With so much uncertainty over COVID-19 and the economic fallout, there has been significant hesitation on closing mergers and acquisitions. As transactional attorneys many of us are thankful to still be working on deals while we wonder what the future holds. It is no secret that many companies have received Paycheck Protection Program ("PPP") loans as part of the CARES act relief bill and the impact of those are now being felt on pending M&A deals.
In particular, the form PPP loans we’ve seen include an event of default for the loan where the company “[r]eorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent;”. This creates a potential issue where a company has a PPP loan pending forgiveness and an overlapping M&A deal that is pending.
Suffice it to say that guidance from the SBA and Treasury on PPP loans is fluid right now and it is not difficult to imagine that forgiveness could be impacted by the loan being in default. Given that there will likely be some form of written certification by a business for forgiveness of the PPP loans, being in default could present a barrier to the company ultimately obtaining forgiveness. Effort should certainly be made to obtain consent from PPP lenders for the proposed transaction (though word of caution, many banks are simultaneously navigating this for the first time so you may need to exercise some patience).
The loan itself can create some interesting issues to navigate in terms of its impact on the purchase price by virtue of impacting liabilities on the balance sheet and cash on hand (which theoretically at least should net out). A more worrisome scenario for pending M&A deals is with potential non-forgiveness of the loan (no matter how favorable the loan terms are). If the seller is planning on keeping cash (a common term in M&A deals) then PPP loan use of funds requirements may not be met. If the loan is not forgiven it will certainly have an impact on the target company's financials and the proposed purchase price and post closing adjustments. Of course the liability should be also included on disclosure schedules.
Furthermore, we are seeing most deals contemplating incorporation of representations and warranties into purchase agreements to reflect compliance with forgiveness eligibility requirements (at least those that are known at this time).
If you are a company with a pending transaction and you have received a PPP loan, it is best to discuss this with counsel and ensure that proper consideration is being given to the loan's impact on the deal.
Many companies have received Paycheck Protection Program ("PPP") loans and the impact of those are now being felt on pending M&A deals.