On April 23, 2020, the Small Business Administration (the “SBA”), in consultation with the Department of the Treasury, published updated Frequently Asked Questions that included one new provocative Q&A about limitations on the types of borrowers that may be eligible for a loan under the Paycheck Protection Program (the “PPP”) issued under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On April 24, 2020, the SBA also issued additional Interim Final Rules regarding the PPP related to promissory notes, authorizations, affiliation and eligibility.
The SBA explicitly calls attention to one of the certifications that must be made in order to apply for a PPP loan. Specifically, a borrower is required to certify in good faith that, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
According to the SBA, borrowers are required to consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business.”
Publicly-Traded Companies – Much of the press has been focused on the impact that this new guidance has on publicly-traded companies and it is likely that this guidance was issued in response to the uproar in the press about public companies taking advantage of PPP loans (for example, Shake Shack, with a market cap of over $2.0 billion and having just raised approximately $150 million in mid-April). In fact, the SBA uses public companies as an example in the new guidance, concluding that it is “unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
Because of the specific discussion of publicly-traded companies, we recommend that public companies who have utilized PPP consider whether they should take remedial action in light of this new guidance (discussed more fully below). Furthermore, public companies seeking funding under the newly passed program should seriously consider the required certification and potential public relations consequences.
Large Private Companies – Although the press has been focused on publicly-traded companies, the guidance could be interpreted by the SBA to also apply to large private companies. In fact, the wording of the question itself hints at this more expansive interpretation, asking, “[d]o businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” Read expansively, the SBA could conclude that a private company with material cash on its balance sheet to operate for an extended period of time does not meet the certification standards.
The SBA also cautions that, “[a]lthough the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere … borrowers still must certify in good faith that their PPP loan request is necessary.”
Unfortunately, there is a lot of grey area in this new guidance as it relates to large privately owned businesses especially in light of the fact that the CARES Act explicitly suspends the requirement that borrowers must be unable to obtain credit elsewhere. For example, how much liquidity is “adequate” in light of the uncertainty around the Covid-19 pandemic? How many months of liquidity is needed before you cross the line from not adequate to adequate? Further guidance addressing these and other questions would be helpful but is unlikely to come in time for companies to take remedial action. As such, decisions must be made in light of imperfect information.
The SBA, recognizing perhaps that this new guidance is likely to be interpreted as more stringent than prior guidance, gives companies a grace period to repay loans. If a company repays a PPP loan in full by May 7, 2020, the company will be deemed to have made the required certification in good faith. This repayment provision was included in the Interim Final Rule that was issued on April 24, 2020.
We stand ready to assist companies in thinking through the impact of this new guidance.
Please contact Anthony S. DiSandro, Edward C. Renenger, Sunjeet S. Gill, Daniel J. Sobol or the Stevens & Lee attorney with whom you regularly work if you have questions or need assistance with this process.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
