Understanding the Implications of the CARES Act

On March 27, US President Donald J. Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, offering funding to government agencies, businesses, and individuals fighting the health or economic effects of the Coronavirus Disease 2019 (COVID-19) pandemic.

This was the third in a series of new COVID-19 relief laws and by far the most important. (Earlier this year, the president signed into law the $8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020; and the Families First Coronavirus Response Act, which mandated paid and sick leave and offered a payroll tax credit.) A fourth bipartisan funding bill is on the horizon.

Yet, none of the bills signed into law thus far is as sweeping as the CARES Act, which is highly significant for boards, but not for the usual reasons.  Instead of heaping new rules on boards, the bill offers companies funding during a time of tremendous economic uncertainty.

When it comes to liability and compliance—the usual effects of lawmaking on the boardroom—the CARES Act will have relatively low impact. Despite its 900-page length, the law includes very few new regulations—mainly conditions for receipt of federal funds, if businesses opt to accept them. As explained in NACD’s recent CARES Act summary, which provides key takeaways for boards, the new law requires certain manufacturers of drugs and medical equipment to have a risk management plan and mandates that airlines accepting funds control executive pay levels in specified ways, as detailed in this client alert by Pearl Meyer & Partners.

Other laws and related rules passed after previous crises including the Great Depression, the Enron Corp. and WorldCom scandals, and the 2008 financial crisis—such as the Securities Act of 1933 and the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Act of 2010, respectively—generated hundreds, if not thousands, of rules each, focusing post-crisis boardroom energies on compliance.   

The true significance of the CARES Act, by contrast, is financial. In this respect, it has the potential to be the most significant law passed since 1932 when newly elected US President Franklin Delano Roosevelt ushered in a series of post-Depression era laws that collectively became known as the New Deal.

The CARES Act will pump more than $2 trillion into the economy and could leave few businesses or families untouched. (For concise listings of all the funding allocations, see this summary from Oliver Wyman and this helpful graphic from National Public Radio.)

Businesses run on money—ideally money generated from products and services sold to consumers and businesses. But in an economy where the COVID-19 pandemic has brought whole industries to a standstill (think airline, automotive, tourism, and hospitality, among others), that cash must come from elsewhere; for many businesses, that source may have to be not only tax relief but also outright help in the form of loans from Uncle Sam. And to curb speculation on this front, US Securities and Exchange Commission chair Jay Clayton recently stated that companies should disclose to investors whether they are seeking relief through the CARES Act.

The fourth bill coming next will reportedly cost another $1 trillion, and include another payroll tax cut, a capital gains tax cut, the offer of 50-year Treasury bonds, and a safe harbor from liability for companies if and when employees get COVID-19 on the job.

All the COVID-19 related bills so far show a bipartisan attempt to help Americans without engendering an undue burden of liability on businesses. While the macroeconomic picture created by these bills raises concerns of government debt burden, the future scenario for businesses is promising. Thanks to the bipartisan spending bills, companies have a fighting chance to sustain themselves and get back to business once the COVID-19 pandemic passes, when they can once again deliver American ingenuity under the wise guidance of boards.

Come 2021, and following fall elections, Congress could return to a regulatory mindset, but for now the focus is where it should be: setting up the economy for a strong comeback.