ppp and important m&a issues
TRANSCRIPT
July 7, 2020
PPP and Important M&A Issues
2
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Introduction
Sara Ainsworth, Associate, [email protected]
As an associate in the Securities & Corporate Finance practice, clients rely on Sara Ainsworth to work with Polsinelli’s team of attorneys to
analyze each transaction matter to develop a strategic approach to representation based on the client’s immediate and long-term business
and operational goals. Working closely with seasoned Polsinelli attorneys in the Securities & Corporate Finance practice, Sara helps deliver
a range of legal services during the life cycle of the client’s business—from selecting the appropriate choice of entity through to exit strategy,
and assisting with the nuts and bolts of fund formation and fund transactions.
Bill Sanders, Tax Practice Chair, [email protected]
Through over 30 years of practicing law concentrated on tax matters, Bill Sanders has developed broad tax experience in corporate,
partnership, limited liability company, complex business transactions, and workout and bankruptcy issues. As chairman of the firm’s tax
practice group for the last 15 years and a licensed CPA in Missouri, Bill’s clients range from Fortune 100 companies to family-owned and tax-
exempt organizations. He regularly represents clients nationwide before the Internal Revenue Service at all levels including audits, the
Appeals Division and in tax court.
Phil Feigen, Office Managing Partner, [email protected]
Phil Feigen is a shareholder in Polsinelli’s Business Department, chair of the Financial Institutions Practice Group and managing partner of
the firm’s Washington, DC office. With over 25 years of experience, Mr. Feigen brings a unique perspective to providing general corporate
advice, as well as complex business counsel to clients in ever-changing regulatory environments. His practice focuses on representing
financial institutions, Small Business Investment Companies and other entities before the Small Business Administration, other private
investment funds, federal and state banks and other financial services related companies. Mr. Feigen has represented clients complying with
complex federal/state licensing and regulatory requirements.
Issues to flag
Due diligence considerations
The purchase agreement
Representations and warranties
Covenants
Indemnification
Escrow
Leftover funds
Discussion Topics
Issues to Flag
Transaction closes before the borrower obtained a PPP loan
Transaction closes after the borrower obtains a PPP loan but
before the borrower applies for forgiveness
Transaction closes after the borrower applies for forgiveness
M&A Scenarios
Change of control is an event of default under standard PPP
loans
You will need bank consent
The SBA has not taken a position on whether borrowers can
undergo a change of control or how a change of control impacts
eligibility for forgiveness
Issues to Flag – Changes of Control
Timing the closing during the covered period can impact
forgiveness
Reductions
If the buyer is taking on the PPP loan but not the employees, there could be a
reduction due to a reduced FTE count
If the buyer is not taking the PPP loan but is taking the employees, the borrower
could face a reduction in forgiveness due to a reduced FTE count
Using the proceeds
If the borrower no longer has employees due to the transaction, it may not be
able to use all of the loan proceeds
Issues to Flag – Timing the Closing
Carving out only the PPP loan is not always possible
De facto merger
Continuity of shareholders or owners
Buyer is a mere continuation of the seller
No continuity of ownership
Buyer is a “new hat” for the seller
The purchase agreement must be very carefully drafted
Issues to Flag – Successor Liability in an Asset Purchase
The SBA will audit all PPP loans of over $2 million, and likely all
PPP loans in which an affiliate group has loans of more than $2
million
Audits can occur at any time in a the six years following the end
of the covered period
Buyers should make sure that sellers have all documentation
now
Issues to Flag – Audit Risk
Lenders or the SBA can deny forgiveness
There is a process for appeal, but any purchase agreement
should contain a mechanism for handling any such denials
Please note that additional guidance is forthcoming on such
denials, so the purchase agreement should be flexible on this
point
Issues to Flag – Forgiveness Denials
Loan forgiveness does not create a taxable “debt forgiveness”
event under the CARES Act
However, the IRS has indicated that despite the CARES Act
provision, a deduction will not be allowed for the expenses that
give rise to loan forgiveness (e.g., payroll, interest, utility, etc.)
