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PPP Program Alert: New Paycheck Protection Program Guidelines Permit Escrow Option to Close M&A Transactions Without Prior SBA Approval

October 26, 2020

During the COVID-19 pandemic, many companies with Paycheck Protection Program (“PPP”) loans that are considering mergers, acquisitions, or sales of their businesses have been working with lenders and advisors to best structure “change of ownership” transactions to comply with restrictions on these loans.  Unfortunately, very little guidance has been available until now regarding how to structure these transactions in compliance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the approvals necessary from the SBA and lenders, and the procedure for obtaining forgiveness of these PPP loans.

On October 2, 2020, the U.S. Small Business Administration issued a procedural notice to SBA Employees and Paycheck Protection Program Lenders which clarifies the procedures applicable to a change of ownership for an entity that has received funds under the CARES Act.  This notice provides guidance on many fundamental questions facing PPP borrowers who elect to close a change of ownership transaction prior to forgiveness of a PPP loan.

For borrowers with outstanding PPP loans, a “change of ownership” is triggered when: (i) at least 20 percent of the common stock or ownership interests of the borrower is sold or transferred, (ii) the borrower sells or transfers at least 50 percent of its assets, or (iii) a borrower merges with or into another entity.

One critical issue in transactions has been the time required to obtain approval of a forgiveness application for a PPP loan, which can push back closing times considerably or possibly make a transaction impracticable.  With the new SBA guidance, however, only lender approval is required in order to move forward with a “change of ownership” even if a PPP loan remains outstanding if certain steps are followed.  No longer does a buyer or seller have to hold up a transaction for an additional approval by the SBA to forgive the PPP loan or approve a change of ownership prior to closing.

In cases where a PPP loan has not been repaid or forgiven prior to a “change of ownership”, a PPP lender may approve the change of ownership without SBA approval if:  (i) the sale or transfer is of 50% or less of the common stock or ownership interest of the PPP borrower, or (ii) the PPP borrower completes a forgiveness application and establishes an escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan.  Notably, if either of these options is utilized, the PPP lender must provide the applicable SBA Loan Servicing Center, within 5 business days of the completion of the transaction, updated detailed ownership information.

A PPP borrower is also permitted to sell 50% or more of its assets without prior SBA approval prior to the forgiveness of a PPP loan if:  (i) the borrower completes and submits a forgiveness application to their PPP lender, and (ii) establishes an escrow account at the lender with funds equal to the outstanding balance of the PPP loan.

Borrowers choosing to avail themselves of the escrow option remain fully responsible for all PPP loan obligations, certifications made in connection with the application (including the certification of economic necessity), and compliance with all updated regulatory guidance.

Borrowers should review more detailed regulations if they are considering a change of ownership transaction prior to the forgiveness of a PPP loan. Please let us know if you need any additional assistance.  The change of control guidance regulations remain fluid and subject to change.  For assistance, please contact Gene, Grayson, or Scott.