Many transactions begin with the delivery by one party to the other of a letter of intent (“LOI”).[1]  The LOI is a document setting forth the parties’ intent to enter into a transaction and summarizing certain salient business terms.  If the parties cannot agree, it would be better to learn that early on during the LOI stage rather than later after expending substantially more time and resources.  In many cases, LOIs include both non-binding and binding terms, each of which should be clearly delineated to avoid ambiguity.

A signed LOI can ignite deal momentum, comfort parties with respect to key terms, and facilitate and serve as guide for the preparation of definitive agreements.  The LOI can be as specific or vague as the circumstances require, but typically includes some understanding or a proposal with respect to the following areas:

  1. Structuring.  Most acquisition transactions are structured as stock purchases, asset purchases, or mergers.  Each transaction structure carries with it differing tax treatment and legal distinctions that can have an impact both on risk-allocation between the parties and speed/certainty of closing.  In addition, at times, advance tax structuring may be required due to tax complications of a transaction.
  2. Purchase Price and Payment. Customarily, the LOI will include the buyer’s proposal with respect to the purchase price which may include, without limitation, an upfront cash payment, deferred payments payable in installments post-closing, earnout payments based on the achievement of agreed financial targets, and equity in the buyer or a parent company of the buyer (commonly referred to as rollover equity and customarily between 10% and 20% of the total transaction consideration).  It is also common to include a basis on which the purchase price was calculated (for example, some multiple of the seller’s EBITDA or revenues).
  3. Closing Conditions. The LOI will often include conditions precedent to closing which can include financing, diligence and other contingencies such as obtaining any required third-party consents.
  4. Due Diligence. By the time the LOI is negotiated, the parties will likely have exchanged some preliminary diligence material subject to a confidentiality agreement (see below). Once the LOI is signed, the buyer will undertake a more comprehensive review of the target.  The LOI may include basic parameters of such further review and a timeline for completion.
  5. Confidentiality. Again, parties may exchange diligence prior to the execution of the LOI and in such case, it is imperative for the seller to have a binding confidentiality agreement in place prior to sharing any diligence.  The LOI should either refer to an existing confidentiality agreement or include binding confidentiality provisions absent such prior existing agreement.
  6. Exclusivity. In exchange for dedicating resources to a transaction, the buyer will want comfort that the seller is not simultaneously negotiating with other potential buyers.   Accordingly, it is customary for an LOI to include a binding agreement that the seller will not, for some period of time after signing the LOI, discuss or pursue a transaction with any other prospective buyer.  Many times this is related to the due diligence period plus a period of time following completion of due diligence with an extension right.

Some parties will opt to front-load the negotiation of certain other deal points for inclusion in the LOI, addressing matters such as the scope of indemnification, caps, baskets, deductibles, and survivability of representations, warranties, and covenants.  In general, sellers prefer a more comprehensive LOI to limit the buyer’s positioning later on and to ferret out any preliminary issues.  Conversely, buyers prefer a less comprehensive approach to the LOI to provide for flexibility, account for what they have learned in due diligence, and preserve leverage for later on.

The LOI is the first step in a long process.  Often times the business principals negotiate the LOI without counsel, resulting in lack of specificity or key terms.  If you are planning to send out or anticipate being in receipt of an LOI, the earlier you involve counsel the better suited you will be to negotiate your transaction.


[1] This article focuses on letters of intent; however, in some instances, discussions are memorialized or proposals are made under a term sheet, an expression of interest or a memorandum of understanding.

On January 8, 2021, the U.S. Small Business Administration (“SBA”), in consultation with the Department of Treasury, announced the re-opening of the Paycheck Protection Program (“PPP”) to first-time borrowers and certain existing borrowers. Through a series of Interim Final Rules (each, an “Interim Rule”), the SBA provided guidance on the expanded PPP as enacted by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), with respect to PPP loan applications, eligible borrowers and lenders, and loan forgiveness applications submitted both pre and post-enactment of the Act.

Below is a summary of the key provisions and updates to the PPP as contained in the Interim Rules:

Additional lending under the PPP will be open first to community financial institutions, with First Draw PPP Loans (i.e., new PPP loans under the expanded PPP) available starting on January 11, 2021 and Second Draw PPP Loans (i.e. additional advances to existing PPP borrowers) available starting on January 13, 2021. Funds will be available to PPP borrowers until March 31, 2021. The First Draw application and Second Draw application are available on the SBA website (and linked here), and are substantially similar to the original application required under the initial PPP.

