While the PPP loans have provided necessary working capital for many businesses to survive the economic impacts of Covid-19, as those funds have been used and payment deferrals have expired, companies are looking to enter into M&A transactions. When a company has a PPP loan the M&A process is further complicated for the company and its lender.
On October 2, 2020 the SBA issued a Procedural Notice to provide guidance on the notification and consent requirements for changes in ownership of companies with PPP loans. The usual SBA 7(a) loan requirements are to obtain consent of the SBA prior to a lender approving a change in ownership. This October 2 guidance was meant to clarify what the SBA would expect specifically related to PPP loans and change of ownership.
First, let’s define change of ownership.
According to the guidance, change of ownership occurs when:
At least 20% of the common stock or other ownership interest of a PPP borrower is sold or transferred, whether in one or more transactions. This includes a sale or transfer to an affiliate or to an existing owner of the borrower.
The PPP borrower sells or transfers at least 50% of its assets in one or more transactions. The 50% of assets is based on market value.
The PPP borrower is merged with or into another entity.
Next, does the SBA need to approve the change of ownership?
The SBA will need to approve the change of ownership unless one of these three requirements are met.
1. The PPP loan has been fully satisfied, either having been:
a. Paid in full, or
b. Forgiven by the SBA, and the SBA has remitted payment to the lender, and any unforgiven amounts are paid in full.
2. In a stock sale or merger of 50% or more of the PPP borrower’s stock/ownership, the PPP borrower must:
a. Complete a loan forgiveness application showing the PPP borrower’s use of all loan proceeds,
b. Submit the forgiveness application to the lender,
c. Place the full amount of the PPP loan in an interest bearing escrow account controlled by the PPP lender.
3. In an asset sale of 50% or more of the PPP borrower’s assets, the PPP borrower must:
a. Complete a loan forgiveness application showing the PPP borrower’s use of all loan proceeds,
b. Submit the forgiveness application to the PPP lender,
c. Place the full amount of the PPP loan in an interest bearing escrow account controlled by the PPP lender.
The time required for the SBA to approve a change of ownership will result in many transactions requiring compliance with the guidance above.
Lenders may require that the escrowed funds be held by the PPP lender as the escrow agent.
What happens when a PPP borrower is contemplating the sale of the business or the sale of assets?
The PPP borrower must notify the PPP lender in writing of the transaction and provide copies of relevant documents.
The PPP lender is required to submit documentation of the transaction to the SBA within 5 business days of the closing of the transaction.
Despite the change of ownership, the PPP borrower is responsible for:
Performance of all obligations under the PPP loan,
Certifications made with the PPP application, including economic necessity, and
Continued compliance with PPP requirements.
If SBA consent is required for the ownership transfer, the PPP lender submits required documents to approve the ownership change to the SBA, and the SBA will have 60 days from receipt of required documents to act on the request to transfer ownership.
Now what?
Both PPP lenders and non PPP lenders to a company considering transferring ownership need to be aware of the requirements, including the escrowing of the full amount of PPP proceeds prior to a PPP loan being forgiven and funded by the SBA to the PPP lender.
This will complicate ownership transfer transactions, especially if the PPP lender and the secured lender are different parties.
Lenders and their advisors must exercise care when considering these ownership transfer transactions. Consequences could include:
Denial of loan forgiveness,
Ineligibility for loan forgiveness,
Acceleration of obligations under the PPP loan, and exercise of rights and remedies which could include setoff with bank accounts, and
Successor liability or fraudulent transfer risk.
Further clarifications and considerations.
The SBA continues to provide updated guidance related to the PPP loan program. This information is current, but as ownership transfer transactions present themselves, all lenders must be aware of the PPP loans and the current requirements. When a borrower is considering an ownership transfer, all lenders must be aware of the status of the PPP loans and compliance with the SBA’s ownership transfer requirements and the PPP loan forgiveness guidance.