The only certainty, so far in 2020, has been uncertainty. For traders and their advisers, this is not a useful observation when trying to close deals, often despite the vicissitudes of 2020. The Small Business Administration (SBA) Paycheck Protection Program (PPP) is an example of potential danger in the form of a gift. These PPP loans have been vital lifesavers for many borrowers during the height of the COVID-19 pandemic earlier this year, and the SBA reports that more than 5 million PPP loans have been extended. As the appetite for mergers and acquisitions grows, PPP borrowers and their potential acquirers, as well as their respective advisers, question whether the SBA should consent to a transaction that would result in a change in ownership of a PPP borrower, a case default in many, if not most, PPP loans.

Fortunately, the SBA has published advice indicating when PPP borrowers can change ownership (i) without the consent of their PPP lender or SBA, (ii) with only the consent of their PPP lender, or (iiii) with the consent of the SBA. This alert summarizes when consent is required for transactions in which a change in ownership of a PPP borrower occurs and then consent is required. As a preliminary matter, the SBA has determined that a “change in ownership” occurs with respect to a PPP borrower when (i) at least 20% of the equity of the PPP borrower (including a listed entity in stock Exchange)¹ is transferred, whether in a single transaction or as a result of multiple transactions since the date of approval of the PPP loan and taking into account transfers to affiliates or to an existing owner of the PPP borrower; (ii) at least 50% of the PPP borrower’s assets (measured by fair market value) are transferred, either in a single transaction or under multiple transactions since the date of approval of the PPP loan; or (iii) the PPP borrower is merged with or into another entity. If a transaction does not result in a change of ownership such as

¹ The SBA clarified that only transfers resulting in a person holding 20% ​​or more of the equity of a publicly traded PPP borrower need to be aggregated to determine whether 20% or more of the equity has been transferred.

contemplated in the guidelines, unless there are conflicting or additional requirements set out in the PPP borrower’s loan documentation, the SBA’s opinion does not require consent.

In the event that a PPP borrower is considering a change of ownership, he must inform his PPP lender in writing of the proposed transaction and provide the lender with all documentation relating to the transaction. However, depending on the status of the PPP loan and the details of the proposed transaction, the specific rules applicable to the PPP borrower will differ. In all cases, the PPP lender is required to notify the SBA within five business days of closing a transaction resulting in a change in ownership of a PPP borrower.

If the PPP borrower’s PPP loan is fully satisfied, no approval is required.

The SBA has provided that no restrictions apply to a change in ownership of a PPP borrower as long as, prior to the closing of the contemplated transaction, that borrower has:

• fully repaid the PPP loan Where
• completed the loan cancellation process and either (A) the SBA has returned the funds to the lender in full satisfaction of the PPP loan or (B) the borrower has repaid the remaining balance of the PPP loan.

Simply put, if all PPP loan amounts have been canceled or repaid, the PPP borrower should be able to effect a change of ownership without the approval of the PPP lender or the SBA. A full discount and / or refund is therefore ideal, but it is understandable that parties are unwilling (or impossible) to delay closing a transaction for the time necessary for it to happen.

Only a PPP lender can approve a change of ownership in certain equity transactions or if an escrow account is established to repay the PPP loan.

If the proposed transaction resulting in a change of ownership is structured as a capital transfer or a merger, the PPP borrower may close without the approval of the SBA if the transaction results in the transfer of 50% or less of the interests in the borrower PPP. Presumably, the PPP lender will need sufficient documentation to confirm the details of the transaction.

For any other contemplated transaction resulting in a change in ownership of a PPP borrower, whether through a capital transfer, merger or asset sale, the transaction can be completed without SBA approval only if:

• The PPP borrower has used 100% of the proceeds of the PPP loan;
• The PPP borrower completes and submits to his lender the PPP loan forgiveness request, as well as all the required documents;
• An interest-bearing escrow account controlled by the PPP lender is established, into which an amount equal to the outstanding balance of the PPP loan is deposited; and
• At the end of the remittance process (including any administrative remedies), escrow funds must first be disbursed to repay the remaining PPP loan balance, plus interest.

The SBA guidelines do not require the PPP borrower to provide the funds for the escrow account. Presumably, the parties to a transaction that would result in a change in ownership of a PPP borrower can share the account funding burden as needed to achieve closing. This escrow account path will also undoubtedly be useful to parties and their advisers in the initial stages of proposing terms of the agreement and drafting documentation.

The Last Resort: SBA Approval

SBA approval is only required if it is not possible to fully repay the PPP loan prior to closing or to (i) structure the transaction as a transfer of 50% or less of the PPP borrower’s ownership interest or (ii) comply with the escrow account procedure described above. Parties falling into this category will still need to work with the PPP lender, who will submit the request for approval to the SBA.

The ASB’s request for approval for a change of ownership must include:

• The justification (s) for which the PPP borrower cannot fully repay the PPP loan or open an escrow account;
• A description of the proposed transaction, as well as any letter of intent or other transaction document outlining the responsibilities of the PPP borrower;
• A copy of the PPP loan note;
• Indicate if the buyer has an existing PPP loan and, if so, provide the SBA loan number; and
• A list of all owners with a 20% or more interest in the buyer.

The SBA must render a decision within 60 days of receiving a completed application. Note that the SBA guidelines clearly provide that the SBA may make its approval conditional on “risk mitigation measures” designed to ensure that the PPP loan balance will be repaid. For example, the SBA opinion provides that, if applicable, the approval by the SBA of an asset transaction resulting in a change of ownership will be conditional on the buyer assuming the obligations of the PPP borrower under the PPP loan, and the transaction documentation should include wording regarding this assumption. (unless a separate support agreement is submitted to the SBA).

Buyers or successors should ensure that their own PPP funds are segregated.

Target PPP borrowers (or successor entities) should ensure that their own PPP funds are segregated, if applicable, from those of the target PPP borrower. Documentation should be kept to show compliance with PPP requirements for each PPP loan. This guidance is also useful in suggesting that a PPP borrower-buyer should not be dissuaded from purchasing a PPP target borrower, as long as both the buyer and the target ensure they comply with the PPP rules for each PPP loan.

A transaction does not remove the liability of a PPP loan.

Any mergers and acquisitions practitioner should not be surprised by this statement. However, for the avoidance of doubt, the SBA provides that a PPP borrower (or, in the event of a merger, its successor) remains subject to its PPP loan obligations. The SBA advice goes further to make it clear that the SBA can go after the new owner (s) of a PPP borrower if those owners are using the PPP loan funds for any purpose not. authorized.

Either way, merger and acquisition transactions are generally a dance of burden and risk sharing. The year 2020, in all its variety, has not changed that. Certainly, armed with this advice, the parties and their advisers can conclude these transactions on terms agreeable to buyers and sellers.

TAKE ACTION

Whether you are a PPP borrower considering your strategic options, or a potential buyer interested in acquiring a PPP borrower, this guide is a useful tool to keep in mind when considering how to design the deal. This is especially true when it comes to engaging in early discussions on how to structure the escrow account approach on terms that will allow you and your counterparty to achieve a smooth close. If you’ve documented your transaction before, consider how these tips can be helpful in ironing out any existing issues you’ve encountered, including changing the transaction documentation to use the escrow account approach. .

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