SNAPSHOT: Paycheque Protection Program Forgiveness Uncertainty Prevents Agreements
Despite a record stock market rebound, Central America continues to struggle as the global Covid-19 pandemic persists.
As discussions in Congress over additional stimulus languish Along the parties, small and medium-sized businesses have witnessed the growing economic divide between their own businesses and mega-cap companies such as Apple and Amazon that seem entirely unaffected in these turbulent times.
The pain, unfortunately, doesn’t end there, as companies now recognize another issue that is holding them back. The Paycheque Protection Program (PPP), instituted earlier this year as part of the CARES Act, was intended to support small businesses suffering from mandatory government shutdowns initiated to slow the spread of the pandemic. Unfortunately, business owners and their advisors now realize that uncertainty surrounding one aspect of the program – balance owed forgiveness – threatens mergers and acquisitions (M&A).
As a reminder, the PPP was enacted to provide loans to businesses with less than 500 total employees, with a few exceptions. These loans were calculated by multiplying the average payroll of a company by 2.5 times. Businesses were allowed to use the proceeds of these loans to cover certain eligible costs, such as 60% of salary costs and other expenses such as utilities and rent. Perhaps the most important aspect of the program: If a company adhered to the parameters set by the Treasury and Small Business Administration (SBA), it could potentially apply for the total cancellation of the loan.
This last point was arguably the most attractive aspect of PPP. As with all good things, many business owners and their advisors have found that the promise of free money comes with unforeseen conditions. Companies
tthose who were already in the process of selling before the pandemic or who have since gone on sale are trapped by the uncertainty of forgiveness.
The M&A space for PPP loan recipients faces a number of unique challenges.
As we have seen, program eligibility was based on a rigid calculation of the number of employees of a company. As long as this number of employees did not exceed the applicable threshold, a potential borrower was considered eligible. A problem arises; however, when a company still uses the proceeds of the PPP loan before the December 31, 2020, cut. If that same business is considering a sale before the deadline, depending on the buyer’s status and the nature of the buyer’s business, a sale before the PPP loan funds are depleted could make a seller ineligible for the discount. . For example, a firm exploring a sale to a private equity buyer may become ineligible to claim a rebate upon completion of the sale, since the private equity firms have received the designation of the SBA as being “primarily engaged in investments or speculation, and these companies are therefore not eligible to receive a PPP loan”.
In addition, the changing political landscape since the inception of the PPP, coupled with a certain level of uncertainty that is dissipating given the broader market recovery, has led to some speculation as to whether companies already engaged in the the sales process could make the certificate that “the uncertainty of the current economic conditions makes it necessary to apply for a loan to support the ongoing operations of the eligible beneficiary”.
Commentators focused on the Current effect rule which relates to an existing acquisition agreement given current effect depending on the progress of the parties in the process of closing the deal. In part, the rule considers “stock options, convertible securities and merger agreements (including agreements in principle) to have a current effect on the power to control a company.
Thus, a business already engaged in the sales process before the creation of the PPP must potentially consider the attributes of the buyer, such as the nature of the business and the number of employees in order to determine its own eligibility. Unsurprisingly, the unique facts and circumstances of each situation must be assessed, as the applicability The current effect rule depends heavily on the level of “definition” of the existing agreement documentation. In certain circumstances, a signed letter of intent – even if it is not binding – could be considered to have actual effect if those agreements or understandings contain specific terms and remain subject only to a certain level of diligence.
Finally, M&A advisers are troubled by the possibility that subsequent Treasury and SBA guidance will further affect a proposed asset purchase. At first glance, the current effect rule and other issues already discussed above appeared to be limited only to an entity acquisition. This belief, however, grew strained as potential buyers and sellers of assets considered the notes issued in conjunction with a PPP loan. In particular, the form note provided by the SBA to private lenders contains a default provision that can be triggered if a borrower “[r]organizes, merges, consolidates or otherwise changes the ownership of the business structure without the prior written consent of the lender. While the foregoing does not specifically distinguish an asset sale, lenders and certain commentators have signaled apprehension that a sale of almost all of a company’s assets implicitly falls within the trigger events.
Moreover, due to the hasty, haphazard and sometimes contradictory directions offered by the Treasury and the SBA throughout the PPP process, there is no guarantee that the landscape will not be subject to further changes. As the rapid outrage of the public and the reply to reports that large publicly traded companies have received PPP loans, regulators have taken the unorthodox position of instituting regulations and rules after the fact that threaten the ability of business owners and their advisers to operate in a predictable regulatory environment. This is of particular concern given that changes and regulations in tax law have historically been enacted on a eventual basic, since holding people accountable for rules that did not exist at the time a decision is made has a detrimental effect on business decisions.
The Solution — Delay or Commitment
In the world of mergers and acquisitions, nothing is worse than uncertainty. While the PPP has offered a lifeline to struggling small businesses across the country, the piecemeal and piecemeal rule-making process has crippled the trading community. As of August 10, the SBA has finally started accepting forgiveness requests from PPP borrowers; however, early indications suggest that a final decision to forgive could take as long as 150 days. While some buyers and sellers may be willing to wait for such a decision before closing the deal, a waiting time of almost five months is sure to act as a deterrent to mergers and acquisitions.
Purchasers of assets and entities have taken the logical position that PPP loans must be paid on or before closing, as the questions of a possible future imposition of successor liability are unsustainable from a corporate perspective. risk management. The sellers, on the other hand, do their best to get waivers from the lenders for the default provisions contained in their note as they attempt to have their cake and eat it too. While a seller cannot be faulted for wanting free money and the full amount of the intended purchase price, these actions taken by sellers seem particularly dubious given the existence of the effect rule. current. Ultimately, this current stalemate between the parties can only be resolved through the use of escrow of the outstanding PPP loan amount.
If there is one lesson to be learned from this widespread confusion, it is that inconsistent and contradictory regulation and guidance can cripple the intended beneficiaries.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Christopher Hanewald is a member of the Corporate and Securities team at Wyatt, Tarrant & Combs LLP in Memphis, Tenn.