By Teri Lindquist and Andy Smetana

On April 30, 2020, the Small Business Administration (SBA) and Department of Treasury released their seventh Interim Final Rule regarding loans under the Paycheck Protection Program (PPP). This Interim Final Rule is immediately effective, and a copy can be found here. This latest guidance from the SBA creates a $20 million cap on eligibility for borrowers that are part of a corporate group and would require them to withdraw or request cancellation of any loan applications that are in process that would cause the group’s aggregate amount of PPP loans to exceed $20 million. This does not impact PPP loans that were fully disbursed as of April 30.

Many PPP borrowers are businesses with 500 or fewer employees that would not have qualified for $20 million loans. However, some businesses were eligible to borrow $20 million or more pursuant to the terms of the CARES Act based on their historic payroll costs (as a reminder, the borrowing amount is calculated as 2.5 times the borrower’s average payroll costs). This would have included businesses that benefited from the waiver of the SBA’s “affiliation” rules that Congress provided in the CARES Act for franchises and businesses with an NAICS Code beginning with 72 (accommodation and food services business) that have 500 or fewer employees per location. Businesses that were otherwise eligible for PPP loans under the SBA’s “alternative minimum size” test and businesses that are in an industry with an NAICS Code that specified more than 500 employees could also be impacted by this new Interim Final Rule. For such businesses, including many that are struggling as a result of COVID-19, this is a significant development that could limit their ability to retain and pay their employees by limiting their borrowing amount under the PPP loans. For other businesses, this may be viewed as a welcome change that prevents additional PPP funds from being allocated to larger corporate enterprises.

WHO IS IMPACTED BY THIS NEW GUIDANCE?

The April 30 Interim Final Rule applies to single corporate groups, which are defined as businesses that are majority owned, directly or indirectly, by a common parent. This could include, for example, certain businesses that use state- or location-specific subsidiaries to mitigate risk or address regulatory requirements, if they are all majority owned by a common parent company. It is also possible that this could include companies that are under majority ownership by a common institutional investor, such as a private equity fund or other institutional investor.

The language of the Interim Final Rule includes some ambiguity that businesses will need to navigate. Notably, the Interim Final Rule does not refer to control, which is a concept used in the SBA’s “affiliation” rules. Instead, the Interim Final Rule refers to majority ownership by a common parent. For institutional investors with multiple funds, it is unclear whether a shared management structure (e.g., a management company that has dispositive and investment authority over all the investment funds) would be deemed to constitute ownership by a common parent; however, ownership can be distinguished from contractual management rights. Companies that have fallen under public scrutiny have included restaurant and hotel chains, such as Ruth’s Hospitality Group Inc. (parent of Ruth’s Chris Steakhouse restaurants)—which has pledged to return its $20 million in PPP loans—and Ashford Hospitality Trust and Braemar Hotels & Resorts, which reportedly applied for $126 million in PPP loans through various subsidiaries. It is unclear whether the new Interim Final Rule is intended to curb perceived abuses by such corporate groups or is also intended to limit borrowing for companies under common control by institutional investors.

The April 30 Interim Final Rule does not apply to loans that were fully disbursed as of April 30, 2020. Loan applications that are pending, or loans that have been approved but were not fully funded by April 30, are subject to the new Interim Final Rule. The guidance provides that, for PPP loans that have been partially disbursed, the limitation applies to any additional disbursement that would cause the total PPP loans to a single corporate group to exceed $20 million.

WHAT SHOULD AFFECTED BORROWERS DO NOW?

If your business is part of a single corporate group that is subject to this new Interim Final Rule, and you have a PPP loan that was not fully funded by April 30, you should communicate within your corporate group to confirm the amount of PPP loans that have been received by other members of the group. With this information, your corporate group will have the following options:

• If the aggregate amount exceeds $20 million, then you will need to contact your lender to withdraw or request cancellation of your PPP loan, even if the loan has already been approved by the SBA and your lender.
• If the aggregate amount does not yet exceed $20 million but would exceed $20 million if all other pending PPP loans were funded, then the corporate group will need to determine which loans to allow to proceed and which to withdraw or cancel. The Interim Final Rule did not provide any guidance regarding how to decide which loans to cancel and which to allow to proceed.

WHAT ARE THE OTHER CONSEQUENCES OF THIS RULE?

Under this Interim Final Rule, borrowers that do not comply with the new limitation on borrowing amount will be regarded as using the PPP loan proceeds for an unauthorized purpose. Under many lender promissory notes, this means that the borrower would be in default on their PPP loan, which would require repayment of the PPP loan and could trigger a cross-default if the borrower has other existing credit facilities in place. It would also disqualify the loan for forgiveness, eliminating one of the primary reasons that borrowers have turned to the PPP loans as a way to manage the current economic uncertainty.