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Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

On April 23, 2020, pursuant to Section 4003(b)(3) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (“CARES Act”), the U.S. Department of Treasury (“Treasury”) released a loan application form for “businesses critical to maintaining national security.” While the application form is “for informational purposes only” to allow prospective borrowers to begin to prepare their respective submissions, Treasury announced on April 25, 2020 that applications may be submitted online beginning on April 27, 2020.

Interested companies are advised to prepare and submit their applications promptly as applications are due at 3:00 P.M. EDT on May 1, 2020. Applications received after that time may not be considered. However, Treasury maintains discretion to consider late applications for approval subject to the availability of funds. Prospective borrowers are reminded that, unlike under the Paycheck Protection Program available to small businesses, loan forgiveness is not available under this loan program.

Specifically, the CARES Act authorizes the Treasury to make available up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security.” Section 4003(a), (b)(3). During an interview on April 23, 2020, Treasury Secretary Steven Mnuchin, in describing the intended beneficiaries of this loan program, stated that, “[t]his pot of money was designed to consider the needs of defense contractors, key suppliers to [the Department of Defense], and other companies that carry classified information.”

The purpose of the loan program is to provide liquidity to offset covered losses, which include losses incurred directly or indirectly as a result of the coronavirus (COVID-19) pandemic. Importantly, an applicant is eligible only if it has “not otherwise received adequate economic relief in the form of loans or loan guarantees” provided under the CARES Act. Section 4002(4)(B).

Treasury has defined a “business critical to maintaining national security” as one that, at the time of the loan application, is either:

  • Performing under a DX-priority rated contract or order under the Defense Priorities and Allocations System regulations (15 CFR Part 700); or
  • Operating under a valid Top Secret facility security clearance under the National Industrial Security Program regulations (32 CFR Part 2004).

Dep’t of Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security Businesses (updated as of Apr. 10, 2020).

The application requires applicants to submit detailed information supporting either of the above. If an applicant does not satisfy either threshold requirement, it may nevertheless be considered for a loan if the Secretary of Treasury, based on a recommendation and certification by the Secretary of Defense or the Director of National Intelligence, determines that the applicant is critical to maintaining national security.

In addition to requiring information supporting either of the above criterion, the loan application requires applicants to provide information regarding their:

  • Corporate structure;
  • Debt, asset, and equity positions;
  • Operations in the United States;
  • Covered losses;
  • Most recently completed IRS Form 941 (“Employers Quarterly Federal Tax Return”);
  • Various consolidated financial statements; and
  • Any outstanding liens with the U.S. Government.

Applicants must also submit a financial plan. Two company officials must certify that the information and certifications provided in the application are true and correct.

Importantly, prior to submitting an application for a loan under this program, potential borrowers should be aware that such loans will be subject to certain conditions and restrictions, including:

  • If the borrower is a public company, then the borrower “must provide a warrant or equity interest in the [b]orrower” to the U.S. Government, unless the Secretary of Treasury determines, in his discretion, that issuance of such warrant or equity interest would not be feasible;
  • If the borrower is a private company, then the borrower may, at the discretion of the Secretary of Treasury, issue a senior debt instrument to the U.S. Government instead of a warrant or equity interest;
  • The borrower must maintain employment levels as of March 24, 2020 to the extent practicable, and in any case not reduce its employment levels by more than 10 percent from the levels on such date, at least until September 30, 2020;
  • Neither the borrower nor any affiliate of the borrower may purchase an equity security of the borrower or any parent company that is listed on a national securities exchange (this restriction does not apply if the borrower or affiliate is required to purchase such a security under a contractual obligation in effect as of March 27, 2020);
  • Effective until 12 months after the borrower has repaid the loan, the borrower must not pay dividends or make other capital distributions with respect to the borrower’s common stock;
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation (i.e., salary, bonuses, awards of stock, and other financial benefits) exceeded $425,000 but was less than $3 million in 2019 must not receive: (1) total compensation during any consecutive 12-month period that exceeds the total compensation received in 2019; and (2) severance pay or other benefits upon termination of employment that exceeds twice the compensation received in 2019; and
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation exceeded $3 million in 2019 must not receive total compensation during any consecutive 12-month period that exceeds the sum of $3 million and 50 percent of the excess over $3 million of the total compensation received in 2019.

