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Mergers and acquisitions and PPP loans: Recent guidance from the SBA

There is nothing simple about entering into negotiations for mergers and acquisitions. One of the many complications in the process involves Paycheck Protection Program (PPP) loans. Merger and acquisition transactions involving companies with PPP loans may require approval from the Small Business Administration (SBA) before proceeding.

Although the PPP loans have been instrumental in keeping some businesses afloat during difficult economic times, these loans create numerous complications when it comes to mergers and acquisitions involving businesses currently holding outstanding PPP loans. It is critical to understand these loans, how they impact potential transactions and the procedural requirements before proceeding with a transaction.

Paycheck Protection Program loans

PPP loans are part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), signed into law by President Donald Trump in March of 2020 as an economic response to the global pandemic. Part of the Act involved the SBA guaranteeing loans from approved lenders to small to mid-sized businesses. If certain circumstances were met, borrowers could receive forgiveness for 100% of the loan amounts.

Complications arising from PPP loans vis-à-vis mergers and acquisitions

Businesses have bumped up against complications in the administration of the loan forgiveness for PPP loans. Significant delays have arisen for companies seeking forgiveness. The problem arises of how these outstanding debts should be handled in mergers and acquisitions. Should a company potentially assume a debt of a company it will acquire? This question is particularly important in situations where the company under consideration has good reason to believe its loan will be forgiven in full, but the PPP lender and the SBA have not yet issued an official determination as to whether the loan will be forgiven.

What impact should these loans have on negotiations over purchase price? Should they be considered “debts” against the company to be acquired? Who should assume the risk on these loans and what are the reporting requirements?

New guidance from the SBA

Fortunately, the SBA provided guidance via a procedural notice for relevant companies interested in mergers and acquisitions. Specifically, this notice makes clearer the question of whether the SBA needs to be notified in potential merger and acquisition transactions.

The guidelines cover transactions in which:

  • At least 20% of the common stock or ownership interest of a PPP borrower is transferred – these are considered “significant sales” that require notice to the PPP lender before proceeding.
  • A PPP borrower transfers at least 50% of its assets – this transaction requires approval from the SBA before proceeding.
  • A PPP borrower is merged into or with another entity – as with the transfer of at least 50% of assets noted above, this type of transaction requires SBA notice and approval.

It is important to note that, in cases where the PPP borrower has already repaid the relevant loan in full, or if the PPP lender or SBA has issues notice of forgiveness of the loan, there is no reporting requirement to the SBA.

There are multiple complications and nuances in the reporting requirements, and the guiding documents still don’t address some of the ancillary problems caused by PPP loans pending forgiveness in mergers and acquisitions. Whatever your interests or status, talk with an experienced business lawyer before proceeding with any transaction of this kind.