Brown Brothers Harriman (BBH) continues to monitor changes to legislation and program rules under the CARES Act and Paycheck Protection Program (PPP). The details discussed in this article are accurate as of October 8, 2020.
In the months since the PPP’s launch, people considering mergers and acquisitions (M&A) or investments involving businesses that received a PPP loan have struggled to anticipate if and how a transaction could affect PPP loan forgiveness. Confronting this deal risk, many have taken a wait-and-see approach to avoid unexpectedly assuming potential obligations and liability related to another party’s PPP loan. In response to borrower and lender questions, the Small Business Administration (SBA) issued a Procedural Notice on October 1, 2020, indicating that change of ownership transactions involving entities with PPP loans may proceed if either the loan is repaid or completely forgiven prior to closing, the PPP borrower applies for loan forgiveness and funds an escrow account with the amount outstanding on the loan, or the parties seek approval for the transaction from the SBA prior to closing. The notice defines change of ownership transactions as meeting one of the following:
- Transfer to another entity of 20% or more of the PPP borrower’s ownership interest – including to affiliates or existing owners of the entity
- Transfer to another entity of 50% or more of the PPP borrower’s assets (at fair market value) – including if the purchaser is an affiliate or existing owner of the entity
- Merger of a PPP borrower with another entity, including if the merged entity is an affiliate or existing owner
These change of ownership thresholds are calculated to include all ownership interest or asset transfers on an aggregate basis completed from the date of the initial PPP loan approval and forward.
The following table summarizes recent guidance affecting parties considering change of ownership transactions that involve companies that received PPP loans: