Banks are working quickly to adapt to new rules easing their approval of mergers and acquisitions involving Paycheck Protection Program borrowers.
The U.S. Small Business Administration issued a procedural notice in October outlining situations in which banks no longer need SBA approval in advance of certain M&A transactions involving PPP borrowers. If the procedural requirements are met, banks may themselves approve proposed transactions involving PPP borrowers.
The SBA notice applies to proposed changes in ownership of a PPP borrower where the company with a PPP loan has already applied for forgiveness, and it requires that the full amount of the loan be placed in an escrow account controlled by the lender. The escrow account must be set up so that the money is used to pay back any portion of the loan that is not forgiven.
That is a big change from the previous requirement, where lenders were required to ask the SBA to approve these proposed transactions before the process could move forward. The prior process was interfering with mergers and acquisitions in which sellers had not yet obtained loan forgiveness, according to Jeff Paravano, a partner with law firm BakerHostetler LLP in Washington, D.C.
The notice addresses cases where a "change of ownership" is structured as a merger involving the sale or other transfer of common stock or other interest in a PPP borrower. It also covers situations in which the change of ownership is structured as an asset sale.
Now, many banks are moving quickly to meet the demand from companies eager to see their M&A transactions go through, said Kenneth Logsdon, a partner with law firm Dorsey & Whitney LLP. Large banks may be out in front in developing procedures to handle the new rules, he said.
"The bigger banks are coming up with a form of escrow agreement that they're comfortable with using for all their PPP loans, and I think over the next several weeks we're going to see more of that," he said. "The larger the bank, the more likely they are to have a legal team to guide them through the process."
Brendan Dignan, a partner with Washington, D.C.-based law firm Baker Botts LLP, said in addition to handling the escrow accounts and consenting to the deals, banks are responsible for letting their clients know about the new requirements up front.
"Lenders should be aware that this guidance was directed at them," Dignan said in an interview. "It's their responsibility to notify borrowers of these requirements to avoid any disconnect between the lender and the borrower."
Prior to the change of ownership transaction, borrowers must notify the PPP lender in writing of the proposed deal. They also must provide the lender with a copy of the proposed agreements or other documents that would put the transaction in place.
BakerHostetler's Paravano said when the guidance was issued, "the response was immediate and very favorable. We saw our clients racing to complete their transactions."
He said customers in the healthcare space, the manufacturing industry, and the services industry, such as insurance brokerages, have all been eager to move forward.
"Lending banks are cooperating easily without many hiccups," Paravano said. "Banks will always take money and put it into an escrow."
However, he said, the length of time it is taking to get PPP loan forgiveness and get those accounts resolved "is a little bit of a question."
The new notice was issued against a backdrop of uncertainty about the time it might take to get a loan forgiven.
It is not yet known whether Congress will approve legislation that allows companies with loans of $150,000 or less to obtain automatic forgiveness.