The SBA Has a New Shake Shack Rule

Shake Shack, Ruth’s Chris and Potbelly set off a media firestorm last week when the three public restaurant companies announced they had received Paycheck Protection Loans (PPP) under the CAREs Act stimulus program for small businesses. Exemptions for large restaurants and hotel chains were built into program rules because of their multiple locations and large employment base, allowing them to receive substantial loan packages. When the PPP Program ran out of funds on April 16, media anger was directed to these public restaurant chains and other large enterprises that borrowed government funds.

Shake Shack announced on April 17 that it borrowed $10 million under the PPP, while Ruth’s Hospitality Group was able to take advantage of two Employer Identification Numbers and borrowed $20 million. After the media criticism, Shake Shack then announced in a letter from Chairman Danny Meyer and CEO Randy Garutti, that the 280-unit restaurant chain was returning the $10 million loan to the Treasury. 

Ruth’s Chris is still on the hot seat. Business Insider reported that 150,000 people had signed a petition as of April 21, asking the company to give back the $20 million. Yahoo reported yesterday that more than 200,000 have now signed the petition. Ruth’s Chris reported on March 30, that it had drawn down $30 million under its existing credit and as of March 27, had approximately $71.5 million of cash on hand. According to a published report, Ruth’s business has definitely been impacted by the Covid-19 shutdowns. It is offering a to-go menu in 61 company locations and has temporarily closed 23 restaurants.

The SBA and Treasury Department now have their eye on public companies that take down PPP loans and yet, may still have access to other sources of liquidity. In an update of the Paycheck Protection Loan FAQ’s on April 23, the SBA and Treasury made it clear that 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 "[c]urrent 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. 

As for public companies, they must be especially careful. This from SBA and Treasury’s new rules:

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. 

The SBA and Treasury offer a way out for businesses that really didn’t need the liquidity: 

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.

 

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