On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. The CARES Act could impact recent and future M&A transactions, including those that are currently being negotiated. Buyers should (i) take note of how the CARES Act may impact tax aspects of an M&A transaction and (ii) be aware of oversight requirements and restrictions that relate to certain loans or other financial assistance provided to a company pursuant to Title IV of the CARES Act.

(A) With respect to tax provisions of the CARES Act:

  1. Deferral of Payroll Taxes. The CARES Act allows for the deferral of the employer portion of social security payroll taxes for the period from March 27, 2020 until December 31, 2020. Of this amount, 50% can be deferred by an employer until December 31, 2021; the remaining 50% can be deferred until December 31, 2022. Although the standard definition of "pre-closing taxes" in an M&A purchase agreement or merger agreement likely would include these deferred taxes, buyers may want to specifically state that any payroll taxes deferred under the CARES Act are included in pre-closing taxes. Buyers also should ensure that targets benefitting from this provision have sufficient reserves to cover these future liabilities, or that such liabilities are reflected in the calculation of the target's working capital or indebtedness. If the economic impact of these taxes is not borne by the seller(s) at closing, the buyer may be limited to seeking reimbursement from the seller(s)  when the taxes are due at the end of 2021 and 2022. Buyers should not expect any adjustment to the target's representation that all taxes due and owing have been paid, as such taxes would not be due and owing until the end of 2021 and 2022.
  2. Net Operating Loss (NOL) Adjustments. For NOLs arising in 2018, 2019, and 2020, certain taxpayers can carry back such net operating losses to the prior five taxable years. In addition, the 80% income limit on claiming net operating losses is lifted for certain taxpayers for taxable years beginning before 2021. Clients who previously engaged in M&A transactions should carefully review any agreements to determine whether the agreement requires the carryback of NOLs and which party is entitled to the carryback refunds therefrom. In addition, buyers currently negotiating M&A agreements should ensure that the tax refund provision, which normally provides for the payment of pre-closing tax period refunds to the sellers, specifically allows the buyer (i) to carryback any NOLs arising in post-closing tax periods and (ii) to retain any refund attributable to such NOL carryback, even if the NOL is carried back to a pre-closing tax period. The ability to carry back NOLs may be of significant benefit to a seller, particularly if the target's short-year return for the year of the sale would show a loss, as a result of decreased economic activity or otherwise (for example, payment of significant change of control bonuses in the short year). These adjustments to the NOL provisions also will make loss corporations more attractive targets, as there currently is greater flexibility in using existing NOLs (though certain loss limitation rules may limit the ability to utilize such losses).
  3. Modification of the Business Interest Deduction Limitation. The Tax Cuts and Jobs Act of 2017 (TCJA) enacted Section 163(j), which limited the ability of certain taxpayers to claim deductions for business interest expenses. Rather than limiting the deduction to 30% of a taxpayer's adjusted taxable income, the CARES Act increases the limit to 50% for 2019 and 2020. Partnerships are entitled to the increased 50% limit only for 2020; however, if a partnership had excess business interest expense during 2019, 50% of the expense can be deducted at the partner level (without regard to the taxable income limit) in 2020. Furthermore, all taxpayers can elect to use 2019 adjusted taxable income as adjusted taxable income for 2020 (i.e., for 2020, the limit is equal to 50% of the taxpayer's 2019 adjusted taxable income). The increased limitation will make debt financing of transactions during this period more attractive, as there is an increased ability to deduct business interest expense.
  4. Qualified Improvement Property Technical Correction. The CARES Act also includes a technical correction to the TCJA, which correction allows for certain real estate owners, restaurants, and retail businesses to claim a 100% bonus depreciation deduction with respect to qualified improvement property (i.e., improvements to nonresidential real property). Accordingly, an expanded category of assets is now eligible for 100% bonus depreciation.
  5. Extended Due Dates. Although filing due dates have been extended for a number of returns, due dates for information returns have not been extended. Accordingly, any information returns due in connection with a transaction occurring during this time will not be eligible for the automatic extension. Furthermore, parties should review previously executed M&A agreements to ensure that they comply with all contractual requirements relating to tax return preparation and review in light of the extended deadlines.
  6. Increased Importance of Refund Provisions. In addition to the expansion of NOL benefits described above, the CARES Act includes a few other provisions that allow for accelerated refunds (in the case of the corporate alternative minimum tax) or refundable tax credits (in the case of payroll tax credits for eligible employers). As a result, both buyers and sellers should review language in existing agreements and in agreements currently being negotiated to ensure that any newly available refunds are properly addressed.
(B) Oversight and Public Reporting; Restrictions on Targets

