Pub. 11 2020 Issue 4

Pub. 11 2020 I Issue 4 Winter 23 West Virginia Banker contacted by borrowers about various transactions and the impact of having a PPP or EIDL loan. As can be expected, some borrowers under these programs have contemplated or engaged in merg- ers, asset sales, membership or stock redemptions and other transactions. While there is no formal guidance from the SBA, PPP borrowers need to deter- mine if a consent or waiver of default on the PPP loan is necessary when consid- ering a strategic transaction. The PPP loan program is a product of the SBA’s 7(a) business loan program governed by Section 7(a) of the Small Business Act, the SBA Standard Operating Procedures, SBA regulations and SBA Procedural No- tices. Many of these rules also apply to the PPP loan program, in addition to the rules established specifically for the PPP loan program. SOP 50 57 2 provides that, after the full disbursement of loan pro- ceeds, certain actions will require SBA’s prior written approval. These actions include a “(c)hange in the ownership of a Borrower in the first 12 months after the final disbursement.” This require- ment applies to “any adjustment to or change in the ownership of a Borrower, including a change in percentage of ownership, for 12 months after final disbursement on any loan.” Assump- tions of PPP loans that release the original borrower also require SBA approval. In the absence of consent or a waiver of a default, a PPP borrower could potentially forfeit its ability to obtain loan forgiveness. The EIDL loan program has been in existence for decades and is governed by Section 7(b) of the Small Busines Act and carries a different set of regulations from the Section 7(a) rules that govern PPP loans. Also, unlike PPP loans, which involve a private party lender, EIDL loans are funded and administered by the SBA. EIDL loans also have a loan term of up to 30 years, unlike the short-term PPP loans, making it more likely that a stra- tegic transaction involving the borrower will arise during the life of the EIDL. EIDL promissory notes provide that the borrower is in default if it “(r)eorganiz- es, merges, consolidates, or otherwise changes ownership or business structure without SBA’s prior written consent.” Also, the SBA requires collateral to Matthew Kingery is of counsel with Lewis Glasser, PLLC, in Charleston, West Virginia. Matt devotes his practice to commercial transactions, lender representation, commercial development, distressed assets and real property matters with an emphasis on title, acquisitions, sales and financing issues. Matt has been recognized for his work in the legal industry and community and has received numerous awards, including being selected multiple times in Super Lawyers® in the practice area of real property law; named the 2010 West Virginia State Bar Young Lawyer of the Year; honored as a recipient of the 2009 Generation Next 40 Under 40 award by The State Journal, and named a Young Gun by the West Virginia Executive in 2017. He can be reached at mkingery@lewisglasser.com . secure all EIDLs over $25,000.00, often taking a blanket security interest in all of the borrower ’ s tangible and intangible personal property, in addition to any real estate collateral. The EIDL security agreement provides that the borrower “will not sell, lease, license or otherwise transfer (including by granting security interests, liens, or other encumbrances in) all or any part of the Collateral or Borrower’s interest in the Collateral” without SBA’s written approval. EIDLs under $200,000 do not require personal guarantees. Still, for transactions of $200,000 or more, under SOP 50 30 9, the addition or deletion of a guarantor is a material change to an EIDL that requires SBA’s approval and possibly a loan document modification. Summary All parties to a strategic transaction in- volving a small business with an outstand- ing PPP loan or EIDL, including the PPP lender, have a stake in ensuring the SBA has been notified of and has approved the transaction when required. As you might expect, the SBA has been overwhelmed with PPP loan and EIDL requests and forgiveness applications. Accordingly, contacting the SBA from the outset of a strategic transaction should be one of the first due diligence tasks engaged in by the parties to the transaction.  While there is no formal guidance from the SBA, PPP borrowers need to determine if a consent or waiver of default on the PPP loan is necessary when considering a strategic transaction. The PPP loan program is a product of the SBA’s 7(a) business loan program governed by Section 7(a) of the Small Business Act, the SBA Standard Operating Procedures, SBA regulations and SBA Procedural Notices.