  1. First Draw PPP Loans. The Act, as refined by the Interim Rules, permits existing PPP borrowers to obtain new or additional funding in that event that such PPP borrower (i) was previously ineligible under the initial PPP, (ii) did not receive the full amount of PPP funds available to such PPP borrower, or (iii) returned all or any portion of the original PPP loan advanced to such borrower under the initial PPP. Eligible borrowers who did not accept the full amount of the initial PPP loan are now allowed to apply for an increase up to the maximum amount initially authorized.

(a) Additional Borrowers. The Act and Interim Rules expand eligibility under the PPP to the following enterprises:

    • 501(c)(6) non-profit organizations and destination marketing organizations with 300 or fewer employees, provided that such organization derives less than 15% of its gross receipts from lobbying activities;
    • Hospitals owned by governmental entities, provided that they receive less than 50% of funding from state or local government sources, excluding Medicaid;
    • Housing cooperatives with 300 or fewer employees;
    • Television, radio and other eligible news outlets (NAICS Code 511110 or 5151) and public broadcasting entities; and

(b) Limitation on Corporate Groups. In addition to (and not in lieu of) existing SBA affiliation rules, the Interim Rules impose a limitation on aggregate borrowing by “corporate groups” in an amount not to exceed $20 million. For purposes of this limitation, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. The burden is on the PPP borrower to notify the lender in the event of borrowings in excess of the $20 million threshold, and withdraw or request cancellation of any pending or approved application for excess funds. Failure to do so will be deemed as an unauthorized use of PPP funds, and therefore such PPP loan will not be eligible for forgiveness.

  1. Second Draw PPP Loans. Under the Act and the Interim Rules, eligible borrowers may now apply for a Second Draw PPP Loan, provided that such supplemental loan shall not exceed $2 million and the aggregate amount of all loans to all affiliated borrowers from both the first and second round of funding shall not exceed $10 million. The covered period for all new loans advanced under the PPP extends through March 31, 2021.

(a) Eligible Borrowers. In order to apply for a Second Draw Loan under the PPP, the applicant must be a business with 300 or fewer employees (decreased from 500 under the initial program) and have experienced a decline in gross receipts of 25% or greater in any quarter in 2020 relative to the corresponding quarter in 2019. The Interim Rules clarify that an applicant is deemed to have experienced the required revenue reduction if it has experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019. It is worthwhile to note that any amounts forgiven on a First Draw PPP Loan received in 2020 is excluded from borrower’s gross receipts for purposes of such determination.

(b) Limitation on Corporate Groups. With respect to Second Draw Loans, businesses that are part of a single corporate group (as described above) shall not receive more than $4 million of Second Draw PPP Loans in the aggregate. The corporate group limit is applicable to all borrowers, including restaurant and hospital businesses operating under NAICS Code 72.

  1. Use of Proceeds for New PPP Loans. The Act, as expanded by the Interim Rules, substantially expands the provisions of the existing PPP relating to authorized uses of PPP loan proceeds in an effort to address certain non-ordinary course expenses incurred by businesses in connection with COVID-19 safety measures. New categories of acceptable uses of PPP loan proceeds include:
  • Payroll costs, including costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical or family leave, and group health care, life disability, vision, or dental insurance premiums.
  • Covered operational expenditures, which are defined as payments by a business for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
  • Covered property damage costs related to property damage, vandalism and looting due to public disturbances that occurred during 2020, to the extent not covered by insurance or other compensation.
  • Covered supplier costs, which are defined payments to suppliers pursuant to a contract, order, or purchase order in effect before the date of disbursement of the PPP loan, for the supply of goods that are essential to the operations of the business at the time such expenditure is made.
  • Covered worker protection expenditures, which include any operating or capital expenditures required to facilitate the adaptation of the applicant’s business to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent State or local requirements, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19, in all cases during the period commencing on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires. Such expenditures may include costs or expenses incurred in connection with the following:
    • purchase or maintenance of a drive-through window, air filtration or ventilation system or physical barriers (e.g. sneeze guards);
    • expansion of additional indoor, outdoor or combined business space;
    • onsite or offsite health screening capabilities;
    • purchase of particulate filtering face-piece respirators;
    • purchase and maintenance of personal protective equipment

The above notwithstanding, in order to obtain full forgiveness of any PPP loan no less than 60% of loan proceeds must be used to fund payroll and associated eligible costs (inclusive of the amount of any refinanced EIDL).

The full text of each Interim Rule summarized in this alert is linked here and here. We are continuing to monitor as additional guidance is released and will provide any updates as needed. Our attorneys are available to guide you and answer any questions regarding the Interim Rules, the PPP and related pandemic relief measures.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, an integral portion of the Consolidated Appropriations Act of 2021 (the “Act”). As detailed in our Alert released on December 24, 2020, the Act includes the continuation and expansion of the Paycheck Protection Program (“PPP”), subject to certain eligibility requirements and borrowing restrictions. With respect to PPP matters, the Act has been enacted without modification to its initial proposed form.