Congressional action pending to counter the position taken by
the IRS
Issues to Flag – Forgiveness Grant – Tax Consideration
Employer Retention Payroll Tax Credit
Very fact-specific and subject to IRS scrutiny/dispute
Employer’s Share of Social Security Deferral
Planning important for the very significant obligation due 50% on each
of 12/31/2021 and 12/31/2022
NOL revised carryback rule provides some targets the
opportunity to request refunds of taxes paid as long ago as
2013
Issues to Flag – Other CARES Act Tax Considerations
Due Diligence Considerations
Confirming size
Review the loan application and substantiating documents
Affiliation analysis
Understand who the borrower’s affiliates are and whether they impact
the borrower’s eligibility
Ensuring economic need
While the SBA stated that there is a presumption that those with loans
under $2 million had an economic need for the loan, it is always best to
document
Particularly important if the buyer has a PPP loan
Due Diligence Considerations - Eligibility
Confirm that the borrower has correctly used the proceeds of the
loan:
Proper payroll costs
Recent guidance has limited the payroll costs for owner-employees
Does not include paying for 1099 contractors
Mortgage interest on real or personal property mortgages in place by
February 15
Rent on real or personal property leases in place by February 15
Utilities for utility contracts in place by February 15
Determine whether the borrower used cash or accrual
Due Diligence Considerations – Use of Proceeds
Confirm which covered period the borrower will use: 8-weeks or
24-weeks
Determine whether the borrower has spent at least 60% of the
amounts spent during the covered period on payroll costs
Analyze whether there will be any reductions, and whether
those reductions can be mitigated:
Salary reductions
Reductions in FTEs
Due Diligence Considerations – Eligibility for Forgiveness
Absent a legislative fix, confirm expenses giving rise to the loan
forgiveness have not been deducted in computing taxable income
Scrutinize records for qualification and computation inherent in Employer
Retention Tax Credit
Backup documentation for number of hours worked most susceptible to
error/abuse
Confirm calculation of Employer’s share of Social Security deferred and
none of Employee’s share
Investigate net income/losses incurred from 2013 through closing date for
availability of refunds of taxes previously paid
Due Diligence Considerations – Tax Matters
The Purchase Agreement
Seller was eligible for the loan and correctly determined the
maximum loan amount
Seller truthfully and accurately completed the PPP loan
application
Seller has provided all true, correct and complete copies of PPP
documentation
Seller has obtained all necessary waivers, approvals and
consents
Seller has used the PPP loans in accordance with the CARES
Act
Representations and Warranties
The seller will use all of the proceeds in the manner required
under the CARES Act
If the closing occurs after the covered period
The seller will take all commercially reasonable steps to
maximize loan forgiveness
If the closing occurs after the covered period
The seller will maintain all records for at least six (6) years
The seller will apply for forgiveness within a stated period of
time after the end of the covered period or prior to the end of
the covered period
Covenants
Expenses giving rise to the loan forgiveness have not been deducted
Employer Retention Tax Credit has been computed according to the
CARES Act and IRS published guidance
Employer’s share of Social Security deferred has been computed
according to the CARES Act and IRS published guidance
Which party is entitled to the ability to carryback NOLs to a previous tax
year and the refund(s) received by virtue of such carryback
Costs associated with defense of any of the above
Tax Representations, Warranties and Covenants
Seller to indemnify the buyer against any:
Ineligibility, including due to affiliation issues;
Noncompliance with the terms of the loan;
Improper use of funds or proceeds; or
Audit or investigation by the SBA;
Costs and taxes owed by virtue of any IRS notice, adjustment or
examination related to any of the CARES Act tax provisions.
Indemnification
Escrows can be structured in different ways to address the lag
time in forgiveness
Lenders have 60 days from receipt of a complete application to review
a forgiveness application and the SBA has an additional 90 days to
review – a forgiveness decision could take 5 months after the
application
Escrow the total amount of the loan in the event of a denial of
forgiveness
Escrow amounts to cover any potential audit penalties
Escrow
Buyer and seller need to determine what will occur if there are
leftover funds, either due to an inability to spend the full funds or
failure to obtain full forgiveness
Will the loan be paid back?
If not, will it be covered by the escrow?
Leftover Funds
Questions
27
Polsinelli COVID-19 Resources
Contact
For COVID-19 legal advice across a spectrum of
issues impacting an array of industries and legal
areas, our team is available and connected
nationally and in the communities in which you
operate.
Contact us with questions at:
Polsinelli’s cross-disciplinary COVID-19 blog
provides companies tools and information needed
to effectively and lawfully protect their employees
and business.
Visit our blog:
https://www.covid19.polsinelli.com/
Blog + Resources
27
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