August 31, 2020

PPP Loans: Navigating Lender & SBA Consents in M&A Transactions

I’ve previously blogged about some of the complications that parties to an M&A transaction have to deal with when the target is a borrower under the SBA’s Paycheck Protection Program.  This Dorsey & Whitney memo focuses on the implications of the requirement to obtain lender and SBA consent prior to any “change of ownership” transaction. As this excerpt notes, the “change of ownership” concept extends to asset purchase transactions as well:

It is important to highlight that PPP loans are included among what are known as Small Business Administration (SBA) “7(a) loans” and are therefore subject to the same regulatory guidelines that apply to 7(a) loans generally. Among such guidelines are situations when a lender must obtain SBA consent before a borrower is permitted to perform or allow certain activities. One such activity is permitting a “change of ownership” (with no threshold specified) of a borrower within 12 months of the final disbursement of a 7(a) loan, including PPP loans.

This has obvious implications for PPP borrowers that are the target of a merger or an equity acquisition. Nevertheless, and though the SBA regulations do not expressly address asset acquisitions, the SBA has recently been informing PPP lenders that the SBA does not distinguish between an asset acquisition and a “change of ownership” and therefore will expect PPP lenders to obtain SBA consent prior to approving any such transaction.

In terms of the timing of the SBA consent, the memo says that a PPP borrower should expect anywhere from 2 to 6 weeks following the PPP lender’s request to the SBA – and receipt of that SBA consent is not necessarily guaranteed. The consent of the PPP lender is also typically required for a “change of ownership” & the borrower’s failure to obtain its lender’s consent when it is required to do so under the terms of a PPP loan promissory note could result in the denial of loan forgiveness and in acceleration of the loan.

The memo also discusses the alternative of seeking loan forgiveness in advance of closing and the potential implications of that approach on the timing of the deal.  But it also cautions that even if forgiveness is obtained prior to closing, the SBA retains the right to review the underlying PPP loan for eligibility issues.

John Jenkins