What Does “Necessary” Mean in the Context of the Paycheck Protection Program (PPP)?
by Andrew Pardun on May 18th, 2020 in Business & Corporate Law
As a response to the novel Coronavirus (COVID-19), Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). As part of the CARES ACT, in conjunction with the Small Business Administration (SBA) and the United States Treasury, Congress introduced what is known as the Paycheck Protection Program (PPP) which provides funding for small businesses with 500 or less employees and which is designed to support small businesses in a time of great need. The primary purpose of PPP loans is to support payroll obligations of employers which is designed to incentivize employers to keep their employees employed and avoid furloughs or terminations. As part of the PPP loan application, Borrowers are required to make a certification that “current economic uncertainty makes this loan request necessary to support ongoing operations of the Applicant.” At the time that most companies applied for the PPP loan, this certification seemed like an obvious affirmative. However, in light of recent controversy surrounding large companies that have received PPP funding through subsidiaries or affiliates the idea of “necessary” has been put under a microscope.
As mentioned above, the PPP program was intended for small businesses with 500 employees of less. In the language and requirements of the program, however, there is wiggle room especially when the business is in the restaurant sector which allows companies to count only employees per location. Due to this ambiguity, large (even massive) publicly traded companies have applied for the PPP loan and have been funded. A few of the well-known names of companies that received PPP funding (according to Forbes) are:
- Shake Shack: $10 million
- Ruth’s Chris Steak House: $20 million
- Potbelly: $10 million
- Los Angeles Lakers: $4.6 million
- AutoNation: $77 million
After receiving PPP funds these companies have faced intense criticism and have been accused of taking advantage of a loan program that was meant for small businesses and not publicly traded giants or large corporations. Treasury Secretary Steven Mnuchin publicly criticized these companies stating that if they did not return the funds they would be subject to severe financial penalties and perhaps even criminal prosecution. In Treasury Secretary Mnuchin’s interview on CNBC on April 28, 2020 he stated that the Paycheck Protection Program Loans FAQs clearly indicates that these loans are NOT intended for large companies with significant alternative sources of liquidity and access to the public markets. As a result of the intense scrutiny and threat of prosecution many of these large giants have elected to return the funds they were granted to the SBA.
The fall out of the giants I have mentioned above have caused much confusion for actual small businesses. As stated above, at the time of the PPP loan application: which first launched on April 3, 2020, small businesses made a good faith certification that “current economic uncertainty makes this loan request necessary to support ongoing operations of the Applicant.” These companies are now being told (nearly a month after the loans were applied for) that if you took a PPP loan and you were not entitled to take a PPP loan, because it was not “necessary” (whatever that means) you may face draconian consequences such as criminal prosecution or financial penalty.
So in an effort to shed some light on a very ambiguous and convoluted topic I will now take a look at the little guidance we have from the United States Treasury. The United States Treasury has a document referred to as the PAYCHECK PROTECTION PROGRAM LOANS FREQUENTLY ASKED QUESTIONS (FAQs) that seems to be the working guidebook for the PPP. Number 31 on the FAQs, which was published on April 23, 2020 (20 days after the PPP was launched) seems to provide guidance for the companies I mentioned above. This paragraph states:
Question: Do Businesses Owned by Large Companies With Adequate Sources of Liquidity to Support the Business’s Ongoing Operations Qualify for a PPP Loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account 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 the business. For example, 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, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
On April 28, 2020, the Treasury applied the above guidance to private companies when it released #37 which states:
Question: Do Businesses Owned by Private Companies With Adequate Sources of Liquidity to Support the Business’s Ongoing Operations Qualify for a PPP Loan?
Answer: See response to FAQ #31.
Now, if you have read the above and you are saying: “well now I am really confused,” welcome to the club. What constitutes “necessary” under the Treasury guidelines is simply not well settled. We recommend that businesses take a close look at their access to liquidity and determine if economic uncertainty makes the PPP loan necessary to support ongoing operations. The real issue is that companies do not know what the next for months (or years) for that matter will have in store. Therefore, at the time they applied for the loans the answer to this question was unclear and without a doubt, it remains unclear today.
If you have any questions or need help with PPP Loans, contact the business attorneys of Battaglia, Ross, Dicus & McQuaid, P.A. today.