Mergers and Acquisitions with PPP or EIDL Borrowers: Considerations for Buyers, Sellers and Lenders | Williams mullen

By now, most small business owners and their lenders are familiar with the Coronavirus Help, Relief and Economic Security Act (CARES Act), enacted to provide emergency assistance and response. in healthcare for individuals and businesses affected by the COVID-19 pandemic. Among its many provisions, the CARES Act established the Paycheck Protection Program (PPP) to be administered by the Small Business Administration (SBA) of the United States and amended the pre-existing Economic Disaster Lending (EIDL) program of the United States. SBA. As of March 27, 2020, when the CARES Act was enacted, the SBA has approved over 5 million PPP loans and approximately 3.5 million EIDLs.

Given the number of participating companies, it is hardly surprising that some borrowers are evaluating strategic transactions – including sales of shares or membership interests, mergers, corporate or corporate reorganizations. , membership share or interest buybacks, asset sales and the like – while their PPP or EIDL loans are exceptional. Parties to such transactions should review the terms and conditions of the relevant company’s PPP or EIDL loan, as well as applicable SBA rules and regulations, to determine whether the transaction should be approved by either. both PPP and SBA lenders.


Transactions affecting the ownership of a PPP borrower may require the PPP lender to seek SBA approval or notify the SBA of the transaction. These potential obligations deserve the attention of buyers, sellers and lenders and should be considered an important element of due diligence.

Why is SBA approval or notification required?

PPP loans are an outgrowth of the SBA’s 7 (a) business loan program, which is governed by Section 7 (a) of the Small Business Act, SBA regulations, Standard Operating Procedure documents ( “SOP”) of the SBA and the SBA procedural notices. While Congress and the SBA have established certain rules specific to PPP loans, many of the existing 7 (a) rules also apply to the PPP loan program. The SBA guidelines continue to highlight obligations in Rule 7 (a) that may not have been known to borrowers or lenders at the start of the PPP.

Regarding lender service requirements, for example, a recent SBA Notice of Procedure states that “PPP lenders are responsible for the management of PPP loans in accordance with SBA SOP 50 57, as amended. ” [1] The current version of this document, SOP 50 57 2, which entered into force on December 1, 2015, contains the loan management rules for loans 7 (a) and applies to PPP loans in the absence of specific rules for PPP replacement or conflict.[2] As discussed below, these rules may require the lender to notify the SBA, or seek SBA approval, of certain PPP lender transactions.

Transactions requiring SBA approval

SOP 50 57 2 provides that certain actions after full disbursement of loan proceeds require the prior written approval of the SBA as outlined in SBA Lender Service and Liquidation Matrix 7 (a). An action that requires SBA approval is a “[c]be owned by a borrower for the first 12 months after the last disbursement. “[3] This requirement applies to “any adjustment or change in ownership of a borrower, including a change in ownership percentage, for 12 months after the last disbursement of any loan”.[4] Given the breadth of this language, it is prudent to seek SBA consent to a transaction that would alter some or all of a PPP borrower’s property interests.

The assumption of a PPP loan with release from the original borrower also requires the approval of the SBA.[5]

Transactions requiring SBA notification

Other situations do not require prior approval from the SBA, but require lenders to notify the SBA. For example, the lender must notify the SBA of a “[c]in the legal structure of the borrower. This requirement applies to changes in the legal structure that result in a change in the employer identification number or social security number of any debtor.[6] Parties to transactions that are considering the formation of new entities for existing PPP borrowers should assess whether this rule requires the lender to notify the SBA to the SBA.

Transactions requiring the consent of the lender

Regardless of any SBA approval or notification that may be required, certain events may require the consent of the PPP lender. The events mentioned above implicitly, if not explicitly, require the consent of the lender. But there are several other events that can constitute a default if the lender’s prior consent has not been obtained. The particular events may vary depending on the lender. Because some lenders used their own forms to document PPP loans, restrictions on transfers or entity changes without the lender’s consent are not uniform for all PPP loans.

