PPP Loans and Mergers and Acquisitions: Considerations for Lenders and Buyers | Hinshaw & Culbertson LLP
Paycheck Protection Plan (PPP) loans are Section 7 (a) loans of the Small Business Administration (SBA). Therefore, they are subject to the same regulatory guidelines that generally apply to Section 7 (a) loans.
Considerations on the lender
These regulatory guidelines include several provisions requiring lenders to obtain the consent of the SBA before allowing a borrower to perform certain activities.
Notably, one guideline requires a lender to obtain SBA authorization before approving a change in ownership of a borrower that occurs within 12 months of the final disbursement of the Section 7 (a) loan, including PPP loans. This guideline applies to a change of ownership, but it does not specify a minimum threshold that would trigger a change of ownership.
A sale of assets would not be expected to fall within the scope of this directive since the selling company continues to exist after a sale of assets. Thus, no change of ownership of the selling company would have taken place.
The ASB regulations do not expressly deal with asset acquisitions. However, the SBA recently informed PPP lenders that the agency does not distinguish between an asset acquisition and a change in ownership. Therefore, the SBA has informed PPP lenders that they must obtain consent before approving an asset sale, merger, or equity investment (Business Combination).
The obligation to obtain SBA consent for a business combination involving a PPP borrower rests with the PPP lender. Failure to obtain such consent may result in the lender losing the SBA collateral covering the PPP loan.
The SBA PPP promissory note contains certain restrictions regarding changes in business and ownership that cannot be made without the consent of the lender (the specific default language relates to transactions in which a borrower “reorganizes, merges, consolidates or otherwise changes the ownership or structure of the business without the consent of the lender prior written consent. ”) This language clearly requires a PPP borrower to obtain the consent of the lender before proceeding with a business combination.
When a PPP lender uses their own memo form, the memo may be silent on whether a business combination needs to be approved by the lender. Since the note does not require the consent of the lender for a business combination, the lender should consider notifying its PPP borrowers that it must obtain the consent of the SBA before a borrower can complete a combination. companies.
Considerations for PPP borrowers
For PPP borrowers, failure to obtain the consent of their PPP lender for a business combination or failure of the lender to obtain SBA approval for a business combination could result in the refusal of the cancellation of the PPP loan. It can also lead to a demand for immediate repayment of the PPP loan.
Buyer’s Considerations – Due Diligence
When conducting due diligence for a PPP borrower, a buyer should consider several things, including whether:
the borrower needed the loan funds. The SBA has a needs certification requirement that requires the borrower to certify that the loan was necessary to support its ongoing operations. The buyer should review the target’s records at the time the loan was made to ensure the target can pass the certification test;
the target was eligible to receive the loan. SBA rules require that a borrower be eligible under SBA rules to receive a PPP loan. These rules include affiliate tests which must be reviewed;
the amount of loan proceeds was appropriate. The buyer should review the documentation prepared by the target to justify the PPP loan amount.
the target complied with all the rules of the PPP program; and
the target has spent the proceeds of the PPP loan on expenses that can be reversed under the program. The buyer should review the records regarding the expenses to be canceled to ensure they are eligible for cancellation.
Buyer Considerations – Final Agreement
When negotiating a definitive deal, a buyer needs to address a number of issues, including the impact that the PPP loan and loan cancellation could have on the purchase price and taxes.
The final agreement should also contain additional statements relating to the PPP loan, including that the target:
was eligible for the loan;
meets the certification requirements of the needs;
complied with the rules of the PPP program; and
spent PPP loan funds on expenses that could be waived under the program.
The final agreement should also include clauses requiring the target, for example, to comply with PPP rules and spend the loan proceeds on repayable expenses.
Finally, the agreement should include indemnification provisions designed to address post-PPP closure issues, as well as violations of PPP declarations and commitments.
Buyer Considerations – Consents
A buyer targeting a PPP borrower should review and ensure compliance with the consent rules outlined above.
It can take two to six weeks for a business combination to be approved by the SBA. In addition, the consent of the SBA is not necessarily guaranteed. And, if given, consent may contain restrictions on future transactions that could cause a buyer to terminate an agreement.
In any case, if it is difficult to obtain the consent of the PPP lender or the SBA, or if the consent of the SBA may be delayed, the buyer should consider delaying the closing so that the discount can be obtained. before closing. However, if the buyer wishes to close without the discount being obtained, consideration should be given to establishing an escrow so that the funds are released upon delivery.
It can take up to five months for forgiveness. The SBA has up to 90 days to approve a loan forgiveness request (subject to any additional time if the SBA chooses to review an application). This is in addition to the 60 days a PPP lender has to approve the rebate request before submitting it to the SBA.
Even if a PPP loan has been fully canceled before or after the completion of a business combination, the SBA reserves the right to review the underlying PPP loan for eligibility issues. Additionally, the SBA and the US Department of the Treasury have stated that all PPP loans over $ 2 million will be reviewed. With this in mind, the buyer should ensure that the target’s post-closing indemnification obligations also apply to the PPP loan.