While the notice provides important convenience to the parties to the transaction, it still leaves important additional questions unanswered, including compliance with the requirements for change of ownership transactions completed before October 2, 2020, whether the escrow account controlled by the PPP lender should be held by that PPP lender, whether the amount financed in the escrow account must also include accrued interest and fees. and other issues that arise with many transactions pending or completed. A detailed analysis of the notice reveals possible solutions to some of the currently known concerns. Since the terms of the escrow agreement are tailor-made and are likely to involve the PPP lender both as a fiduciary agent and as a potential beneficiary, the terms of the escrow agreement deserve special attention – both for the purpose of complying with various SBA guidelines, and to ensure that the parties are not subject to any conditions that extend potential liability or offer a greater great protection to the PPP lender, as provided for in the communication and other guidelines of the SBA. In the case of change of ownership transactions concluded before 2 October 2020, the parties to the transaction should promptly revise the terms of their agreements in order to comply with the notification to the extent possible. This essentially means setting up an escrow account with the PPP lender to ensure that the PPP lender has accepted the transaction and that the PPP lender has provided the SBA with the necessary notices. The SBA has informally indicated that it will not provide convenience to transactions concluded before 2 October 2020 that are not in line with the Communication. As a result, the parties will best protect their positions by complying as much as possible with the rules, even if this involves restructuring certain aspects of the transaction. As part of an important development for the M&A community, the U.S.

Small Business Administration (« SBA ») has issued a « Notice of Procedure » regarding the requirement for companies involved in buying or selling a business with a Paycheck Protection Program (« PPP ») loan – the requirement for the PPP lender to obtain « prior approval » from the SBA for a change of ownership. This requirement resulted in significant delays in transactions and even forced companies to return PPP funds to meet transaction closing deadlines. SBA acknowledged the mess this requirement caused in M&A transactions in general and changed the requirement, but did not eliminate it. From 2. October 2020, as long as companies with PPP loans meet certain conditions specified below regarding the APPLICATION for PPP loan forgiveness and the placement of PPP funds under trusteeship until the remittance process, PPP lenders do not need to obtain prior approval from the SBA – this applies to most change of ownership transactions. Immediately upon completion of the PPP loan waiver process, (a) the PPP loan trust funds will first be disbursed to repay the remaining (unallocated) balance of the PPP loan, and (b) the balance of the PPP loan trust fund will be disbursed by the PPP lender (in its capacity as trustee under the PPP loan trust agreement) to the stockbroker for distribution to the members of the company in accordance with their pro rata. respective Percentages. Funded in whole or in part by a 7(a) loan, all requirements of the SBA loan program under 13 CFR 120.10 must be met. If an escrow account is required in accordance with the procedures described in the notice, the 7(a) loan used to fund the change of ownership cannot be used to fund the escrow account. Finally, it should be noted that, although the SBA has amended the requirements imposed on PPP lenders to obtain the prior approval of the SBA for most change of ownership transactions by adding two new requirements, the SBA has expressly reaffirmed its rights and remedies available under the law to PPP borrowers and successor companies in the event of fraud, prosecute misrepresentation and/or unauthorized use of PPP loan funds.

Since one of the main purposes of PPP credit insurance is to ensure the accuracy of the borrower`s economic certificate of necessity, this coverage may be more relevant than ever for parties involved in M&A transactions. And while PPP credit insurance wasn`t available to PPP borrowers who made a transaction without first getting prior approval from the SBA, PPP credit insurance may have changed now. PPP credit insurers are digesting this new development and wondering if they can cover PPP borrowers who have applied for a loan waiver and deposited the necessary funds until the remittance. In all cases, change of ownership transactions must be conducted in accordance with the guidelines below under « Requirements for All Change of Ownership Transactions » and « PPP Lender Notification Requirements, » including notification to the SBA Loan Service Center of the location and amount of funds in the escrow account within five business days of closing the transaction. [6] If the change of ownership is structured, (i) as a sale or other transfer of common shares or other ownership shares; or (ii) in the event of a merger, a PPP lender may also authorize the change of ownership without the prior approval of the SBA and without completing the waiver application and the establishment of the escrow account described above if the sale or any other transfer represents 50% or less of the common shares or other proprietary interests of the PPP borrower. Companies involved in an ongoing transaction should consult with the borrower`s PPP lender, in particular if the parties have agreed to deposit funds with a third-party fiduciary agent, as such a PPP lender is likely to require that those funds be held by the PPP lender as a fiduciary agent. Currently, only 1% of the more than 5.2 million PPP loans have been sent to the SBA by PPP lenders. Therefore, it is questionable whether PPP lenders can cope with the two additional new requirements of the SBA, which clearly burden them by (1) forcing them to initiate the PPP credit remittance process (which many PPP lenders have not done, while hoping that Congress will pass general legislation on PPP loans that would account for 86% of all PPP loans); and (2) require them to establish escrow accounts for many of their clients. However, it is more than likely that PPP lenders will welcome these new requirements despite the additional burdens, as they provide significant protection to PPP lenders who will be repaid by PPP borrowers involved in the change of ownership operations described above once the loan forgiveness process is complete.

As of October 2, 2020, if that pPP borrower`s loan waiver application is rejected – or if part of it is denied – the PPP lender will already hold funds in receivership equal to the outstanding balance of the PPP loan. These deposited funds are « disbursed first to repay the remaining balance of the PPP loan plus interest ». For most transactions, it is more efficient to maintain a necessary escrow account with the PPP lender. Since the notice only requires the account to be controlled by the PPP lender, the parties may be willing or require to enter into an escrow agreement with another financial institution, but should ensure that the agreement is documented in a manner that maintains a valid argument that the PPP lender has control of the account until the balance of the PPP loan is fully repaid. The notice states that any unallocated balance of the PPP loan will be paid from the escrow account balance. Any unpaid amount includes accrued interest and may include other charges. Although the notice does not explicitly specify what amount is to be deposited in the interest-bearing trust, the parties should consider whether a deposit bearing only the principal amount of the loan is sufficient to cover the entire irreconcilable balance. In many cases where at least a partial pardon is obtained, the issue will be debatable, but the parties should consider whether a loss of profits is possible and, if so, which party can finance this deficit. SBA approval for any change in ownership involving the sale of 50% or more of a PPP borrower`s assets (measured by fair value) is conditional on the condition that the procuring entity assume all of the PPP borrower`s obligations under the PPP loan, including responsibility for compliance with the terms of the PPP loan.

In such cases, the purchase or sale contract must contain appropriate wording regarding the assumption of the PPP borrower`s obligations under the PPP loan by the purchasing person or acquiring company, or a separate assumption of responsibility agreement must be submitted to the SBA. In addition, the Notice provides that before entering into a change of ownership transaction, the PPP borrower must notify the PPP lender in writing of the proposed transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would enable the proposed transaction to be completed[…].