Businesses interested in applying for a loan under this program should carefully evaluate the applicable conditions and restrictions. Prospective borrowers are also advised that recipients of Treasury funds may be subject to increased government oversight and investigations, especially with respect to the certifications required in the application.

Further, any companies interested in applying should prepare their materials promptly to ensure submission in advance of the 3:00 P.M. EDT on May 1, 2020 deadline.

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Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

DOD Implementation of CARES Act Section 3610

On April 8, 2020, the Department of Defense issued a class deviation implementing CARES Act Section 3610, Federal Contractor Authority. Specifically, the Class Deviation, which is effectively immediately, authorizes contractors to use a new Department of Defense Federal Acquisition Regulation Supplement (DFARS) Part 231 clause—DFARS 231.205-79, CARES Act Section 3610 Implementation—”as a framework for implementation of section 3610″ of the CARES Act. The Class Deviation identifies that Section 3610 can provide “reimbursement on any contract type.”

Most notably in DFARS 231.205-79, provided below, is that:

  • It only applies to contractors for which the “cognizant contracting officer has established in writing to be an affected contractor.”  This is an important distinction and contractors should ensure to obtain, and maintain in its contract files, this affirmation from the contracting officer; 
  • It clarifies both that it applies to “work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance,” which provided needed clarity to the language in the CARES Act, and that the performance location can be deemed inaccessible because of local shelter in place orders; and
  • In order for costs to be allowable, they must be “segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained.”

DFARS 231.205-79 CARES Act Section 3610 – Implementation

  1. Applicability.
    1. This cost principle applies only to a contractor:
      1. that the cognizant contracting officer has established in writing to be an affected contractor;
      2. whose employees or subcontractor employees:
        1. Cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions, and
        2. Are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).
    2. The maximum reimbursement authorized by section 3610 shall be reduced by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act (Pub. L. 116– 127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020 for COVID–19.
  2. Allowability.
    1. Notwithstanding any contrary provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7, costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract for up to an average of 40 hours per week, and may be charged as direct charges, if appropriate, if incurred for the purpose of:
      1. Keeping contractor employees and subcontractor employees in a ready state, including to protect the life and safety of Government and contractor personnel, notwithstanding the risks of the public health emergency declared on January 31, 2020, for COVID-19, or
      2. Protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency.
    2. Costs covered by this section are limited to those that are incurred as a consequence of granting paid leave as a result of the COVID-19 national emergency and that would not be incurred in the normal course of the contractor’s business. Costs of paid leave that would be incurred without regard to the existence of the COVID-19 national emergency remain subject to all other applicable provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7. In order to be allowable under this section, costs must be segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained. Segregation and identification of costs can be performed by any reasonable method as long as the results provide a sufficient audit trail.
    3. Covered paid leave is limited to leave taken by employees who otherwise would be performing work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance; but
      1. The work cannot be performed because such facilities have been closed or made practically inaccessible or inoperable, or other restrictions prevent performance of work at the facility or site as a result of the COVID-19 national emergency; and
      2. Paid leave is granted because the employee is unable to telework because their job duties cannot be performed remotely during public health emergency declared on January 31, 2020, for COVID-19.
    4. The facility at which work would otherwise be performed is deemed inaccessible for purposes of paragraph (b)(3) of this subpart to the extent that travel to the facility is prohibited or made impracticable by applicable Federal, State, or local law, including temporary orders having the effect of law.
    5. The paid leave made allowable by this section must be taken during the period of the public health emergency declared on January 31, 2020, for COVID–19, up to and including September 30, 2020.
    6. Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020, for COVID–19, such as the tax credit allowed by division G of Public Law 116–127.

The Class Deviation can be found here and remains in effect until rescinded.

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DOD Implementation of CARES Act Section 3610