In the coming weeks, we expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The U.S. Small Business Administration is directed to issue regulations to effectuate the PPP-related provisions of Act within 10 days of its enactment.

Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

Congress has reached a bi-partisan agreement on the Consolidated Appropriations Act of 2021 (the “Act”), which includes a supplemental relief package aimed at mitigating the continued economic impact of COVID-19 on American businesses, individuals and families, and includes expansion of the Paycheck Protection Program (“PPP”) as initially enacted under the CARES Act[1].  The Act is currently pending signature by the President, who has indicated that he does not intend to sign without further modification of certain matters not directly related to the PPP.  If the President does not sign, it is possible that Congress will agree to certain modifications to the Act or override any Presidential veto and adopt the Act as drafted.

Below is a summary of the key provisions of the expanded PPP, as proposed in the Act in its current form.

Expansion of Paycheck Protection Program Relief.  The Act not only provides for a second round of PPP funding to first and second-time borrowers, but also provides a mechanism for borrowers to increase the amount of their original PPP loans.

(a) Borrowers with Existing PPP Loans. First, the Act permits borrowers who, due to supplemental guidance issued by the SBA, obtained a smaller PPP loan than they could have otherwise obtained upon passage of such supplemental guidance. Affected borrowers may request that their PPP lenders increase their existing PPP loan by the differential. Second, the Act permits PPP borrowers who returned all or any portion of their original loan to reapply for a loan in the amount of such returned portion. This extends to eligible borrowers who did not accept the full amount of the initial PPP loan as well, allowing such borrowers to apply for an increase up to the maximum amount initially authorized.

(b) New and Second Round Borrowings. As drafted, the Act proposes to allocate approximately $267.5 billion in funding for a new pool of PPP funds, $25 billion of which are reserved for businesses with 10 or fewer employees as of February 15, 2020. Eligible borrowers may now apply for a second PPP loan, provided that such supplemental loan cannot exceed $2 million and, the aggregate amount of all loans to all affiliated borrowers from both the first and second round of funding shall not exceed $10 million.

Generally, the aggregate PPP loan amount per applicant shall not exceed 2.5 times the average monthly payroll for the 12 months preceding the date of application or the average monthly payroll for 2019. For accommodation and food service businesses under NAICS Code 72, the maximum loan amount if increased to 3.5 times monthly payroll, not to exceed $2 million.

(c) Eligible Borrowers.

    • All first-time PPP applicants will be subject to the eligibility criteria set forth in the initial PPP under the CARES Act. In order to apply for a second loan under the PPP, the applicant must be a business with 300 or fewer employees (decreased from 500 under the initial program) and have experienced a decline in gross receipts of 25% in any completed quarter in 2020 prior to the loan compared to the same quarter in 2019.
    • The Act expands eligibility to certain 501(c)(6) organizations, subject to certain conditions.
    • The Act permits a debtor in possession or bankruptcy trustee to obtain a PPP loan on behalf of a debtor, which loan will be treated as a debt of the company unless and until forgiven. Further, any Plan of Reorganization that provides for payment of a claim specified in Section 503(b)(10) of the Code (i.e., administrative claims) may be confirmed if the plan proposes make payments on account of such claim when due under the terms of the PPP loan giving rise to such claim.

(d) Use of Proceeds for New PPP Loans. The Act substantially expands the provisions of the existing PPP relating to authorized uses of PPP loan proceeds, in an effort to address certain non-ordinary course expenses incurred by businesses in connection with COVID-19 safety measures. New categories of acceptable uses of PPP loan proceeds include:

    • Covered Operational Expenditures: Payments by a business for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
    • Covered Property Damage Costs: Any cost related to property damage, vandalism and looting due to public disturbances that occurred during 2020, to the extent not covered by insurance or other compensation.
    • Covered Supplier Costs: Payments to suppliers pursuant to a contract, order, or purchase order in effect before the date of disbursement of the PPP loan, for the supply of goods that are essential to the operations of the business at the time such expenditure is made.
    • Covered Worker Protection Expenditures: Any operating or capital expenditure required to facilitate the adaptation of the applicant’s business to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent State or local requirements, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19, in all cases during the period commencing on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires. Such expenditures may include costs or expenses incurred in connection with the following:
      • purchase or maintenance of a drive-through window, air filtration or ventilation system or physical barriers (e.g. sneeze guards);
      • expansion of additional indoor, outdoor or combined business space;
      • onsite or offsite health screening capabilities;
      • purchase of particulate filtering face-piece respirators;
      • purchase and maintenance of personal protective equipment

In addition to the above, the Act expands the definition of payroll costs to include payments for group health or other group insurance benefits (including group life, disability, vision and dental insurance), including insurance premiums. The above notwithstanding, in order to obtain full forgiveness of any PPP loan, no less than 60% of loan proceeds must be used to fund payroll and associated eligible costs.