Title IV of the CARES Act authorizes the Secretary of the Treasury to issue to eligible businesses, states, and municipalities loans, loan guarantees, and other investments that in the aggregate cannot exceed $500 billion. $46 billion of the $500 billion is allocated to the airline industry and businesses that are "critical to maintaining national security," and the remaining $454 billion (and any portion of the other $46 billion that remains unused) is to be used to support other eligible businesses, states, and municipalities.

  1. Oversight. The CARES Act requires broad oversight. Loans (and the terms thereof) and any other assistance provided under the CARES Act will be subject to public disclosure requirements. Such public disclosure may be beneficial to a buyer, as the buyer might be able to evaluate the terms of any such loan before engaging with a target that received assistance under the CARES Act. At this point, because no loans have been made, let alone publicly reported, it is difficult to ascertain whether any terms will prevent a buyer from pursuing a target that received assistance under the CARES Act.
    When evaluating a potential target, a buyer should, among other things and as applicable: (i) consider whether the risk related to a government review (e.g., CFIUS or HSR Act) is enhanced for an M&A transaction where the target received assistance under the CARES Act and properly allocate for the enhanced risk in the purchase agreement; (ii) evaluate the target's compliance with the terms of the loan or financial assistance received pursuant to the CARES Act (and, if necessary, include a special indemnity and strengthen relevant representations); and (iii) consider whether interim operating covenants need to be revised so that the buyer is better informed of target's operations prior to closing. If a deal involves a target that received assistance under the CARES Act, it is very much buyer beware. It is critical that diligence is thorough and that the buyer understands fully the implications of any such restrictions.
  2. Restrictions. Companies that borrow or receive other financial assistance under Title IV will be subject to certain restrictions. If a target has received assistance pursuant to Title IV, the buyer must closely evaluate the terms of any such loan or financial assistance and be aware of restrictions, which may differ depending on the industry in which the target operates and the size of the target. For example:
  • Employment Levels. Until September 30, 2020, certain companies that receive a loan or other financial assistance pursuant to Title IV cannot reduce their respective March 24, 2020 employment levels by more than 10%. Treatment of a target's employees (e.g., employment status, salaries, benefits, etc.) is a heavily negotiated point in M&A deals. The requirement to maintain certain employment levels raises several considerations on the buy side and sell side, depending on the structure of a transaction. For buyers, the employment level requirements may (i) lead to increased M&A deal costs; (ii) require a buyer to take on additional deal risk and unwanted costs; and/or (iii) necessitate more or additional special indemnities to cover employee and/or employment benefits issues, such as misclassification of employees.
    A target, on the other hand, (i) must carefully consider the representations it (or its equity holders) make in a purchase agreement because, depending on the structure of a transaction, the scope of representations may be more expansive; (ii) to the extent possible, address issues such as misclassification and change-in-control obligations in order to expedite negotiations; and (iii) advocate for its employees to receive benefits and salary commensurate with pre-closing levels so that no employees are treated unequally as compared to their peers.
  • Prohibition on Stock Buybacks. The prohibition on stock buybacks and stockholder distributions, if they apply to a borrower pursuant to Title IV, are in effect for 12 months following the date on which the loan is repaid. Specifically:
    • any company subject to such restrictions, or an affiliate of such company, cannot buy back the company's publicly traded equity securities or that of any parent company, except to the extent required under a contractual obligation in effect as of the date of enactment; and
    • any company subject to such restrictions cannot pay dividends or make other capital distributions with respect to the common stock of such company.

The impact of the prohibition of buybacks and dividends is unclear at this time; however, it could lead to potential targets considering a sale of a business (if such a sale is permitted) in order to deliver value to its stockholders.