PPP Updates – October 2020
In the last few weeks, the Small Business Administration (“SBA”) has released several updates with respect to the Paycheck Protection Program (“PPP”).
Changes of Ownership
The SBA has released a Procedural Notice addressing required procedures for changes in ownership of an entity that has received a PPP loan. The Procedural Notice defines a “change of ownership” as:
- The sale or transfer of at least 20% of the equity of a PPP borrower, whether in one or more transactions, including to an affiliate or existing owner of the PPP borrower;
- The sale or transfer of at least 50% of the PPP borrower’s assets (measured by fair market value) in one or more transactions; or
- The merger of a PPP borrower with or into another entity.
If a borrower’s PPP loan is fully satisfied upon the occurrence of a change in ownership, there are no restrictions on such change in ownership. A PPP loan is considered “fully satisfied” if the PPP borrower has (a) repaid the note in full, or (b) completed the loan forgiveness process in accordance with PPP requirements and either SBA has remitted funds to the PPP lender in full satisfaction of the loan or the PPP borrower has paid any remaining balance on the loan.
On the other hand, if the loan is not fully satisfied at the time of a change in ownership, the PPP borrower must follow the procedures set forth in the Procedural Notice, which differ based on the type of ownership change (i.e., stock sale or merger vs. asset sale).
The PPP lender may approve the sale or transfer of 50% or less of the equity of a PPP borrower or 50% or more of the PPP borrower’s assets, in each case without SBA’s prior consent, if the following conditions are met:
- The PPP borrower must complete and submit a loan forgiveness application, together with required supporting documentation, to the PPP lender;
- An interest bearing escrow account controlled by the PPP lender must be established with funds equal to the outstanding balance of the PPP loan; and
- Once the loan forgiveness process is complete, the escrow funds must first be disbursed to pay any remaining PPP loan balance plus interest.
In all other cases, the PPP lender cannot unilaterally approve the change of ownership but must instead submit a request for approval, together with required documentation, to the appropriate SBA loan servicing center.
These rules provide some much needed clarity to M&A advisors and businesses considering or negotiating transactions during these turbulent times. The good news is that it appears that a seller or target entity with a PPP loan will not experience any adverse impact to its forgiveness eligibility if the buyer in the transaction is otherwise ineligible for a PPP loan of its own or already has a PPP loan. The bad news, however, is that in many circumstances, the seller or target entity needs to apply for forgiveness and escrow the loan balance, or get SBA consent, before the deal can go forward. Companies currently engaged in transactions with PPP borrowers or who are themselves PPP borrowers should consider these issues and ensure that their deal documents appropriately reflect any required SBA consent and escrow procedures.
Small Loan Forgiveness
The SBA has released a streamlined loan forgiveness application (SBA Form 3508S) for use by PPP borrowers applying for forgiveness with respect to PPP loans of a total loan amount of $50,000 or less. A borrower using this streamlined form is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or reductions in employee salary or wages that would otherwise apply.
Note that the streamlined application and procedures do not apply to any borrower that together with its affiliates received loans totaling $2 million or greater.