SBA Issues New Guidance for M&A Transactions and PPP Loans

On October 2, 2020, the Small Business Administration (“SBA”) issued SBA Procedural Notice 5000-20057 (“Notice”). The Notice provides information concerning required consents and procedures for certain equity and asset sale transactions involving a target that received Paycheck Protection Program (“PPP”) funds (the “Target”).

These consents and procedures are not applicable to Targets which have (1) paid off their PPP loan in full and/or (2) successfully completed the loan forgiveness process and the PPP lender has received funds from the SBA for forgiveness.

Defining a Change of Ownership

For purposes of the PPP, a “change of ownership” is triggered when any of the following occur:

  1. The sale/transfer of at least 20% of the ownership interest of the Target (including a publicly traded entity), whether in one or more transactions and aggregating any transfers since approval of the PPP loan, including to an affiliate or an existing owner of the Target. This would apply whether the transaction is structured as a merger or a sale of equity.
  2. The sale/transfer of at least 50% of the Target’s assets (measured by fair market value), whether in one or more transactions.
  3. A Target is merged with, or into, another entity.

Notices and Required Consents

  1. Required Notice to PPP Lender. If a transaction or series of transactions results in a change of ownership (as determined above), the Target must notify the PPP lender in writing of the contemplated transaction (prior to close of such transaction) and provide the PPP lender with a copy of the proposed transaction agreements.
  2. Required Consents. In addition to providing the above notice, the consent of the PPP lender or the SBA will be required in certain cases as described below:
    • Transactions Requiring Only PPP Lender Consent. Change of ownership transactions meeting the following criteria will require the consent of the PPP lender (but not the SBA):
      1. 50% or less of Target’s equity changes hands – any transfers of 50% or less of the equity of the Target (calculated on an aggregate basis with other transactions since the loan approval);
      2. More than 50% Target’s equity changes hands – any transfers of greater than 50% (calculated on an aggregate basis with other transactions since the loan approval), where:
        1. Target submits a complete forgiveness application to the PPP lender before the transaction closes; and
        2. The parties escrow (in an interest-bearing account) the outstanding balance of the PPP loan (unclear if this is principal or principal plus possible interest) with the PPP lender at closing.  After the forgiveness process (including any appeals) is completed, the escrow funds will be disbursed first to repay amount of the PPP loan balance plus interest that wasn’t forgiven and then the balance will be paid to the Target.
      3. Asset Sales (i.e., sales of 50% or greater of the assets (measured by fair market value)) if the same requirements for a transfer of more than 50% of the Target’s equity are satisfied.

       3. Transactions Requiring SBA Approval. If a change of ownership transaction does not fall into one of the above scenarios requiring only PPP lender approval, prior SBA approval of the transaction is required. To obtain SBA approval, the PPP lender must submit the request to the applicable SBA Loan Servicing Center and include the following:

(i) the reason that the Target cannot pay off the PPP loan in full or escrow funds as described above;

(ii) the details of the requested transaction;

(iii) a copy of the executed PPP note;

(iv) any letter of intent and the purchase or sale agreement setting forth the responsibilities of the Target, seller (if different from the Target), and buyer;

(v) disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

(vi) a list of all owners of 20 %or more of the purchasing entity.

The SBA will review and provide a determination within 60-calendar days of receipt of a complete request.

Additional Considerations

  1. Target is Still Liable for the Loan. Even following any change of ownership, the Target remains responsible for (1) all obligations under the PPP loan; (2) the certifications made in connection with the PPP loan application; (3) compliance with all other applicable PPP requirements; and (4) obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or to the SBA upon request.  In addition, if the new owner(s) following the change of ownership use PPP funds for unauthorized purposes, the SBA will have recourse against the owner(s) for unauthorized use. 
  2. Existing Buyer PPP Loans. If the buyer, or the successor arising from such a transaction, has a separate PPP loan, then following consummation of the transaction (1) in the case of a stock deal/merger, the Target and the new owner(s) must segregate and delineate PPP funds and expenses and provide documentation to demonstrate compliance with PPP requirements by each Target and (2) in the case of a merger, the successor must segregate and delineate PPP funds and expenses and provide documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.
  3. SBA 7(a) Loans. In cases where the change of ownership transaction is financed in whole or in part with an SBA 7(a) loan, all SBA loan program requirements must be met, and no escrowed funds can be used with proceeds from a 7(a) loan.

If you have additional questions or want to discuss this new guidance, please reach out to a member of our Corporate practice group for assistance.

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