Companies considering a merger, acquisition, or sale of assets have worked with lenders to determine what consents, if any, may be required for a Paycheck Protection Program (PPP) loan. In the absence of guidance from the US Small Business Administration (SBA), M&A attorneys have structured business in various ways to maximize the convenience of their clients. Finally, on October 2, 2020, the SBA issued guidelines to lenders on what involvement, if any, from the SBA or the PPP lender is required if a PPP borrower enters into a transaction that results in a change of ownership. These guidelines address several issues PPP borrowers and lenders have struggled with over the past few weeks and provide clarity on what to expect when SBA approval is required and what the approval process involves. These guidelines are particularly applicable to PPP borrowers (and their lenders) who are considering stock-based financing, mergers, stock sale transactions, reorganizations, or asset sales while a PPP loan is pending.
The new guidance clarifies that a “change of ownership” for PPP loan purposes means:
- At least 20% of the borrower’s common stock or equity will be sold or transferred in one or more transactions (including to an affiliate or other existing owner).
- the sale or transfer of at least 50% of the borrower’s assets in one or more transactions; and
- the merger of the borrower with or into another company.
When a borrower changes ownership In front either The PPP loan has been repaid in full or the PPP loan has been granted with the funds transferred to the PPP lender. then prior approval from the PPP lender and, in certain circumstances, the SBA is required.
Situations where just PPP lender approval (rather than SBA approval) for a change of ownership is required as follows:
- if the change of ownership is structured as a transfer of equity or a merger and involves the sale or transfer of 50% or less of the common stock or other ownership interest of the borrower, or
- if the borrower submits a full loan application before closing and sets up an escrow account with an amount equal to the balance of the PPP loan with the PPP lender as collateral for any amounts that are not granted.
Both PPP lender and SBA approval are required for a change of ownership transaction that does not meet any of these criteria. To obtain approval from the SBA, the PPP lender must provide the SBA with certain information, including:
- why a PPP borrower cannot repay the loan or deposit the funds;
- the details of the transaction and a copy of the applicable letter of intent or proposed definitive agreement for the transaction setting out the borrower’s obligations;
- whether the buyer has an existing PPP loan; and
- a list of all owners of 20% or more of the buyer’s equity.
The SBA guidelines state that in situations where SBA approval is required, the SBA will review and make a determination within 60 calendar days of receiving a full request.
Note that even in situations where only the approval of the PPP lender and not the approval of the SBA is required prior to closing, the PPP lender will still need to provide the SBA with information about the transaction, including the identity of the new one Owners and their percentage of ownership, tax ID numbers of all owners of more than 20% of the company’s equity, and the location and amount of funds in the escrow account, if required.