This article is written by Abhijit Kirtunia, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

Introduction

The Paycheck Protection Program (“PPP”) created under the CARES Act has provided much-needed assistance to millions of businesses and other organizations operating in the United States affected by the COVID-19 epidemic. The Paycheck Protection Program (PPP), created under the Coronavirus Aid,  Relief, and Economic Security (CARES) Act, has provided much-needed assistance to small business owners in response to the COVID-19 epidemic. In recent months, a buyer considering an acquisition of a target with PPP loans should take time to carefully consider how the target’s PPP loan will affect its due diligence, contract negotiations, and post-closing matters. Buyers who have filed a complaint or are considering applying for an Employer Retention Tax  Credit (ERTC) should consider in particular how the target’s status as a PPP loan recipient could affect access to post-closure status actions. The program continues to emerge with the latest developments related to PPP borrowers participating in a regulatory change, merger, or acquisition transaction. 

Due diligence 

During the diligence process, buyers should carefully plan their diligence applications related to PPP  loans and supporting documents in order to assess and allocate risks associated with PPP loans. This is true regardless of the nature of the transaction or whether the loan will be repaid in connection with the closure.  

PPP borrowers may be subject to criminal or public liability in connection with any misconduct or misrepresentation made in their PPP applications or related certificates. In view of this potential debt,  even if the parties decide to repay the PPP loan when it closes, the buyer must review any documents related to the initial loan application, any documents that support its initial PPP eligibility, and any related certificates to verify that the intention is to maintain sufficient documentation to support its initial eligibility under the plan, in the event of a future PPP loan study. 

Similarly, buyers should carefully review PPP loan documents for any transaction agreements required by the lender or SBA in order to maintain a possible PPP loan forgiveness. If the required permits are not available, the PPP loan will not be available, which could result in the borrower’s automatic remedies,  including interest paid or immediate repayment of the loan. The need for prior approval for a change of control, change of ownership, change in the nature of the business, the allocation of loans, or the sale of assets outside the normal course of business is very common in PPP loan documents. PPP lenders are still developing their approval and forgiveness process, and buyers are likely to experience delays and various problems in the process. Loan documents may provide for the consent of the lender, and the SBA  loan service guidelines provide that any proposed changes to the borrower’s identity within the first 12  months after the final issuance of the SBA 7 (a) loan require prior approval of the SBA. In addition to their potential impact on the consolidation and acquisition of shares, SBA loan service guidelines may also be considered to require SBA approval in the sale of assets. Buyers should be aware that there is no SBA  guideline on how M&A transactions affect PPP loan forgiveness. 

During the due diligence process, buyers should also review any documents that will be sent (or sent) or used to assess the target’s application for exemption. The Paycheck Protection Program Flexibility Act  (PPPFA) extends the period during which a PPP borrower must use his or her PPP funds for consolidated use under the plan from eight weeks to the first 24 weeks after the start date of the PPP  loan or December 31st. , 2020. PPP lenders who have received their loans before June 5, 2020, may choose to use a period of eight weeks or 24 weeks. Determining which combined period applies to a  particular PPP borrower will help the buyer to check the timeline where he or she can expect a pardon from the SBA and the PPP lender. The borrower may submit an application for pardon before the expiration date if he meets certain requirements. The SBA has 90 days to approve the amount of loan forgiveness, but only after 60 days, the PPP lender must approve the application for exemption. This means that loan forgiveness can take up to 150 days (or more if there is an investigation into the borrower’s application or certificates) after the borrower’s application for exemption at the end of the closed period. Any documents indicating how the target has used the PPP loan, and whether the policy has reduced wages or salaries or failed to maintain its pre-loan rate for full-time employees, are also important in buyer assessment of whether the intended PPP loan application will work.  

Details on how the target’s PPP-funded expenses may be relevant in assessing and allocating tax risks and making capital adjustment decisions – US Treasury and Congress have been at loggerheads over tax deductions for those costs, but in the absence of legal reforms, the IRS will take these as nondeductible. Appropriate hard work inquiries should also be sought to determine whether the retailer or its partners  (which are widely considered and include affiliated businesses) have installed ERTC, as the ability to claim ERTC and PPP loans are compatible. Accordingly, any acquisition of ERTC demands within the elaborate membership group would indicate the need for further scrutiny of PPP loans since ERTC, when required, tends to represent the group’s most important economic momentum. 

Transaction structure  

When deciding to classify transactions such as direct mergers, stocks, or commodities purchases, buyers may be inclined to limit the potential debt associated with the seller’s PPP loans and certification-related applications by choosing to purchase goods where the seller retains all the money and other PPP-related assets and liabilities. Such a plan can be very appealing when the buyer or managed organizations intend to seek ERTC after closing. However, the procurement strategy may result in the party not receiving the benefits of PPP loan forgiveness if all other assets, including employees, are transferred to the buyer at the close and the seller does not meet PPP’s financial requirements for the loan. Members should also consider whether a particular transaction structure will place a buyer business, a business acquired, or both continuous limits due to PPP loans, including restrictions on benefits, administrative compensation restrictions, or, as noted above, potential failures to seek ERTC. Continuous constraints and potential liabilities are more likely to be directly related than to the indirect merger, equity, or purchase of goods by the holding company, although buyers should always keep in mind that there are nuances associated with each job structure. 