Parties contemplating a strategic transaction should carefully review the PPP rating, loan agreement, and any other certification issued to the PPP lender, to determine whether consent or waiver from that lender should be obtained. While there is no formal SBA guidance to this effect, there is a potential risk that a borrower will lose their ability to obtain loan forgiveness if their PPP loan is in default, even though the lender does not. not call the loan.


Unlike PPP, the EIDL program has been around for decades. The EIDL program stems from Section 7 (b) of the Small Business Act and has a set of regulations different from the rules in Section 7 (a) that govern PPP loans, including SBA SOP 50 30 9, effective from May 31, 2018. EIDLs are funded and administered by the SBA, without the involvement of a private lending partner. Additionally, unlike the relatively short-term PPP loan, an EIDL can have a loan term of up to 30 years, which increases the likelihood that a strategic transaction involving the borrower will occur during the life of the loan. ‘EIDL.

Why is SBA approval or notification required?

In short, SBA approval of a strategic transaction involving an EIDL borrower is required as the EIDL loan documents say so. Concretely, the EIDL promissory note specifies that the borrower is in default if he “[r]organizes, merges, consolidates or otherwise changes the ownership or structure of the business without the prior written consent of the SBA.[7] This wording is broad enough to cover most, if not all, transfers of ownership interest.

When it comes to asset sales, SBA approval depends on securing EIDL. The SBA requires collateral to secure all EIDLs over $ 25,000.[8] Although the SBA prefers real estate guarantees, it often requires a comprehensive security interest in all tangible and intangible property of the borrower to secure an EIDL. The collateral agreement states that the borrower “shall not sell, rent, license or transfer (including by granting sureties, liens or other charges) all or part of the collateral or of the borrower’s interest in the collateral “without the written approval of the SBA.[9]

Transfers of ownership or assets also often involve a contemplated release or change of guarantors. Under SOP 50 30 9, adding or removing a guarantor is a material change to an EIDL that requires SBA approval, and possibly a loan document change.[10] Note, however, that CARES Act LIAs under $ 200,000 do not require personal guarantees.[11]

Application for approval

The initial request for approval of any transfer or modification involving an EIDL should be made to the SBA loan officer who closed the loan. This officer may need authorization from a “supervising loan officer” for significant changes, and even the RES may need authorization from higher up in the chain of command at the SBA.[12]


In a strategic transaction involving a small business with an ongoing PPP loan or EIDL, the buyer, seller, private PPP lender, and lender funding the strategic transaction all have an interest in ensuring that the SBA has been notified and approved the transaction, as required. As the COVID-19 crisis continues, common sense dictates, and our communication with SBA on behalf of clients has confirmed, that SBA is inundated with applications for PPP and EIDL loans. As such, contacting SBA on any contemplated strategic transaction cannot be an afterthought. This should be one of the first due diligence tasks undertaken by the parties to the transaction, and both borrowers and lenders can benefit from engaging advisers who are experienced in interacting with the SBA.

[1] SBA procedure notice n ° 5000-20038, Procedures for Lender’s Submission of Paycheck Protection Program Loan Remission Decisions to the SBA and SBA Remission Loan Reviews (July 23, 2020), at 3.
[2] Identifier., at 3 n.3 (“Because PPP loans are 7 (a) loans, the SOP applies to the service of PPP loans, as long as the SOP is not superseded or in conflict with the specific requirements to the PPP. ”)
[3] SBA Servicing and Liquidation Actions 7 (a) Lender Matrix (Version 15, April 25, 2019), at 1.
[7] Form SBA 147 B in §4.
[8] SBA SOP 50 30 9, Disaster Assistance Program (May 31, 2018), at 112.
[9] SBA Form 1059 in §5.
[10] SBA SOP 50 30 9, Disaster Assistance Program (May 31, 2018), p. 136.
[11] CARES Act § 1110 (c) (1).
[12] SBA SOP 50 30 9, Disaster Assistance Program (May 31, 2018), p. 154.

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