CARES Act Attaches Long-Term Strings to Mid-Sized Business Loans

Date   Mar 28, 2020

Executive Summary: On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Stability (CARES) Act providing roughly $2 trillion in economic relief in response to the COVID-19 outbreak. In an effort to provide liquidity to businesses affected by the COVID-19 outbreak and to encourage those employers to keep a large portion of their employees on the payroll, the newly enacted legislation creates a lending fund for industries and cities, including assistance to severely distressed sectors of the economy such as airlines. Employers with between 500 and 10,000 employees are potentially eligible for low-interest loans, but these loans establish significant restrictions that apply during the term of the loan or longer, which include:

  • Limits on executive compensation;
  • A prohibition on stock buybacks;
  • A prohibition on paying dividends: and
  • A requirement to remain neutral in union organizing campaigns.

Direct Lending Under the Emergency Relief and Taxpayer Protections Provision

The CARES Act makes available $454 billion for loans and loan guarantees in an effort to provide liquidity to businesses, states, and municipalities. One method through which the act provides this liquidity is an assistance program through which “mid-sized businesses” can obtain a loan from private lending entities guaranteed by the federal government. Loans authorized through this provision are available to employers with between 500 and 10,000 employees, are subject to an annualized interest rate no higher than 2%, and provide for no interest or principal payment for at least the first six months after the loan is made.

This loan also comes with extensive strings attached, affecting both the manner in which the business interacts with its stockholders and how the employer interacts with existing unions or unions attempting to represent its employees. As a condition precedent to receiving this type of loan under the CARES Act, an eligible borrower must make a good-faith certification that:

  • The loan is necessary for and will be used to support the employer’s ongoing business operations due to the current uncertain economic situation;
  • The funds received through the loan will be used to retain at least 90% of the employer’s workforce, with full compensation and benefits, until September 30, 2020;
  • The employer intends to restore no less than 90% of the employer’s workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers no later than four months after the date on which the currently-declared public health emergency terminates;
  • The employer is an entity or business that is domiciled in the U.S. with significant operations and employees located in the U.S.;
  • The employer is not currently in bankruptcy proceedings;
  • The employer is created or organized in the U.S. or under the laws of the U.S., and has significant operations and a majority of its employees based in the U.S.;
  • The employer will not pay dividends on its common stock, or engage in any stock buybacks for the employer’s or its parent company’s stocks listed on a national securities exchange during the term in which the loan is outstanding (unless obligated to do so under the terms of an existing contract);
  • The employer will not outsource or offshore jobs for the term of the loan and for two years after completing repayment of the loan;
  • The employer will not abrogate an existing collective bargaining agreement for the term of the loan and two years after completing repayment of the loan; and
  • The employer will remain neutral in any union organizing effort for the term of the loan.

In addition to these good-faith certifications, the borrowing employer must also make a separate agreement that, until one year after the date on which the loan is no longer outstanding:

  • It will not engage in a stock buyback of its own stock or that of its parent company (unless required under a pre-existing contract);
  • It will not pay any dividends or make other capital distributions on its common stock;
  • No officer or employee whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) will:
    • Receive a total compensation that exceeds the total compensation received by the same officer or employee received in calendar year 2019; OR
    • Receive severance pay or other benefits upon termination of employment that exceeds twice the maximum total compensation received by the same officer or employee in calendar year 2019; and
  • No officer or employee whose total compensation exceeded $3 million in calendar year 2019 may receive total compensation in excess of the sum of:
    • $3 million, and
    • 50% of the compensation received over $3 million from calendar year 2019.

In calculating these restrictions, “total compensation” is defined to include salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee. Further, note that, despite conflicting terms between the separate agreement and the good-faith certification, the employer must agree to a moratorium on stock dividends and buybacks for a period of one year following repayment of the loan.

If you have any questions regarding this Alert, please feel free to contact the author, Paul Beshears, a partner in FordHarrison’s Atlanta office, at Of course, you may also contact the FordHarrison attorney with whom you regularly work.

FordHarrison is closely monitoring the spread of Coronavirus and has implemented continuity plans, including the ability to work remotely in a technologically secure environment when necessary, to ensure continuity of our operations and uninterrupted service to our clients. We are following all CDC guidelines and state and local laws as applicable. We are committed to ensuring the health and welfare of our clients, employees, and communities while continuing to provide our clients with the highest quality service. Please see our dedicated Coronavirus Taskforce page for the latest FH Legal Alerts and webinars on Coronavirus, as well as links to governmental and industry-specific resources for employers to obtain additional information and guidance. Additionally, links to shelter in place mandates issued by states and major municipalities are available on the Taskforce page, here. For more information or to be connected with a Coronavirus Taskforce attorney, please contact