After deciding what type of activity to use, the parties must decide whether to repay the PPP loan in terms of closing or keeping it in place. This decision should take into account the likelihood that the loan will survive a sale. If the buyer enters the transaction with the intention of sharing the proceeds from the seller after closing, it is advisable for the PPP loan to be repaid at the closing. Ensuring that PPP loans are repaid on closing and could put the buyer and his or her partners in a better position to seek ERTC after closing, especially if the recently distributed legal provisions are incorporated into the new COVID-19 law. 

Another way to deal with the uncertainty surrounding PPP loan forgiveness is to delay closing it until such forgiveness is received. However, as mentioned above in the Diligence section of this article, delays in a  transaction until the PPP loan is possible may not work, as the final approval of the pardon may take more than 150 days from the date the application for exemption is submitted. If a post-closing business can also qualify for a PPP loan, a post-closure loan waiver can be granted. The parties must consider whether the PPP buyer business will continue to operate separately from the buyer business, as this will make it easier to respond to the use of PPP loans, thus supporting disputes that support post-closure loan forgiveness. 

Purchase price consideration 

Considering that the PPP loan will remain with the business acquired after the closure, the parties next need to evaluate how the loan can be managed in the calculation of the purchase price and other related adjustments. Entities may manage PPP loans such as 

(i) general credit that reduces the purchase price;  

(ii) a debt that reduces the purchase price, by an agreement that the buyer will send any amount of forgiveness to the seller upon receipt; 

(iii) the amount payable when the loan is waived, from the amount  actually forgiven; 

(iv) debt relief at the close of the closing process after the closing decision has been  finalized by the SBA and the PPP lender; or 

(v) a different escrow amount if the loan is fully forgiven before the closure, but the buyer may have doubts as to whether the seller is eligible for the loan at the time of initial application or adequately met the exemption requirements. These machines are designed to deal with any risk that the PPP loan may ultimately be forgiven and require the seller to bear the risk of non-payment. 

Submissions and warrants buyers will request 

Considering that the PPP loan will remain in place after the closure, buyers should consider  requesting the following submissions from the seller on a clear acquisition agreement: 

1. That in obtaining and applying for a PPP loan, the seller and the target meet all eligibility requirements and certificates at the time of its initial application. 
2. That all PPP-related certificates were present and valid, valid and validated. 
3. That the seller and the target have complied with all of the loan plans that the seller and his /  her intended participation under the CARES Act (or any other similar law), including any restrictions on the use of any loans. 
4. That no directors, officers, or other employees of the seller or his or her clients are barred or otherwise barred from engaging in any government activity. 

Agreements a seller may request 

Depending on the nature of the transaction, the seller may request the following agreements from  the buyer in a clear acquisition agreement in an attempt to preserve PPP loan forgiveness after  closing: 

1. That the buyer will maintain a separate legal presence of the PPP loan business. 
2. That the buyer will comply with, and cause the PPP loan company to comply with, the applicable terms of the PPP loan plan, including any limitations on the purchase of shares and profits. 
3. That the buyer will lodge, or cause the PPP lender to apply, exempt, and use appropriate commercial efforts to obtain a PPP loan waiver. 
4. Refusal of any PPP buyer or business action that may reasonably be expected to result in unforgiveness of debt or determination of PPP loan disqualification. 

If the buyer or his or her partners intend to seek ERTC after closing, the buyer must review the language of the specific contract requested and refer to the existing guidelines of the CARES Act  (or subsequent law) before committing to such an agreement. Under current leadership,  significant uncertainty exists as to whether the PPP recipient’s acquisition will jeopardize the buyer and his or her partners in terms of past or future ERTC claims. Because the ERTC, when demanded, represents a significant economic benefit, one can imagine a situation in which a  buyer wants to retain the benefits of ERTC, if any, and choose to waive the ongoing right to PPP  loan benefits.

Agreements that the buyer must request 

Buyers should request the following agreements from the seller in a fixed acquisition agreement to reduce  any potential post-closing debts related to PPP loans: 

1. That the buyer will manage any audit related to PPP loans for a valid period of six years of the audit. 
2. That the seller will fully cooperate with any SBA research or other government investigation or related cases in any way on PPP loans and will ensure adequate access to their books, records, and any persons involved in the application and administration of PPP loans. 

Commitment Consideration 

Lastly, the buyer who buys a PPP loan company should carefully consider complying with the terms of the collateral in the fixed acquisition agreement, and whether the loan will remain in place after closing, must be paid in respect of the closure or withdrawal from the sale and retained by the seller. Depending on the risk the buyer considers to be related to the PPP loan of the target and any related eligibility criteria or certificates made by the regulator or retailer, buyers may apply different caps and baskets or consider making a basic PPP loan representation. A buyer who thinks these options provide insufficient coverage should request a special obligation for any PPP loan. 

References

1. https://www.bakerlaw.com/alerts/ma-considerations-for-buyers-of-targets-with-ppp-loans
2. https://www.morganlewis.com/pubs/2020/08/navigating-ppp-loans-in-m-a-transactions

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