Nobody is likely to shed any crocodile tears over companies receiving yet another federal bailout being prohibited from this type of financial engineering, but as I read through the bill, I noticed something interesting. Airlines have been the poster children for the buyback ban, and whether or not that’s the rationale, the language of the buyback restriction that applies to airlines and related entities is different than the language of the restriction that applies to companies getting money under the Treasury-backed Fed program.
Here’s the language of Section 4003(c)(3)(A)(ii)(I) (page 518) that applies to recipients of the Fed’s largesse. It requires them to agree that:
Until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
Here’s the language of Section 4003(c)(2)(E) of the bill (page 516) that applies to the airlines. It requires them to agree that:
Until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of this Act.
Similar language appears in Section 4114 of the bill, which deals with payroll support for air carrier employees. I took a quick look, and it appears that while the term “affiliate” is defined for at least one part of the CARES Act, it’s undefined in this particular part. So, it seems that without further clarification, the highlighted language might well be construed to prohibit airline officers and directors from purchasing shares of their own company’s stock. As I mentioned, there are limits on comp that apply to recipients of the bailout (Section 4004), but is that what is intended?
Since it’s so sweeping and came together so fast, I’m sure that the CARES Act is full of little interpretive grenades – like this one, which means that Congress hasn’t forgotten to take care of America’s lawyers as it prepares to fire its cash bazooka.
That reminds me of an old adage that I once saw on a coffee mug: “Every business has its own best season. That is why they say that June is the best month of the year for preachers. Lawyers have the other eleven.”
-John Jenkins, TheCorporateCounsel.net March 27, 2020
