On March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection & Innovation, with the Federal Deposit Insurance Corporation (FDIC) appointed as receiver.

The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and transferred to the DINB all insured deposits of SVB. This temporary measure protects insured depositors and gives depositors access to their insured deposits (up to $250,000 per depositor). The treatment of deposits in excess of that, however, has not been clearly addressed in the FDIC’s announcements. Until further information from the FDIC becomes available, there is uncertainty around the ramifications of the receivership for SVB customers.

Below are key takeaways and practical insights—including on urgent employment and public company disclosure matters and fraud risks—based on information currently known.

When will I be able to access the funds in my SVB deposit accounts, and how much will I be able to access?

The FDIC has initially frozen withdrawals, but has announced that SVB depositors will be able to access $250,000 in insured deposits on Monday, March 13. According to the FDIC, banking activities will resume no later than that date, including online banking and other services.

There is uncertainty around when or in what amount uninsured depositors will be paid, although the FDIC has stated that it will pay an advance dividend within the next week representing a percentage of the customer’s deposits. The exact percentage and timing remain unknown.

Uninsured depositors will receive a receivership certificate for the remaining balance of their uninsured deposits that entitles them to share proportionately in the proceeds as SVB’s assets are liquidated.

At this point, the FDIC has not announced any specific process with respect to uninsured deposits. We expect that the FDIC will provide more specific guidance in the coming week.

What is expected to happen next?

It is possible that the FDIC is seeking another bank to acquire the assets and liabilities of SVB. However, there are no assurances that this will be the case here. We expect further information to be made available by the FDIC between now and Monday.

Can I use credit cards issued by SVB?

Our understanding is that credit cards are not functioning at this time.

I have sweep account arrangements that “sweep” excess cash in my deposit account and invest such excess cash in money market mutual funds. How are these treated compared to deposit accounts?

If these money market mutual funds are held at a third-party financial institution, such as Blackrock or Morgan Stanley, they should not be subject to the receivership. However, it may take some time before these funds can be accessed. Many of our clients have been able to reach their relationship bankers at SVB to confirm the status of these arrangements.

I have an undrawn credit line with SVB. Will I still be able to borrow?

The FDIC has frozen all lines of credit and, at this time, they are not currently available to be utilized.

I have outstanding loans with SVB. Should I continue making my scheduled payments? What other steps should I take?

The FDIC has stated that borrowers should continue to make payments under their existing loan facilities. This can raise a number of fact-specific concerns for borrowers, so we recommend consulting with your Wilson Sonsini attorney to discuss.

Please keep in mind that it may be advantageous to keep in place your existing loan facility in the event that SVB’s assets are acquired by another bank, because it may be challenging to obtain a replacement financing on similar terms and conditions, given the current market environment.

Should I consider short-term bridge financing to address near-term liquidity issues?

In order for companies to satisfy near-term obligations, including payroll, it may be necessary or prudent for companies and boards to seek emergency bridge financing.

These transactions can be complex depending on the circumstances of the company and its capitalization table, including potential subordination and intercreditor issues if the company has outstanding debt or lines of credit.

Companies should also be mindful that investors may have their own liquidity issues, and timing of funding may be delayed even if investors are willing to bridge the company.

For this reason, discussions with investors about potential bridge financing and negotiations with respect to potential terms should begin immediately if it is determined that it may be necessary or prudent to raise additional financing in the near term.

As always, boards should be mindful of their fiduciary duties and should, with the assistance of counsel, document in their minutes and other records the factors that were considered in seeking the financing, including the emergency nature and necessity of the financing under the circumstances, and the process followed in exercising the board’s fiduciary duties. In addition, boards should review and address stockholder protective provisions, rights of first refusal, and other covenants and approvals that may be implicated.

Boards should also consider the appropriate investment instrument in light of the timing requirements and potential complexities, including intercreditor and subordination issues, as well as potential delays involved in obtaining approval. In most circumstances, given the timing concerns, it will likely be most efficient to fund emergency bridge financings of this nature with simple short-term non-convertible promissory notes or Simple Agreements for Future Equity (SAFEs), depending on whether the amounts will be repaid or not. In some cases, it may be appropriate to add covenants that the funds will be designated for a specific purpose (e.g., payroll) and that the funds may not be deposited with SVB without investor consent.

Please consult with your Wilson Sonsini attorney or any member of the firm’s corporate or corporate finance team for guidance on these matters, as even seemingly simple instruments can raise complex issues under these circumstances.

What should I know about and do if I do not have the funds to pay my employees?

SVB’s closure has created payroll challenges for many of its customers. We are hopeful that SVB depositors will have access to funds in excess of the $250,000 in insured deposits early next week; however, companies without access to the funds necessary to meet current and future payroll obligations should consider the following:

• Employers must pay earned wages on the days designated in advance as regular paydays. A failure to pay wages timely is a violation of state and federal law. Rescheduling the payroll date (for example, in California and Massachusetts) typically requires giving employees advance notice of the change. 
• Some states assess penalties for the failure to pay wages on time. For example, in California, in addition to substantial penalties for failure to timely pay wages upon termination of employment, an employer may be penalized for failing to pay employees on time during the course of employment. Under state and federal law, employers may also owe interest on late-paid wages. 
• Employers must also pay timely federal and state payroll taxes. Fortunately, the California Employment Development Department has stated that it will waive penalties for payment of late payroll taxes for companies that did business with SVB. 
• Directors and officers face personal liability risks for unpaid wages under state and federal law. In general, the risk of personal liability for directors and officers is greatest in circumstances where an employer allows employees to work when it knows the company does not have sufficient funds to pay employees. Therefore, employers should carefully assess and monitor their ability to fund payroll on an ongoing basis. Moreover, where funding is in doubt, employers should take steps to establish that they have undertaken good faith efforts to ensure the timely payment of wages, and document those efforts. While unlikely in most cases, there also exists a risk of criminal prosecution for the willful failure to pay wages.
• Employers are strongly advised to prioritize satisfying payroll obligations with available funds. If existing funds are insufficient to meet accrued payroll obligations, employers should seek out other options to secure necessary funds, including seeking lines of credit and loans.
• Employers should communicate directly with employees about the situation and the employer’s efforts and plans to fulfill its payroll obligations.
• Employers should understand whether any insurance policies (e.g., employment practices liability insurance or directors and officers insurance) may be applicable to disputes arising from a failure to meet payroll obligations, and what indemnification rights exist for its officers and directors. 

