INSIGHT: Foreign Employees, Subsidiaries, and Parent Companies! Oh, My! Meeting the Main Street Lending Program Eligibility Criteria

The Federal Reserve’s Main Street Lending Program (MSLP or program) is now open for lender registration, meaning banks can now extend loans to eligible businesses. In order for a borrower to access the program, it must satisfy a series of eligibility criteria.

Two of the biggest eligibility hurdles—particularly for those businesses with foreign employees, subsidiaries, or parent companies—are (1) the 15,000 employee / $5 billion annual revenue limit and (2) the restriction that the borrower be a “U.S. business.”

We provide here a yellow brick roadmap of how to compute these two calculations when a business has foreign affiliates and walk through a case study as an example.

The 15,000 Employee/$5 Billion Annual Revenue Limit

Businesses eligible for a MSLP loan must meet one of the following two conditions: (i) the business has 15,000 employees or fewer, or (ii) the business had 2019 annual revenue of $5 billion or less.

Businesses must meet at least one of these conditions, but are not required to meet both.

To determine how many employees a business has or a business’s revenue, the employees and revenue of the business must be aggregated with the employees and revenues of its affiliated entities. This is the same test that applies to borrowers seeking to access the Small Business Administration’s Paycheck Protection Program.

Generally, entities are affiliates when one controls or has the power to control the other, or a third party or parties has the power to control both. Four tests or circumstances establish an applicant’s affiliations, which is a fact-specific, not formulaic, assessment:

• Equity Ownership—If an individual, concern, or entity owns or has the power to control more than 50% of the applicant’s voting equity; absent such over 50% ownership, the CEO, board of directors, or similar body are deemed in “control” of the applicant; a minority shareholder that has the authority to block board or other shareholder action also is deemed to be in “control.”

• Common Management—When the CEO or president (or similar manager) of the applicant also controls the management of one or more other concerns; or where an individual, concern, or entity controls the board/management of the applicant and the board/management of one or more other concerns; or when a single individual, concern, or entity controls the applicant through a management agreement.

• Identity of Interest—When close relatives (spouse, parent, child, or sibling—or the spouse of any such person) have identical or substantially identical business or economic interests (e.g., they operate concerns in the same or similar industry in the same geographic area); but note, applicants may rebut a finding of affiliation under this test and show the businesses are separate.

• Stock Options, Convertible Securities, and Agreements to Merge—Generally will be considered to have present effect on the power to control a concern and are treated as though rights granted have been exercised. But no present effect will be given for:
  • Agreements to open or continue negotiations toward a possible merger or sale at a future date (don’t count as agreements in principal);
  • Options, convertible securities, and agreements that are subject to conditions precedent, which are incapable of fulfillment, speculative, conjectural, or unenforceable under state or federal law, or where the probability of the transaction (or exercise of the rights) occurring is shown to be extremely remote, are not given present effect; or
  • Individuals’, concerns’, or other entities’ ability to divest all or part of their ownership interest in order to avoid a finding of affiliation.

There are general exceptions to the affiliation rules (see 13 CFR 121.103(b)) that apply for purposes of the program.

The ‘U.S. Business’ Restriction

In order to be eligible for a MSLP loan, a business also must be a “U.S. business.” The applicant must be created or organized in the U.S. (including U.S. subsidiaries of a foreign company) or under the laws of the U.S. with (i) significant operations in, and (ii) a majority of their employees based in, the U.S.

In determining whether a borrower has “significant operations” in the U.S., the business’s operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. According to the MSLP’s Frequently Asked Questions, a borrower has significant operations in the U.S. if, when consolidated with its subsidiaries, greater than 50% of the borrower’s:

• Assets are located in the U.S.;

• Annual net income is generated in the U.S.;

• Annual net operating revenues are generated in the U.S.; or

• Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the U.S.

Case Study: Which Entity Should Apply?

Assume Widget Enterprises wishes to apply for a MSLP loan. It must first determine whether it meets the 15,000 employee or $5 billion in annual revenue limit, and then determine which of its companies are “U.S. businesses.”

Widget Enterprises

To determine whether Widget Enterprises meets the 15,000 employee or $5 billion annual revenue limit, it aggregates its employees and revenue with its affiliates—Companies A+B+C+D+E = 5,150 employees and $7.06 billion in revenue. Although its annual revenue is above the $5 billion limit, the number of its employees is less than 15,000. Therefore, Widget Enterprises meets this eligibility criteria. The same would be true in the inverse situation—if Widget Enterprises had annual revenue of less than $5 billion, but had more than 15,000 employees, it would still meet this MSLP eligibility criterion.

Next, Widget Enterprises must determine which of its companies should apply for the loan. An eligible borrower must have been created or organized in the U.S., limiting the potential applicants to either Company B or Company D. Company B has significant operations in the U.S. because, when consolidated with its subsidiaries, $5.04 billion out of its $6.04 billion of revenue are generated in the U.S. But, when consolidated with its subsidiaries, it only has 1,100 out of 4,100 employees located in the U.S. Therefore, Company B would not meet the “U.S. business” restriction because less than 50% of its employees are located in the U.S.

Company D, however, would meet the “U.S. business” restriction because it does not have any subsidiaries, meaning 100% of its operations and employees are in the U.S.

Conclusion

Widget Enterprises meets the 15,000 employee or $5 billion annual revenue limit, and Company D is the entity that would apply for the MSLP loan. Nevertheless, Company D must still meet the other eligibility criteria that are not dependent on its relationship to foreign employees, subsidiaries, and parent companies. Among other criteria, Company D must have been established prior to March 13, 2020, and it cannot have received specific support under Title IV of the Coronavirus Economic Stabilization Act of 2020 (CARES Act). Potential borrowers should note that receipt of Paycheck Protection Program loan or an Economic Injury Disaster Loan does not bar eligibility for the MSLP.

For a comprehensive overview of the eligibility criteria and other MSLP terms, click here. Steptoe also has Borrower Beware and Lender Beware series for those seeking to access CARES Act federal funding.

Before businesses set off to see the Wizard (or their lenders), they should carefully evaluate the eligibility criteria and other MSLP restrictions to determine which of their subsidiaries are eligible for the program and capable of complying with all of the program’s terms.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matthew B. Kulkin, co-chair of Steptoe & Johnson’s Financial Services Group, is a former Commodity Futures Trading Commission division director who advises financial market participants on a wide array of legislative, regulatory, compliance, and enforcement matters.

Josh Oppenheimer is an associate at Steptoe in Washington, D.C., and provides strategic advice on regulatory, legislative, and political issues with a focus on the financial services and retail sectors. He advises clients on securities, commodities, cybersecurity, and insurance laws at the federal and state levels.

Anna Stressenger focuses her practice on complex commercial litigation matters including drafting motions, developing trial strategies, extensive research, and discovery.