We are now two-thirds of the way through 2020 with a majority of the year being spent navigating through the coronavirus pandemic. Not only has COVID-19 affected the health of people across the United States, but it has also had a major impact on our economy. From wage reductions to layoffs and decreased productivity, the pandemic has changed the economic landscape for companies nationwide. The pandemic has also had a drastic impact on the flow of mergers and acquisitions (M&A) deals. A recent Barron’s article indicated that the COVID-19 pandemic has resulted in a 29% decrease in the number of announced M&A deals, bringing about an 83% drop in total deal value year-over-year. Companies continuing to contemplate M&A activities during this pandemic should carefully consider the recent legal and regulatory changes that have a direct impact on the transaction, especially the Paycheck Protection Program (PPP).
PPP was created under the CARES Act and has since been modified in various ways from subsequent legislation. PPP loans were designed to provide support to small businesses that had been affected by the COVID-19 pandemic. As of the last day of PPP loan applications, Aug. 8, 2020, a total of more than $525 billion was distributed through the Paycheck Protection Program, providing a significant lifeline to millions of companies navigating through this pandemic. However, a nuance of PPP that may add additional requirements to companies seeking to finalize an M&A transaction is a likely requirement for PPP recipients to first obtain approval from the Small Business Administration (SBA) before finalizing the merger or acquisition.
The PPP program is born out of Section 7(a) of the SBA’s business loan program. While Congress expressly created certain separate rules related to the PPP loans, including eligibility, it appears, based upon recent commentary, that the SBA will continue to use existing guidance under the 7(a) program for certain aspects of the PPP loan including seeking approval for “change in ownership of a Borrower in the first 12 months after the final disbursement.” Under the SBA SOP 50 57 2, Servicing and Liquidation Actions 7(a) Lender Matrix, a lender who has disbursed a loan under Section 7(a) must seek written approval from the SBA prior to a borrower making a change in ownership if the change in ownership is made within 12 months after the final disbursement of any SBA 7(a) loan.
While the SBA guidance does not directly prevent the borrower from completing a change in ownership without the consent of the SBA, there could be unintended consequences for taking such action without prior approval. Without specific guidance from the SBA about whether they will deviate from this guidance for PPP loans, borrowers who complete an M&A transaction without consent may subject themselves to denial of loan forgiveness or request for immediate repayment of any outstanding PPP loan obligations.
Companies contemplating completing a merger or acquisition should ensure that they make PPP compliance a part of their due diligence checklist. Determining whether a target company has received a PPP loan, whether they originally qualified for such a loan, and the impact of the PPP forgiveness on the transaction should be part of the questions that are raised during the due diligence process.
Going through an M&A transaction is no easy feat – especially in a pandemic. The M&A and PPP compliance attorneys at KJK are well-positioned to assist your company through the transaction. If you have any questions or need assistance, please feel free to contact Demetrius Robinson at djr@kjk.com or (614) 427-5749 or any of our other Corporate professionals.