Updating Governing Documents to Permit SBA-Approved Financing for COVID-19 Relief

July 30, 2020

Updating Governing Documents to Permit SBA-Approved Financing for COVID-19 Relief

Office of Employee Appeals

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, designating $349 billion in forgivable financing to assist small businesses impacted by COVID-19. The Small Business Administration (SBA) currently coordinates the distribution of payroll funding to eligible entities, including corporations, LLCs, tribal businesses, sole proprietorships, partnerships, and non-profit organizations. Despite the forgivable nature of these emergency distributions, they are considered loans and not businesses stimulus grants.

While most SBA-associated businesses qualify for financing under the CARES Act, accepting a PPP loan might conflict with an entity’s governing documents. Business owners often need to quickly update their controlling instruments to avoid liability before requesting a payroll loan. Entities that did not keep their articles of incorporation or bylaws up to date may need to quickly rewrite and file amendments to multiple legal documents. Further, inactive businesses must generally comply with state law to update their legal status. Government relief funds are limited, so contact the experienced Virginia and D.C. small business lawyers at McClanahan Powers, PLLC, by calling (703) 520-1326 or reaching out online without delay.

Terms for Small Business Coronavirus Relief Financing

Qualifying small businesses apply for the Paycheck Protection Program (PPP) directly with a participating lender. Most state financial institutions provide SBA-approved CARES Act loans under the same terms for all applicants. Congress authorized the PPP to help businesses keep employees on the payroll. As such, the following terms and limitations apply to COVID-19 business financing:

  • Loans may cover payroll for up to eight weeks and include financing for salaries and employer-provided benefits
  • Loans are forgivable if at least 75% of the disbursement goes directly to payroll expenses
  • Eligibility generally caps employees’ annual salaries at $100,000
  • Lenders may not charge originating fees
  • PPP loans do not require collateral or personal guarantees
  • Funding may cover the business’ rent, mortgage interest, and utility costs
  • Any funds not forgiven mature in two years with a 1% interest rate
  • Corporations have a six-month grace period before payments ineligible for forgiveness come due

After subtracting annual compensation exceeding $100,000 per employee and related expenses, the business may apply for a loan equating to eight weeks of payroll and necessary operating costs. Small companies must generally keep all employees staffed and fully salaried to qualify for complete loan forgiveness. For some, this may mean requesting COVID-19 financing above the entity’s permissible debt limit. For others, the internal financing approval process might detrimentally delay PPP financing applications.

Reviewing Bylaws, Operating Agreements, and Contracts for Financing Limitations

Corporate bylaws, operating agreements, and partnership contracts often contain provisions establishing a debt ceiling, restricting officers’ ability to obtain financing, or requiring bilateral action. For certain stock, nonstock, and limited liability corporations, requesting coronavirus financing in violation of a controlling agreement might subject employees, agents, and partners to fiduciary and contractual liability. Non-profit organizations may also struggle to obtain COVID-19 financing without undergoing a stringent internal and tax approval process.

The need for emergency funding has left many small businesses scrambling to modify their governing documents. However, most amendments require majority approval, deliberation, or shareholder feedback. Some revision procedures even include mandatory waiting periods or require the approval of owners, managers, or members who have since left the company. These barriers may require updating the entity’s articles of incorporation or organization before moving to change corporate documents. Some small businesses may even face internal opposition to requesting SBA-approved financing necessitating emergency removal or appointment of directors.

Amending Governing Documents in Response to COVID-19

For Virginia limited liability companies, Va. Code § 13.1-1014 permits changes to the terms of a written operating agreement at any time and, if there are no provisions to the contrary, the majority of managers or organizers may simply agree to apply for financing. Sole proprietors and partnerships typically have little to no formal prerequisites necessary to obtain debt or amend governing instruments. Virginia corporations, however, might need to adopt emergency bylaws as permitted under Va. Code § 13.1-625 to manage the company and make decisions during pandemic closures.

Commonwealth law states that emergencies exist when a quorum of the board of directions cannot assemble due to a catastrophic event. The coronavirus epidemic may qualify as a catastrophic event in Virginia provided it prevented assembling a quorum when necessary to ensure the entity’s continued function. Emergency bylaws might include changing the procedures for calling board meetings, altering quorum requirements, and substituting directors. These temporary bylaws remain in effect until the emergency ends. Further, the law insulates directors, employees, officers, and agents from liability for good faith corporate actions taken under emergency bylaws. Speak with a qualified corporate attorney to determine your eligibility to exercise emergency bylaw procedures in Virginia.

Only corporations and limited liability companies (LLCs) need to file amended articles of organization or incorporation with the State Corporate Commission (SCC).  Both domestic and foreign entities may utilize the SCC’s online information system to do so. It only costs most businesses $25 to instantly file articles of amendment in Virginia, and companies need only include the date and text of the changes along with the method of adoption. A qualified business-financing lawyer can help entities apply for forgivable loans under the CARES Act without running afoul of their governing instruments.

Discuss Your Eligibility for CARES Act Relief with the Virginia Corporate Lawyers at McClanahan Powers, PLLC

The federal government has already injected additional funds into the Paycheck Protection Program to stimulate the economy. Eligible entities may need to apply for SBA-approved financing immediately to obtain COVID-19 funding. Opening your business to future liability, however, may negate the value of an eight-week payroll loan. Due to the unprecedented nature of the coronavirus, courts may refuse to proceed with fiduciary or shareholder litigation for emergency actions taken in good faith. Our lawyers continue to monitor current litigation trends as the business law develops during this crisis.

The dedicated small business lawyers at McClanahan Powers, PLLC, can help business entities expediently amend their bylaws, operating agreements, and organizing articles to obtain coronavirus financing. Contact us today for a COVID-19 financing consultation by calling (703) 520-1326 or connecting with us online.