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Treatment of PPP Borrowers with Foreign Affiliates

On May 18, 2020, the United States Small Business Administration (“SBA”) released an Interim Final Rule applicable to borrowers with foreign affiliates who relied on the pre-May 5 guidance (the “IFR on Foreign Affiliates”), under which the SBA indicated that it would not find a borrower ineligible for a PPP loan solely because the borrower excluded non-U.S employees of foreign affiliates from the calculation of its employee headcount in reliance on the prior SBA guidance, provided that the borrower (i) applied for a PPP loan prior to May 5, 2020, (ii) had no more than 500 employees whose principal place of residence is in the United States on the date of its PPP loan application, and (iii) does not use PPP funds to support non-U.S. workers or operations.  This safe harbor relates only to the employee test and borrowers must still be otherwise eligible for the PPP.

Background

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) into law. Section 1102 of the CARES Act temporarily permits the SBA to guarantee 100% of loans granted under the Paycheck Protection Program (“PPP”). The PPP is a loan guarantee program, administered by the United States Treasury and SBA, through which financial institutions can make forgivable loans to small business concerns, business concerns with fewer than 500 employees, and certain other eligible borrowers. Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

PPP applicants are subject to certain affiliation rules, which deem entities to be affiliates based on a variety of factors including stock ownership, overlapping management, and identity of interests. The affiliation rules provide that, to calculate the number of employees of an entity for purposes PPP eligibility, employees of the borrower “and all of its domestic and foreign affiliates” should be included in the determination of the borrower’s headcount (except in certain limited circumstances). An entity that has more than 500 employees (in the aggregate, among its domestic and foreign affiliates) is ineligible for a PPP loan.

In response to confusion around whether to include employees of affiliates who are domiciled outside of the U.S. (“Foreign Employees”) in the calculation of an entity’s size, the SBA stated in its Frequently Asked Questions on May 5, 2020 that, for the “purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates.”

Interim Final Rule on the Treatment of Entities with Foreign Affiliates

On May 18, 2020, the SBA released the IFR on Foreign Affiliates in recognition of “reasonable borrower confusion” around the calculation of employee headcount with respect to Foreign Employees.  The IFR on Foreign Affiliates makes clear that borrowers who applied for a PPP loan before May 5, 2020 and who did not include Foreign Employees in their employee headcount calculation would not, solely on that basis, be deemed ineligible for a PPP loan. That is, such borrowers “shall not be deemed to have made an inaccurate certification of eligibility” due to their confusion on the treatment of Foreign Employees. The guidance makes clear, however, that such borrowers must not use PPP loan funds to support non-U.S. employees or operations, and that such borrowers must have had 500 or fewer employees whose principal place of residence is within the United States as of the date of its application.

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Christian Chandler Employment lawyer Wiggin Dana
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Christian is a Partner in the firm’s Labor, Employment and Benefits Department in the Washington, DC office. He has over 20 years of experience in executive compensation and employee benefits matters. His significant experience in this area has made him a valued resource for a range of clients across industries, including public and private companies, senior executives, management teams and boards of directors.

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James serves as Counsel in Wiggin and Dana’s Stamford office where he represents corporate and individual clients in connection with mergers, acquisitions, divestitures, commercial agreements, and other complex corporate transactions and related corporate governance matters. He advises clients across multiple industries, including manufacturing, retail, pharmaceutical, biotech, medical cannabis, and several services sectors.

James has experience representing acquirers, issuers, and financial advisors in private and public offerings of equity securities in connection with merger and acquisition transactions.

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He received his J.D. cum laude from Temple University Beasley School of Law and his B.A. cum laude from Colgate University.

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Scott D. McClure Corporate Wiggin and Dana Washington, DC
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Scott D. McClure is a Partner in Wiggin and Dana’s Corporate Department in the Washington, DC office. He brings to the table his expertise of nearly 30 years in Corporate Law. He started as an associate with a large, international firm in their Corporate Practice Group (Tax) division and worked his way up to being partner of the firm’s Corporate Practice Group Tax Division in which he led out the structuring of multiple taxable, tax-free domestic and cross-border reorganizations as well as stock and asset acquisitions.

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Joshua Kutticherry Corporate Attorney Wiggin and Dana New York, NY
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Joshua Kutticherry is an Associate in Wiggin and Dana’s Corporate department in the firm’s New York office.

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