SBA issues guidance on business mergers and acquisitions in the context of Paycheck Protection Program loans

Many clients have asked about the impact of a Paycheck Protection Program (PPP) loan and the entitlement to a remission in connection with a change of control, sale of assets or transaction. equity. We have been asking the Small Business Administration (SBA) to issue guidance since July 2020. On Friday, October 2, 2020, the SBA issued an SBA Process Notice to establish the procedures businesses must follow to complete a merger transaction , asset or capital. when the seller has an outstanding PPP loan. The guidelines remove the SBA approval requirement for many “change of ownership” transactions and remove much of the uncertainty when structuring those transactions.

The SBA defines a change of ownership for the purposes of this guide as: (1) a sale or acquisition of at least 20% of the ordinary shares or other interest of a PPP borrower (including a listed entity), whether in a or more transactions, including to an affiliate or existing owner of the entity, or (2) a transfer of at least 50 percent of the borrower’s PPP assets (measured by fair market value), than this either in one or more transactions, or (3) the merger of a PPP borrower into another entity. For the purposes of determining a change in ownership, all sales or transfers that have occurred since the PPP loan approval date are aggregated to determine that the relevant threshold has been met.

Depending on the status of the loan and the structure of the transaction, the prior approval by the SBA of a change of ownership may be required.

SBA approval is not required when:

1. The PPP Rating is fully satisfied, either through a refund or discount before the sale or transfer is closed;
2. The sale or other transfer amounts to 50% or less of the ordinary shares or other interest of the PPP borrower; Where
3. The sale or other transfer of more than 50% of the shares or 50% or more of its assets (measured by fair market value), if the PPP borrower:
   • completes a rebate request reflecting its use of all PPP loan proceeds and submits it, along with any required supporting documentation, to the PPP lender, and
   • establishes an interest-bearing escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan.

If the PPP borrower opts for a forgiveness request and escrow account, the PPP lender should use the escrow account to pay any outstanding PPP loan amount, plus interest. As per the requirements below, the PPP lender must notify the SBA Loan Servicing Center of the location and amount of funds in the escrow account within five business days of closing the asset transaction.

SBA PRIOR APPROVAL PROCESS AND CONDITIONS

If your change of ownership transaction does not fit any of the categories stated above, the PPP borrower must obtain SBA approval prior to the transaction, or payment of the note can be expedited and the borrower will not be able to get the discount. To obtain the prior approval of the SBA of a capital transaction, the PPP lender must submit an application that includes:

1. an explanation as to why the PPP borrower cannot fully meet the PPP rating instead of allowing the transaction to close and get the discount;
2. details of the transaction;
3. a copy of the executed PPP note;
4. any letter of intent or merger or acquisition agreement establishing responsibilities for PPP loan amounts;
5. disclosure of whether the buyer or the acquiring company also has or had a PPP loan; and
6. a list of all owners of 20 percent or more of the procuring entity.
7. a certificate of exhaustion of PPP funds; and
8. a certificate that the PPP borrower has submitted a loan forgiveness request to the PPP lender.

SBA will review and provide an approval or rejection of the transaction within 60 calendar days.

The SBA intends to review certifications of economic necessity and hold original borrowers accountable whether the transaction has been reviewed or approved.

CONTINUING OBLIGATIONS AND NOTICE REQUIREMENTS TO THE PPP LENDER

Whether or not the change of ownership requires SBA approval, the PPP borrower remains responsible for the PPP loan obligations and all previous certifications. Additionally, if the new owner (s) uses the PPP funds for any unauthorized purpose, SBA will have recourse against the owner (s) for the unauthorized use. If the new owner has their own PPP loan, the PPP funds and expenses should be segregated and demarcated.

It is important to note that even when SBA approval is not required for a transaction, the PPP lender must provide certain information to the SBA service center within five days of closing a transaction. The information should include:

1. the identity of the new owner (s) of the ordinary shares or of any other ownership rights;
2. the percentage (s) of ownership of the new owner (s);
3. the tax identification number (s) of any owner holding 20% ​​or more of the company’s capital; and
4. the location and amount of funds in the escrow account under the control of the PPP lender, if an escrow account is required.