October 6, 2020

PPP Loans and M&A: What You Need to Know

SBA Provides New Guidance for PPP Borrowers Involved in M&A Transactions

On October 2, 2020, the U.S. Small Business Administration (the “SBA”) issued new guidance concerning Paycheck Protection Program (“PPP”) loans and changes in the ownership of an entity.  The SBA Procedural Notice Control No. 5000-20057 (the “Procedural Notice”) provides direction on the required processes for an entity that has received PPP funds and is now taking part in a change of ownership.  In some instances, the SBA is allowing lenders to approve the change of ownership transaction without the prior approval of the SBA.

A “change of ownership” occurs when the common stock (or other ownership interest) of a borrower is sold or otherwise transferred, a merger occurs, or through a sale of the borrower’s assets.  There are no restrictions or approvals needed from the SBA for a change of ownership transaction if the PPP note has been fully satisfied or if the PPP loan has been fully forgiven and the lender has received payment from the SBA.

If the PPP note has not been fully satisfied, the Procedural Notice provides specific circumstances for when certain change of ownership transactions structured as either a sale of common stock (or other ownership interest) of the borrower, a merger, or an asset sale would only require the prior approval of the PPP lender.  If the sale is of less than fifty percent (50%) of the borrower’s equity or assets, then the change of ownership does not need SBA approval.

In addition, if the sale is of fifty percent (50%) or more of the equity or assets of the borrower, as long as the borrower has completed and submitted a loan forgiveness application to the lender and has also established an interest-bearing escrow account controlled by the lender to cover any unforgiven portion of the PPP loan as a part of the transaction, then SBA prior approval is not required for the change of ownership.

If the change of ownership transaction does not fall under the above circumstances, then SBA approval will be required for the transaction.  This approval process includes, among other things, providing the SBA with the details of the transaction and submission of all transaction documents to the SBA.  The SBA will make its determination within sixty (60) days of its receipt of the approval request, and its approval will be conditional on the purchasing entity assuming all of the borrower’s obligations under the PPP loan.

It is important to note that the PPP borrower must notify the PPP lender about the contemplated change of ownership transaction and provide the PPP lender with a copy of the proposed transaction documents prior to the closing of any change of ownership transaction.  The PPP lender also has obligations to notify the SBA upon the completion of the change in ownership transaction. 

The PPP borrower continues to be responsible for all applicable requirements and obligations under the PPP loan, regardless of any change of ownership.  To review the full Procedural Notice, please visit https://www.sba.gov/sites/default/files/2020-10/5000-20057-508.pdf

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