(e) Forgiveness. In addition to existing PPP loan forgiveness requirements, the Act codifies an attempt by the Federal Reserve and the SBA to simplify the PPP loan forgiveness process for smaller loans. For PPP loans less than $150,000, the SBA will issue a new one-page forgiveness application (to be issued within 24 days of passage of the Act), in which a borrower will attest to compliance with all loan requirements, supported by limited information. Upon forgiveness, records must be retained for at least 3 years (4 years with respect to employment records). The Act also provides direction to the SBA to submit an audit plan to Congress regarding policies and procedures for review or larger loans. Lastly, proceeds of EIDL loans will no longer reduce full forgiveness.

(f) Deductibility of PPP Loan Funded Expenses.

    • The Act clarifies that gross income does not include any amount as a result of the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for deductible expenses paid with the proceeds of a PPP loan (e.g., employee salaries) that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
    • While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible.  The IRS then stated that no deduction would be allowed under existing law for an expense that is deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income.  The Act changes current law to reverse that decision and permit a deduction.

The Act passed both houses of Congress on December 20, 2020. The President has indicated as recently as Wednesday, December 23, 2020, that he does not intend to sign the Act without substantial changes. If and when passed, we can expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The SBA is directed to issue regulations to carry-out the Act within 10 days of its enactment.

Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.


[1] For a comprehensive review of the existing Paycheck Protection Program and related SBA guidance, please refer to our COVID-19 Resource Center.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The Southern District of New York has recently issued a decision that could ultimately have a significant impact on the enforceability of contracts that required performance during the COVID-19 pandemic.  In JN Contemporary Art, LLC v. Phillips Auctioneers LLC, (20-cv-04370), the Honorable Denise Cote, U.S.D.J., ruled that COVID-19 constituted a “natural disaster,”—thus falling within the ambit of a force majeure clause contained within the parties’ contract—and excused the defendant’s performance under the contract by dismissing the breach of contract case.  This decision, if ultimately upheld, will have implications that will trickle down to the likely thousands of cases that will be filed as a result of the pandemic.

In brief, in JN Contemporary Art, LLC, the plaintiff, the owner of a painting by artist Rudolf Stingel (hereinafter, “JN”), contracted with an art auction house – the defendant, Phillips Auctioneers LLC (hereinafter, “Phillips”) – to (among other things) grant Phillips the right to sell the painting at a specific, live, New York auction that was to be held in May 2020 in exchange for a guaranteed minimum payment to JN of $5 million.  Of note, the contract contained a force majeure clause within the contract’s termination provision that stated, “[i]n the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war. . .[Phillips] may terminate this Agreement with immediate effect.  In such event [Phillip’s] obligation to make payment of the Guaranteed Minimum shall be null and void…”

After an adjournment of the auction as a result of the pandemic, Phillips terminated the contract and sent a termination notice to JN citing its inability to conduct the live New York auction at its planned May 2020 date.  JN thereafter sued for, among other things, specific performance and alleged that Phillips terminated the contract without cause and was, in actuality, using the pandemic as a pretext to avoid its contractual obligations because of the weakening market for the painting.

In a 36-page decision, the Court rejected JN’s arguments (among others), and agreed with Phillips that the COVID-19 pandemic constitutes a “natural disaster” that excused Phillips performance under the contract pursuant to the force majeure clause in the termination provision.  Specifically, the Court held, in relevant part, that:

It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.  One need look no further than the common meaning of the words natural disaster.  Black’s Law Dictionary defines “natural” as “[b]rought about by nature as opposed to artificial means,” and “disaster” as “[a] calamity; a catastrophic emergency. . . .”

The Court further noted that:

[A] pandemic requiring the cessation of normal business activity is the type of “circumstance” beyond the parties’ control that was envisioned by the Termination Provision.  The exemplar events listed in Paragraph 12(a) include not only environmental calamities events such as floods or fires, but also widespread social and economic disruptions such as “general strike[s],” “war,” “chemical contamination,” and “terrorist attack.”

By interpreting COVID-19 as a “natural disaster” that excused contractual performance within the ambit of this specific force majeure clause, the Court may have opened an avenue of relief to many parties to contracts that could not be performed as a result of the multitude of Government orders related to the COVID-19 pandemic.  Contracting parties should therefore study their contracts closely to determine and assess their rights and whether they are entitled to relief as a result of the ongoing worldwide crises.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.