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Update on M&As Involving Entities Having Taken Paycheck Protection Program Loans: SBA Issues Guidance

By John DiGiacomo

We wrote recently about how an extra layer of merger and acquisition due diligence should be triggered if the target business has taken a loan under the Paycheck Protection Program (“PPP”). Since we wrote, the Small Business Administration (“SBA”), which administers the PPP, issued what is called “Procedural Notice No. 5000-20057.” We will call it the “Guidance.” The SBA’s new Guidance is aimed at answering questions and establishing procedures with respect to a “change of ownership” of a business entity that has received a PPP loan.

The Guidance states that, where a “change of ownership” occurs, approval from the PPP lender and/or the SBA is required. Written notice and disclosure must be provided to the lender and the SBA (including copies of transaction documentation). Under some circumstances, PPP lenders may issue unilateral approvals. Under other circumstances, the SBA must approve the transaction. The SBA commits itself to providing a decision on approval within sixty (60) days.

The definition of “change of ownership” is very broad, covering transactions structured as EITHER a stock sale or an asset purchase. The definition is much broader than the definition used by most courts. In brief, the Guidance defines a change of ownership to occur when:

  • 20% or more of the ownership is sold or transferred
  • The PPP borrower sells 50% or more of its assets
  • A merger into another entity of the PPP borrower takes place

As noted, if there is a change of ownership, as defined by the Guidance, then the PPP borrower must provide written notice and obtain approval. Unilateral lender approval is generally limited to the lower levels of what is defined as change of ownership. For example, unilateral PPP lender approval can be given where ONLY 20% of stock or LLC ownership units are transferred. This might cover a situation where ownership units are transferred, for example, between family members.

Note that notices and approvals are required for all PPP borrowers involved. Thus, the Guidance requirements can be triggered if the BUYER is a PPP borrower. For example, if both the target business and the acquiring business are PPP borrowers and the borrowers will be merged into a new entity, then, essentially, two SBA or lender approvals would be needed. Even if the acquiring business will remain, the Guidance still requires that, post acquisition, the buyer must segregate and delineate the different PPP funds, must track and allocate the different PPP expenses and demonstrate compliance with all PPP requirements for EACH PPP borrower. Even if only the buyer is a PPP borrower, the buyer will still have to demonstrate compliance with the PPP.

The Guidance does NOT apply to the following circumstances:

  • Where a PPP loan has been paid off or will be paid off as part of the M&A consummation
  • Where a PPP loan has been fully forgiven

If loan forgiveness is pending but not yet approved, the transaction can still proceed as long as the amount of the outstanding PPP loan is placed in escrow with the PPP lender.

If you have questions or need more information, contact the business lawyers at Revision Legal at 231-714-0100.

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