• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar

McCarter & English Logo

  • People
  • Services
  • Insights
  • Our Firm
    • Leadership Team
    • Social Justice
    • Diversity, Equity & Inclusion
    • Pro Bono
    • Client Service Values
    • Alumni
  • Join Us
    • Lawyers
    • Summer Associates
    • Patent Professionals
    • Professional Staff
    • Job Openings
  • Locations
    • Boston
    • Philadelphia
    • East Brunswick
    • Indianapolis
    • Stamford
    • Hartford
    • Trenton
    • Miami
    • Washington, DC
    • New York
    • Wilmington
    • Newark
  • Share

Share

Browse Alphabetically:

  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • X
  • Y
  • Z
  • All
Bankruptcy, Restructuring & Litigation
Blockchain, Smart Contracts & Digital Currencies
Business Litigation
Cannabis
Coronavirus Resource Center
Corporate
Crisis Management
Cybersecurity & Data Privacy
Delaware Corporate, LLC & Partnership Law
Design, Fashion & Luxury
E-Discovery & Records Management
Energy & Utilities
Environment & Energy
Financial Institutions
Food & Beverage
Government Affairs
Government Contracts & Global Trade
Government Investigations & White Collar Defense
Healthcare
Hospitality
Immigration
Impact Investing
Insurance Recovery, Litigation & Counseling
Intellectual Property
Labor & Employment
Life Sciences
Manufacturing
Products Liability, Mass Torts & Consumer Class Actions
Public Finance
Real Estate
Renewable Energy
Sports & Entertainment
Tax & Employee Benefits
Technology Transactions
Transportation, Logistics & Supply Chain Management
Trusts, Estates & Private Clients
Venture Capital & Emerging Growth Companies
  • Broadcasts
  • Events
  • News
  • Publications
  • View All Insights
Search By:
coronavirus
Main image for Investors Beware: Avoid Knee-Jerk Response to Eliminate Investor Protective Provisions Without First Determining If They Negatively Impact PPP Eligibility
Publications|Alert

Investors Beware: Avoid Knee-Jerk Response to Eliminate Investor Protective Provisions Without First Determining If They Negatively Impact PPP Eligibility

Coronavirus Legal Advisory

4.9.2020

As small businesses backed by venture capital or private equity analyze whether they may qualify for the benefits of the SBA Paycheck Protection Program (PPP), we are starting to see “knee-jerk” reactions by many of these small businesses asking or demanding that their investors eliminate key (and largely customary) investor protective provisions (whether by stockholder approval or approval by the director designated by such investor).  As we have previously noted, the SBA’s affiliation rules make it harder (and in some instances impossible) for small businesses backed by venture capital or private equity to obtain the benefits of this program without eliminating previously negotiated investor protections.  The benefits of the PPP must be balanced by the company and investor against the importance of these protective provisions which are integral to investor power and decision making.  However, we want to note that that the mere existence of these protective provisions is not, in and of itself, a prohibition against eligibility for obtaining the benefits of the PPP.  As such, eliminating these protective provisions should be the last step in the analysis as to whether and how a company may obtain the benefits of the PPP and not the first step. 

To secure the benefits of the PPP, a company must have not more than 500 employees or such number for the applicable industry in the North American Industry Classification System (NAICS). Included in this calculation are the number of employees of controlled portfolio companies of venture capital or private equity funds if the applicable investor is deemed to be affiliated with the subject company.  As such, once potentially troublesome provisions linked to affiliation are identified, the next step in the analysis is to determine the number of employees that may be attributable to the company applying for the PPP.  Assuming that the investor is an affiliate of the subject company, then the company and the investor must determine whether the company, together with the controlled portfolio companies of the investor, would have greater than 500 employees or such number for the applicable industry in the NAICS.  If the number of employees of the company together with the employees of the controlled portfolio companies of the investor are less than 500 or such number for the applicable industry in the NAICS, then the company would have no need to eliminate any protective provisions to be eligible to obtain the benefits of the PPP.

If the company (when combined with such other controlled portfolio companies) has more than 500 employees or such number for the applicable industry in the NAICS, then the company and the investors will have to consider modifying these protective provisions and any other provisions which provide for blocking rights over “day-to-day” activities if access to the PPP benefits is desired.  In a previous article we noted some ways in which this may be accomplished but the list is not exhaustive and investors and the company will have to determine if (i) the benefits of the PPP are necessary for the company and outweigh the burdens imposed on investors in losing these protections and (ii) if so, whether they can negotiate a compromise position which provides the investor with a level of comfort that it will continue to have meaningful input into the strategy and operations of the company.  As such, before agreeing to remove any protective provisions, venture capital and private equity fund, investors should require that their portfolio companies undertake a fulsome analysis to determine whether and how to obtain the benefits of the PPP before jumping to the conclusion that removal of protective provisions is required. Investors also should aggregate the data necessary to determine the number of employees of those of their portfolio companies likely to be considered affiliates under the SBA rules.  

We hope this is helpful, and, of course, our team is available to assist in any way.

sidebar

pdfemail

Related People

Media item: Howard M. Berkower
Howard M. Berkower

Partner

Media item: Jedediah Ande
Jedediah Ande

Partner

Related Services

Coronavirus Resource Center
Corporate
Venture Capital & Emerging Growth Companies
Subscribe to our Insights
McCarter & English, LLP
Copyright © 2023 McCarter & English, LLP. All Rights Reserved.
  • Login
  • Attorney Advertising
  • Privacy
  • Awards Methodology
  • Contact
  • Subscribe
  • Sitemap

The McCarter & English, LLP website is for informational purposes only. We do not provide legal advice on this website. We can provide legal advice only to our clients in specific inquiries that they address to us. If you are interested in becoming a client, please contact us, but do not send any information about your specific legal question. We cannot serve as your lawyers until we establish an attorney-client relationship, which can occur only after we follow procedures within our firm and after we agree to the terms of the representation.

Accept Cancel