Out-Law News | 27 May 2020 | 12:18 pm | 3 min. read
The CLBILS is one of the core business support mechanisms that the UK government has outlined to help companies obtain the finance they need to counteract the economic impact of coronavirus, officially Covid-19. Under the scheme commercial lenders loan money to eligible UK-based businesses and the government, through the British Business Bank, provides an 80% guarantee on those individual loans. The scheme has been operating since April and has already provided 36,000 loans giving more than £6 billion of support, according to the government.
Last week the extension of the Scheme was announced by the government, however Lynette Jacobs and James Sullivan-Tailyour of Pinsent Masons, the law firm behind Out-Law, said the new terms of support have implications for how CLBILS borrowers of more than £50 million will be able to remunerate executives in the business.
Jacobs said that the issue of executive pay remains a focus for investors and the media, with the message being that in the current climate where employees are on furlough, receiving reduced pay and/or at risk of redundancy as a result of Covid-19, executives should be "sharing the pain".
"Continuing high executive pay packages are not considered acceptable for companies in receipt of taxpayer-funded support schemes, be that furlough and/or business rates holidays," Jacobs said. "Conditions on pay attach to loans between £50 million and £200 million under the CLBILS which are available from 26 May. These transition investor, shareholder and media censure to simple unavailability of this funding for companies that are unwilling to apply the required restraint on executive pay."
"Other than in certain specified circumstances, the government is excluding funding under the CLBILS in excess of £50 million to any company which pays cash bonuses, or awards any pay rises, to its senior management, including the board. A similar caveat has been placed by the government on loans under the Future Fund – which makes funding available for innovative companies with good potential that would typically be relying on equity investment, offering matching loans of between £125,000 and £5 million where investors co-invest. To be eligible for this funding, again subject to specified exceptions, no bonus or other discretionary payment can be made to any employee, consultant or director of the company for a 12 month period from the date the funding is received," she said.
"The 'significant reputational ramifications' warned of by the Investment Association in its April 2020 guidance on how it expects listed companies to respond to the pandemic in respect of executive pay, for companies which make use of government support schemes without reflecting this in director pay, are now an actuality," she said.
James Sullivan-Tailyour said: "The government has not yet published any guidance on its restrictions on remuneration for loans under the CLIBLS above £50 million. However, the statements that have been released by the government suggest that the restrictions will be limited to cash bonuses and salary increases – that could potentially leave the door open to bonuses being delivered entirely in shares, and for other share awards to continue to be made."
"Likewise, there are no details on how long the CLIBLS restrictions on awarding bonuses or salary increases will last. If the restrictions last only for a limited initial period – say, 12 months, which would align with the Future Fund scheme for smaller businesses – the restriction is unlikely to have a practical impact, as businesses relying on the CLBILS are unlikely to be in a position to pay bonuses this year in any event. However, if the restricted period is longer – possibly the lifespan of the loan – that could end up being very restrictive for businesses several years down the line, when they need to pay bonuses to retain or reward staff but are prevented from doing so under the rules of the CLBILS," he said.
Jacobs said there are comparisons to be drawn with how coronavirus business support schemes in the US are addressing the topic of executive pay.
She said: "It is noteworthy that that the US CARES Act – the Coronavirus Aid, Relief and Economic Security Act through which $2 trillion in emergency relief is available in the form of loans to support individuals and businesses impacted by Covid-19, enacted in March – also requires companies seeking benefit under the Act to agree to limits on total compensation packages for higher paid employees and directors, with the restrictions remaining in place for specified periods after the loan to the company has been repaid."
28 May 2020