If you are an employer that remains uncertain about your ability to pay employees for work that is to be performed, please consult any member of Wilson Sonsini’s employment law practice to discuss your company’s situation.

What should public companies disclose about this situation?

What public companies disclose about the effects of the SVB closure on their company, and when, is very fact specific to the company. We are consulting with many clients on potential disclosure, considering each company’s fact situation. Some common questions include:

• Are we required to disclose something at this time?
  Some companies may be obligated to disclose information about the impact of SVB’s closure on their liquidity and capital resources, as well as related risks, because, among other things:
  • They are filing an annual report on Form 10-K or quarterly report on Form 10-Q. The impact of SVB’s closure may trigger disclosure in financial statements, management’s discussion and analysis of results of operations and financial condition (MD&A), risk factors, and legal proceedings.
  • They are raising capital in a registered offering. The prospectus must not contain any material misstatements or omissions of material facts.
  • A Form 8-K requirement has been triggered, such as acceleration of a direct financial obligation under Item 2.04 or a material asset impairment under Item 2.06. (We note that such determinations may take some time to ascertain, and management teams and boards of directors should be sensitive to these potential requirements as additional information becomes available.)
• Even if not required to disclose something at this time, we see that a number of other companies are making public disclosures—should we? 
  On the day SVB was placed into receivership, many companies received phone calls from investors and other stakeholders, and a number of companies voluntarily filed Forms 8-K, typically under Item 7.01 or 8.01, or otherwise made Regulation FD-compliant statements, that they did not have any accounts at SVB or that the amounts held at SVB were not material. A smaller number disclosed specific amounts that were held at SVB. In determining whether to make a voluntary disclosure, companies may consider, among other things:
  • The general principle that there is not typically an affirmative duty to update the market outside of a required disclosure situation such as those named above.
  • If a company does speak voluntarily, the disclosure must not contain material misstatements or omit material facts. 
  • The company's specific desire to remove market uncertainty and efficiently communicate its situation to the market and investors.
  • The amounts held at SVB, and the resulting impact on liquidity. 
  • The ability to access liquidity from other resources and whether its existing cash and cash equivalents held at non-SVB sources and cash flow from operations will be sufficient to meet its working capital, capital expenditures, and material cash requirements from known contractual obligations for the next 12 months and beyond.
  • The significance of information not currently available and whether additional time before disclosure would permit the company to provide meaningful additional information.
• What are other considerations to think about?
  In addition to considering direct exposure to SVB, companies should consider whether they have indirect exposure, such as from customers, suppliers, service providers, or other sources, and acknowledge the uncertainty of the situation and potential systemic issues.

  Companies with direct exposure to SVB or with other impacts as a result of the SVB shutdown should consider whether to suspend use of shelf registration statements it may have available for at-the-market (ATM) facilities, equity lines of credit, or for selling stockholder resale of securities until appropriate disclosure can be made. If a company does suspend such registration statements, it should review applicable contractual provisions for notice requirements to potentially affected parties and whether suspension will also trigger any separate public disclosure.

This certainly is not a situation where one-size disclosure fits all. Given the fact-specific nature of any public disclosures made, please consult with your Wilson Sonsini attorney or any member of the firm’s public representation practice to discuss your company’s situation.

From a corporate governance standpoint, boards should be updated and should remain engaged to the extent possible, with their deliberations documented in minutes.

What wire transfer fraud risks should I be alert to?

In the wake of SVB’s closure, we expect a number of entities to begin establishing new bank accounts and updating wire transfer information. This creates opportunities for hackers and criminal organizations to introduce fraudulent wire transfer information in order to steal wire transfers. Failure to verify new wire transfer information prior to transferring money may be considered a failure of financial controls, and each year millions of dollars are lost to this type of fraud. Companies should keep the following information in mind if they are asked to wire money to a new bank account:

• Never accept new wire transfer information by email alone. Email accounts can be spoofed or hacked.
• Preferably, speak to someone you know by phone, on a phone number that you know and can verify, or by a video conference call. Keep in mind that some hackers have engaged in “vishing”—or voice phishing—and have pretended to be an individual in accounting or finance on the phone and verified fraudulent wire transfer information by phone.
• If you are unable to speak to someone you know, make sure that you are calling a verified phone number associated with the company that you are calling. Do not ask the individual to call you, and do not agree to call a phone number that you are not sure is associated with the company requesting to update the wire transfer information. Be very suspicious of anyone who states that they are traveling and are unable to talk by phone.
• If your company banked with SVB and is establishing a new account, make sure you send clear instructions to your vendors/partners/customers about how to verify that they have received the correct information through established channels.

The FBI has been able to stop fraudulent transfers identified within 72 hours of initiation, and we recommend that clients monitor closely and confirm very large transfers to new bank accounts within 24 hours of initiation.