Recently, we published a brief article concerning the treatment of a PPP loan in a change of control transaction; specifically, the sale of a PPP borrower's business. In our experience in such transactions, to date, banks have struggled with addressing the PPP loan prior to the acceptance of an application of forgiveness. On October 2, 2020, the SBA wisely issued guidance on how PPP lenders should handle an outstanding PPP loan balance in the event of a "change of ownership" – the term used by the SBA to define what most practitioners would call a change of control.
While the PPP loan remains outstanding, and in the case of the sale or transfer of 50% of the equity in the PPP borrower, the transfer of more than 50% of the assets of a PPP borrower, or the merger of a PPP borrower into another entity, the PPP borrower must notify the PPP lender of the proposed transaction and may, in some cases, need to obtain SBA approval. Conversely, following the full satisfaction of the PPP loan, no SBA approval is required. That seems self-evident.
The trouble lies, as we have written before, during the pendency of a transaction and in the time period prior to a determination on a PPP borrower's application for forgiveness. In those cases, the updated SBA guidance suggests that SBA approval is not required if the borrower completes its application for forgiveness reflecting its use of all the PPP loan proceeds and the PPP borrower establishes an escrow account controlled by the PPP lender in the amount of the outstanding PPP loan balance. The escrow funds must first be used to repay any remaining PPP loan balance after forgiveness has been processed plus interest.
Other guidance is provided in cases where the buyer of a PPP borrower also maintains a PPP loan.
In either case, it seems clear that the PPP loan forgiveness application must be completed prior to the completion of the proposed transaction. The application may not have to be processed, nor does a final determination need to be made prior to closing in order for a transaction to proceed without SBA approval, but it will be an important issue to track during due diligence and closing of any transaction involving a PPP borrower.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.