On October 2, the Small Business Administration (SBA) issued an important Procedural Notice clearing the way for dealmakers to begin closing M&A transactions involving targets with outstanding Paycheck Protection Program (PPP) loans with the implicit blessing of the SBA.

Most PPP loan documents prohibit changes in ownership of a PPP borrower without the lender’s consent, and pre-existing SBA servicing requirements would have required PPP lenders to obtain the SBA’s approval before consenting to any such change in ownership during the first 12 months that a PPP loan was outstanding. This Procedural Notice is addressed to PPP lenders and provides the first post-CARES Act guidance regarding circumstances in which the SBA’s approval will be required in connection with a change of ownership transaction.

Importantly, this Procedural Notice provides that PPP lenders may consent to changes of ownership of PPP borrowers without SBA approval if the borrower (1) completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP lender and (2) funds an escrow account controlled by the PPP lender in an amount equal to the outstanding balance of the PPP loan, to be held to pay off the PPP loan to the extent that forgiveness is denied.

This Procedural Notice also confirms that no SBA approval will be required in connection with changes of ownership of PPP borrowers whose PPP loans have been fully forgiven and/or repaid prior to the change of ownership. The SBA had previously indicated that it would begin formally granting forgiveness applications as early as this week, with smaller loans likely to be processed fairly quickly while loans of more than $2 million will be subject to greater scrutiny.

For additional information regarding changes of ownership of PPP borrowers, see the extended discussion of related matters in our Private Equity Dealmakers Guidebook to Healthcare M&A During the COVID-19 Pandemic, which has been updated in response to this Procedural Notice.

The Bass, Berry & Sims CARES Act Task Force continues to monitor developments related to the unprecedented governmental assistance programs enacted in response to the COVID-19 pandemic. If you have questions about the PPP and your business, please contact a member of the task force or your relationship attorney at the firm.