Emerging Markets Law

PPP Loans and Changes of Ownership: Considerations for M&A Transactions

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On October 2, 2020, the Small Business Administration (SBA) issued a Procedural Notice to provide information concerning required procedures for a “change in ownership” of an entity that has received a paycheck protection program (PPP) loan.  Prior to issuance of this Procedural Notice, the SBA regulations that govern PPP loans did not expressly address asset acquisitions/sales or even provide a detailed definition of “change of ownership” for borrowers.  Further, while most PPP loan documents required the PPP lender to consent prior to a “change of ownership,” the term “change in ownership” was not defined.  This lack of guidance and undefined language in the PPP loan documents left PPP borrowers who wanted to accomplish an asset acquisition/sale, sale of common stock or ownership or merger at risk of defaulting on their PPP loan covenants, which would require immediate repayment of their PPP loan.

“Change in Ownership” Defined

The SBA Procedural Notice defines “change of ownership” to mean when (i) at least 20% of common stock or ownership interest of a PPP borrower is sold or transferred (whether in one or more transactions since the date of approval of the PPP loan), including to an affiliate or existing owner; (ii) the PPP borrower sells or transfers at least 50% of its assets (whether in one or more transactions since the date of approval of the PPP loan); OR (iii) the PPP borrower is merged with or into another entity.

Requirements for a “Change in Ownership” M&A Transaction

Prior to closing of any “change of ownership” transaction as identified above, in which the PPP loan has not been repaid in full or the loan forgiveness process has not been completed, the PPP borrower must notify the PPP lender of the transaction and provide the PPP lender with a copy of the proposed agreements and other documents that would effectuate the proposed transaction. 

Further, regardless of the requirements for any “change in ownership” situation (as further discussed below), the Procedural Notice states the PPP borrower remains responsible for performance of all obligations of the PPP loan, certifications made in connection with the PPP loan, compliance with PPP requirements and for obtaining, preparing and retaining all required PPP forms and supporting documentation and providing those forms and documents to its PPP lender and/or the SBA upon request.   

Sale or Transfer of Stock or Ownership Interest and Merger

With respect to a “change in ownership” transaction for a sale or transfer of stock or ownership interest, only PPP lender consent is required (not SBA consent or approval) if the sale or transfer of stock or ownership interest is for 50% or less of the common stock or ownership interest.  In the event of the sale or transfer for greater than 50% or in the event of a merger, a PPP borrower can still avoid the requirement of SBA consent or approval if a PPP borrower completes and submits a forgiveness application reflecting use of ALL of the PPP loan proceeds, with any requested supporting documents, to the PPP lender AND establishes an interest-bearing escrow account (controlled by the PPP lender) with funds equal to the outstanding balance of the PPP loan (with the escrowed funds only to be disbursed upon the final determination of forgiveness).

Sale or Transfer of Assets

In the event a PPP borrower desires to sell 50% or more of its assets, SBA consent or approval is not required (only PPP lender consent is required) if the PPP borrower completes and submits a forgiveness application reflecting use of ALL of the PPP loan proceeds, with any requested supporting documents, to the PPP lender AND establishes an interest-bearing escrow account (controlled by the PPP lender) with funds equal to the outstanding balance of the PPP loan (with the escrowed funds only to be disbursed upon the final determination of forgiveness).

Resulting Multiple PPP Loans

In the event any new owners or the successor resulting from a “change of ownership” has a separate PPP loan, then in the case of a sale or transfer of common stock or ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance for each PPP borrower.  In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with respect to both PPP loans.

SBA Approval/Consent Required

If a PPP borrower does not meet the conditions above in connection with a “change of ownership” transaction, the SBA’s prior approval/consent is required.  To obtain SBA prior approval the PPP borrower must submit a request to their PPP Lender, who will then submit such request to the SBA, providing: (i) the reason the PPP borrower cannot satisfy (pay in full) the PPP Note or escrow funds as required above; (ii) details of the proposed transaction; (iii) a copy of the executed PPP Note; (iv) any letter of intent or purchase or merger agreement setting forth the responsibilities of the PPP borrower, seller and buyer; (v) disclosure of whether the buyer has an existing PPP loan (and SBA loan number); and (iv) a list of all owners of 20% or more of the purchasing entity. The SBA may make a determination of risk mitigation measures as a condition of approval.  Additionally, SBA approval of any “change in ownership” involving a sale of 50% or more of the assets will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan.  Finally, the SBA will have sixty (60) calendar days to review and provide a determination when SBA consent is required.

Action Items

For any “change in ownership” transaction, businesses should seek the assistance of legal counsel for compliance to ensure the appropriate consent is obtained and specific terms are included in the transaction documents. Further, businesses should be mindful that multiple small “change in ownership” transactions over the period of time from approval of a PPP loan until forgiveness (including to affiliate entities or existing owners) can trigger a “change in ownership” as defined by the SBA. Corporate governance and accounting is critical and should be well documented until your PPP loan has been forgiven.  Finally, with the Procedural Notice being provided for informational purposes, additional hurdles/requirements, such as making the PPP borrower escrow some amount of interest payments on the Note/loan, may be required by a PPP lender.

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