Paycheck Protection Program Update: New SBA Guidance Impacting M&A Activity

Last month, we published two alerts, here and here, that specifically addressed considerations relevant to PPP borrowers and companies that seek to acquire or merge with them. We noted that SBA had not yet provided specific guidance in connection with M&A activity involving PPP borrowers. SBA’s new guidance, published October 2, 2020, now addresses this important issue. Notably, the guidance is directed to PPP lenders with respect to their decisions to consent to transactions involving PPP borrowers. Of course, ultimately the guidance will impact both lenders and borrowers.

Definition of “Change of Ownership”

SBA’s new guidance states that, for the purposes of the PPP, a “change of ownership” is deemed to have occurred when:

1.  at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions,¹ including to an affiliate or an existing owner of the entity;

2.  the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or

3.  a PPP borrower is merged with or into another entity.

The guidance states that prior to the closing of any change of ownership, as defined above, the PPP borrower must notify the lender in writing of the proposed transaction and provide a copy of the proposed agreement.

Lender vs. SBA Approval

Critically, the guidance also details under what circumstances a PPP lender may approve the ownership change unilaterally, and under what circumstances the lender is required to obtain SBA approval. Specifically, neither SBA nor lender approval is required where:

1.  The PPP note is fully satisfied—i.e., repaid in full, or the loan forgiveness process has been completed;

Only lender approval is required where: 

1. The PPP note is not fully satisfied, and the transaction is a stock sale:

a.  In which the change of ownership is of 50 percent or less of the common stock or ownership interest of the PPP borrower (aggregated since the time of loan approval); or

b.  Where the PPP borrower completes and submits a forgiveness application and supporting documentation reflecting the use of all PPP loan proceeds and creates an escrow account controlled by the lender with funds equal to the outstanding loan balance. The escrow funds will be disbursed following the loan forgiveness decision.

2.  The PPP note is not fully satisfied, and the transaction is an asset sale, in which case a PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without SBA approval only if the PPP borrower submits a forgiveness application and supporting documentation reflecting the use of all PPP loan proceeds and creates an escrow account controlled by the lender with funds equal to the outstanding loan balance.

If the transaction(s) in question do not meet one of the foregoing conditions, a lender must seek SBA approval before consenting to the transaction(s). The guidance states that SBA will review and determine whether to approve within 60 calendar days of receipt of the following documentation:

1.  the reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds as described above;

2.  the details of the requested transaction;

3.  a copy of the executed PPP note;

4.  any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;

5.  disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

6.  a list of all owners of 20 percent or more of the purchasing entity.

Borrower Responsibilities Post-Ownership Change

The guidance specifies that regardless of a change of ownership, the PPP borrower remains responsible for all obligations and certifications related to the PPP loan and for providing the SBA with all supporting documentation upon request.

In addition, if any of the new owners or the successor arising from the transaction(s) in question has a separate PPP loan, then, following consummation of the transaction(s): (1) in the case of a purchase or other transfer of common stock or other 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 with PPP requirements by each PPP borrower, and (2) 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 PPP requirements with respect to both PPP loans.

Conclusion

Thus, SBA’s new guidance clarifies a hitherto ambiguous consent requirement in PPP borrowers’ loan documents related to “changes of ownership.” Ultimately, the guidance creates a strong incentive to repay the loan or complete the forgiveness process prior to undertaking a sale of more than 50 percent of the stock or assets of the PPP borrower entity. Otherwise, the borrower either will have to escrow significant funds while it awaits a forgiveness decision or await review and approval by SBA under an as yet untested process.

Additional Resources

Pillsbury attorneys can help clients interpret the foregoing requirements and determine whether to apply for an SBA loan. We will continue to monitor guidance regarding the Paycheck Protection Program and other programs under the CARES Act.

Pillsbury is closely monitoring and analyzing the global legal, economic, policy and industry impacts of COVID-19. For our latest insights, visit our COVID-19 and Economic Impact Resource Center.

^{1.  The guidance clarifies that all transactions since the date of PPP loan approval must be aggregated to determine whether the 20 percent threshold has been met. For publicly traded borrowers, only sales that result in one person holding or owning at least 20 percent of common stock or other ownership interest must be aggregated.}