SBA advises PPP loan borrowers on M&A transactions | Murtha Cullina


The Paycheck Protection Program (“PPP”) created under the CARES Act has brought much-needed economic relief to businesses and other organizations adversely affected by the COVID-19 pandemic. However, until recently, PPP borrowers with outstanding PPP loans were unsure how their creditworthiness and ability to obtain credit forgiveness might be affected by transactions such as sale of interests, mergers, restructurings, repurchase and sale of assets . This lack of clarity often resulted in transaction delays, raised concerns about the PPP eligibility of loans and loan forgiveness after those transactions, and in some cases resulted in borrowers repaying their PPP loans rather than risking a breach of the law.

On October 2, 2020, the Small Business Administration (“SBA”) issued a SBA Procedural Note 5000-20057 (the “SBA Notice”), which provides information on the procedures required for a change of ownership of a company that has received a PPP loan and the framework for determining whether prior SBA approval is required for a change of ownership of the borrower company.

According to the SBA Notice, a “change of ownership” is deemed to have occurred when (1) at least 20% of the common stock or other interest in ownership of a PPP Borrower is sold or otherwise transferred, (2) the PPP Borrower’s assets are at least 50% (as measured on fair value) sold or otherwise transferred; or (3) the PPP Borrower merges with or into another entity. All sales and other transfers that have occurred since the date of approval of the PPP Loan must be aggregated for purposes of this provision.

The SBA Notice states that in all cases prior to the completion of any title change transaction, the PPP Borrower must notify the PPP Lender in writing of the proposed transaction and provide the PPP Lender with a copy of the proposed agreements or other documents the proposed transaction would carry out . The SBA notice also states that if the PPP loan is fully satisfied prior to the closing of the transaction, there are no restrictions on a change of ownership. This can be achieved through full repayment of the PPP loan or through a combination of loan forgiveness and repayment of any unforgotten amount. If the PPP loan is not fully satisfied, the change of ownership can only occur with the approval of the PPP lender (prior approval from the SBA is not required) if:

  1. The change of ownership will be structured as a sale or other transfer of common stock or other ownership interest, or a merger, and:
    1. The sale or other transfer is no more than 50% of the common stock or other ownership interest of the PPP Borrower; or
    2. The PPP Borrower submits a completed Forgiveness Application to the PPP Lender and establishes an interest-bearing escrow account, controlled by the PPP Lender, with funds equal to the outstanding PPP loan balance.
  2. Change of ownership structured as asset sale and: the PPP Borrower submits a completed Forgiveness Application to the PPP Lender and establishes an interest-bearing escrow account, controlled by the PPP Lender, with funds equal to the outstanding PPP loan balance.

Transactions that do not meet the conditions of (i) or (ii) above require the prior approval of the SBA for the change of ownership prior to closing. To obtain pre-approval from the SBA, the PPP lender must submit an application to the SBA that includes the following information:

  1. the reason why the PPP Borrower is unable to fully meet the PPP Loan or Trust Funds;
  2. the details of the transaction;
  3. a copy of the executed PPP promissory note;
  4. any letter of intent and contract of sale or sale setting out the responsibilities of the PPP Borrower, the Seller (if not the PPP Borrower) and the Buyer;
  5. Disclosing whether the buyer has an existing PPP loan; and
  6. a list of all owners of 20% or more of the buyer.

The SBA’s approval of a change of ownership that involves the sale of 50% or more of a PPP Borrower’s assets will be conditional on the acquiring entity assuming all of the PPP Borrower’s obligations under the PPP Loan. In such cases, the purchase or sale agreement must contain language regarding the buyer’s assumption of the PPP borrower’s obligations under the PPP loan, or a separate assumption agreement must be filed with the SBA.

In the event of any sale or other transfer of common stock or other ownership interest or merger, whether or not the sale requires the prior approval of the SBA, the PPP Borrower (and, in the event of a merger of the PPP Borrower with another company, the successor of the PPP Borrower) remain subject to all obligations under the PPP Loan. In addition, if either of the new owners or the successor has a separate PPP loan, then after the closing of the transaction: (1) in the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new(s) Owners are responsible for the segregation and segregation of PPP funds and expenses and for providing documentation demonstrating each PPP Borrower’s compliance with PPP requirements, and (2) in the event of a merger, the successor shall be responsible for segregation and segregation of PPP responsible for funds and expenses and providing documentation demonstrating compliance with PPP requirements in relation to both PPP Loans.

Regardless of any change of ownership, the PPP Borrower remains responsible for (1) the fulfillment of all obligations under the PPP Loan, (2) the certifications made in connection with the PPP Loan Application, including the Certification of Economic Need, and (3) compliance any other applicable PPP requirements. In addition, the PPP Borrower remains responsible for obtaining, preparing and maintaining all required PPP forms and supporting documents and making such forms and supporting documents available to the PPP Lender or SBA upon request.

The SBA Notice provides welcome guidance for companies with outstanding PPP loans and buyers wishing to acquire them by providing a template for obtaining PPP lender and SBA approvals, if required, for these transactions. Notwithstanding the SBA notice, however, a number of questions remain, including the standards that PPP lenders should adopt with respect to requests for a change of ownership and whether the SBA notice will apply to changes of ownership made prior to its release on October 2, 2020 have taken place. The SBA Notice also adds another layer of complexity to an already complicated business environment for PPP borrowers and the maze of PPP rules, regulations and procedures they must comply with.

The SBA notice expires on October 21, 2021.

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