M&A operations over the next year are highly likely to involve PPP loans. Here are several elements of the agreement that should be taken into account in light of the PPP.
In Vermont, as of May 30, 2020, approximately 11,000 businesses had received a Paycheck Protection Program (the “PPP”) loan from the US Small Business Administration (the “SBA”) under the Coronavirus Aid, Relief, and Economic Security Act. (the “CARES Act”). These companies now operate to spend the loan proceeds before requesting a loan forgiveness. As of June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) extended the period covered for PPP loans from eight to twenty-four weeks, thereby extending the period during which PPP loans can become entangled in businesses. Mergers and acquisitions transactions. Even after the period of coverage has expired and a loan forgiveness request is filed, it may take months longer before a final loan forgiveness decision is made. The process to review a loan forgiveness request can take up to five months (or even longer). Currently, there is no way to expedite the review of a loan forgiveness request. Therefore, there is a high probability that next year’s M&A deals could involve PPP loans.
Critical aspects of PPP loan cancellation remain uncertain and subject to promised, but delayed SBA rules. Perhaps of even more significant consequence, the SBA aggressively slashed its audit and enforcement authority, resulting in many borrowers relinquishing the loan proceeds under threat of loss of forgiveness eligibility and liability. and potential criminal and / or civil penalties. All this uncertainty underlines the importance of the distribution of risks / rewards between the parties to any merger and acquisition transaction including a PPP loan. Over the next year, the novelty of the PPP, the large sums that may be at stake and the vagaries of the implementation of the PPP will influence the transactions effecting the purchase and sale of companies that have borrowed PPP loans.
To protect against the uncertainty and risks of PPP cancellation, buyers should require additional diligence, and both parties may seek special representations and / or indemnification arrangements from the other. Mutual consideration should be given to treat the PPP loan as any other debt that must be repaid in full at closing, but in this scenario the seller’s waiver of the discount value can also influence the purchase price. In any case, both buyers and sellers will need to carefully consider the distribution of the benefits and risks of PPP loans, as well as the process for future loan cancellation. In turn, such consideration will influence the negotiation and drafting of M&A transaction documents. Elements of the deal that should be considered in light of the PPP include:
Adjustment of the purchase price; Escrow. A buyer may consider negotiating a purchase price adjustment for any uncancelled loan amount, including interest. The PPP loan may need to be a separate component for adjustment taking into account the potential extended period that may be required to determine whether the PPP loan will be canceled and, if so, by what amount. Buyers can also request a separate escrow of the principal and interest amount of the PPP loan, to be released upon surrender.
Indemnity. If an adjustment for an unsatisfied PPP loan amount is not included in the purchase price adjustment section, buyers could seek compensation from the seller for this. Even if the parties agree to an adjustment of the purchase price for the amount of the loan, the purchasers could request specific compensation for audit and / or litigation fees and expenses, and possible liabilities and penalties. criminal and / or civil, especially if these liabilities arise from previous certifications of the seller and the use of the loan proceeds.
If the proceeds of the PPP loan remain unused or must be spent while the close of the corporate transaction remains pending, the buyer may seek to negotiate interim operating clauses governing the use of the proceeds of the PPP loan. For example, such clauses could allow PPP funds to be used by the seller only for purposes eligible for forgiveness in order to maximize the prospect of loan forgiveness. Sellers may also consider that negotiating post-closing commitments governing the buyer’s use of the PPP loan proceeds after closing could limit potential future liabilities and execution risks. The parties may also consider the mutual benefits of negotiating interim operating clauses regarding actions or communications that could increase the likelihood of scrutiny or liability for the PPP loan or that could adversely affect the likelihood and level of the discount.
- Party controlling the loan / audit / call remission request.
If the seller is eligible for a loan forgiveness or has retained post-closing PPP liabilities, the seller can seek a commitment to control the PPP loan forgiveness request process. In turn, the buyer may require their own review and consent to the loan forgiveness request prior to submission. Conversely, if the buyer controls the loan cancellation request, the seller could seek covenants that would limit any deleterious effects on the purchase price or other PPP liabilities of the seller after closing.
Likewise, parties should consider including commitments regarding the control of any audit process or the use of appeal, possibly including the right to separate counsel, cost sharing or recovery, and rights. participation, decision-making and settlement.
PPP loans can also have tax consequences that parties should consider. For example, who benefits from using an employee loyalty credit? Likewise, although the IRS has issued guidelines prohibiting the deduction of expenses paid with P3 funds, there is public and political pressure to reverse this position. In the event of cancellation, which party benefits from the new authorized deductibility of PPP expenses, whether incurred before or after closure?
Representations and guarantees.
The business buyer may consider negotiating seller’s representations and guarantees to align with the PPP loan application and the seller’s prior certifications. Separately, a seller may ask the buyer to acknowledge and agree that the certifications made in the PPP loan application will not violate any representations and warranties under the transaction documents, including those regarding the financial position. or operational of a party.
Effects of the PPP loan on current and future financing.
Finally, parties should consider the impacts of the PPP on current and future financing facilities. A buyer’s due diligence review should include a careful review of PPP loan documents to confirm change of control, assignment and sale provisions and asset prohibitions. Typically, PPP loan documents will require the consent of the lender before entering into a transaction involving a change in management control or the sale of the business or substantially all of its assets. If consent is not obtained, eligibility for loan forgiveness may be compromised. In such a case, the loan must be repaid at closing. If not repaid, completion of the transaction may result in an event of default under the PPP loan, triggering default remedies for the lender, including default interest and immediate repayment. Unfortunately, there are no guidelines governing when lenders can consent to a borrower engaging in merger and acquisition activity. Equally disturbing, there is also no guidance on whether a borrower can continue to participate in the forgiveness after obtaining the lender’s consent and completing a merger and acquisition transaction.
Parties should also be aware of existing commitments under other current non-PPP debt facilities that may have been breached had consent for the PPP loan not been obtained beforehand. In the future, all financing arrangements and debt documents should be drafted to reflect the PPP loan, including not only the amount of the forgiveness, but, if necessary, the service and repayment of the PPP loan.
Ultimately, the parties should work closely with each other, their legal advisor, and the PPP loan provider when assessing the impact of a PPP loan on a merger and acquisition transaction. imminent. As with everything PPP, the answers won’t always be easy.