and/or commercial frustration. For example, a major tenant in the property you will be purchasing is closed until further notice, or there is a high likelihood of previously unanticipated tenant defaults. These are not easy cases to win but, as we’ve said, this is legally unchartered territory.

You can assume a seller will not agree to terminate your agreement and/or release your earnest money. In most cases, your joint escrow instructions will provide that the earnest money will remain on deposit with the title company until such time that both parties agree to its release or the title company is directed to act pursuant to a court order. As such, the buyer and seller will need to either settle the matter or litigate. The prospect of long drawn out litigation will often be the impetus to a settlement because, until such time that there is a resolution, the monies will sit in an account that neither party can access.

No one knows exactly how the courts will come down on issues like these but what we do know is that it will be a very fact-specific analysis. Judges will be wary of buyers taking advantage of the COVID crisis to terminate a deal in bad faith.

Absent some clear contractual grounds in your agreement, it will most likely be a business decision as to whether the potential exposure in going through with a closing is greater than losing the escrow money you have at risk.

 

Q3: “What additional due diligence should we do now around a target company’s business continuity and crisis response plans? I imagine this sort of thing matters now more than ever.” Answered by Ashik Shah

A: Business continuity and crisis management response plans help a company protect its business from a disaster (e.g., earthquake, cybersecurity breach, pandemic, etc.). Due to the effects of the COVID-19 pandemic, a Buyer should carefully analyze the effectiveness of a target company’s use of its business continuity and crisis management plans. If a target company does not currently have a business continuity plan or crisis management plan in place, then this could raise a potential red flag issue in the due diligence process. If a plan does not address particular concerns related to COVID-19 (e.g., working remotely, employee safety issues, continuing customer and supplier relationships, etc.) or specific inadequacies under the plans, then a Buyer should contemplate implementing any additional requirements under the plans.

 

For more resources and LP's response to COVID-19, visit this webpage.