In order to clarify the required procedures for changes of ownership of entities that have received Paycheck Protection Program (“PPP”) funds, the Small Business Administration (“SBA”), on October 2, 2020, released a Procedural Notice. Specifically, the Procedural Notice addresses the procedures companies with outstanding PPP loans must follow when undergoing a change of ownership, including mergers, equity or asset acquisitions, or ownership restructurings.[1]

Prior to the October 2, 2020 Procedural Notice, SBA loans typically required prior SBA approval for any transaction involving a change of ownership, regardless of the percentage change. Without further guidance from the SBA, PPP lenders have been cautious in granting their consent to their PPP borrowers’ change of ownership transactions without prior SBA approval in order to avoid potential defaults and forego forgiveness rights of the PPP loan.

The Procedural Notice ‘Change of Ownership’ Definition

For purposes of PPP loans, the Procedural Notice clarifies the SBA’s prior definition of a change of ownership by carving out smaller (percentage-wise) transactions. Specifically, the Procedural Notice states that a change of ownership will have occurred only when (i) 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity; (ii) the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or (iii) a PPP borrower is merged with or into another entity.

NOTE: Before closing any change of ownership transaction, the PPP borrower must notify the PPP lender in writing and provide a copy of the proposed transaction agreement or other documents.

No Requirements for Satisfied PPP Loans

The Procedural Notice confirms that if, prior to the closing of a change of ownership, the PPP loan is repaid in full or forgiveness has been granted in accordance with PPP requirements and funds have been remitted to the PPP lender, there are no restrictions to such change of ownership.

Change of Ownership Transactions without SBA Prior Approval

If, prior to the closing of a change of ownership transaction, the PPP loan is not fully satisfied, a change of ownership may occur without SBA prior approval so long as:

Change of Equity Ownership (sale or transfer of common stock or other ownership interest or merger):

  • The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower[2]; or
  • The PPP borrower submits its completed forgiveness application to its PPP lender and establishes an escrow account with the PPP lender equal to the outstanding balance of its PPP loan.

Change of Asset Ownership (of 50% or more of a PPP borrower’s assets as measured by fair market value):

  • The PPP borrower submits its completed forgiveness application to its PPP lender and establishes an escrow account with the PPP lender equal to the outstanding balance of its PPP loan.

Change of Ownership Transactions with SBA Prior Approval

If any of the above conditions are not met, then SBA prior approval of the change of ownership is required and a PPP lender cannot unilaterally approve the change of ownership. Therefore, the PPP lender must submit an approval request consisting of:

  • The reason why the PPP borrower cannot fully pay off the PPP loan or escrow the funds with the PPP lender;
  • The details of the requested change of ownership transaction;
  • A copy of the executed PPP Promissory Note;
  • Any letters of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
  • Disclosure of the buyer’s existing PPP loan (if any) and the SBA loan number (if applicable); and
  • A list of all 20+% owners of the purchasing entity.

SBA may require additional risk mitigation measures upon its change of ownership approval. The Procedural Notice does state that the SBA will condition any change of ownership involving the sale of 50+% of a PPP borrower’s assets on the purchasing entity assuming all the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. Therefore, the SBA is requiring purchase or sale agreements involving such transactions to include language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing entity (or a separate agreement effecting the same).

The SBA has committed to reviewing all completed approval requests and providing a determination within 60 days of receipt.

Requirements for ALL Change of Ownership Transactions (Whether Requiring SBA Prior Approval or Not)

Regardless of whether or not SBA approval is required for a change of ownership transaction, the Procedural Notice provides that the PPP borrower will remain subject to all obligations under the PPP loan. Additionally, it provides that if new owner(s) use any of the PPP funds for any unauthorized purposes, the SBA has recourse against the owner(s) for such unauthorized use.

Additionally, if any new owner or successor arising from a change of ownership transaction has their own separate PPP loans, then:

  • The PPP borrower and the new owner(s) must segregate out and delineate PPP funds and expenses and provide documentation demonstrating PPP compliance by each PPP borrower; and
  • If a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation demonstrating PPP compliance for both PPP loans.

Furthermore, regardless of whether or not SBA approval is required for a change of ownership transaction, the PPP lender must notify the appropriate SBA Loan Servicing Center within 5 business days of completion of the transaction, of the:

  • Identity of the new owner(s) of the common stock or other ownership interest;
  • New owner(s)’s ownership percentage(s);
  • Tax identification number(s) for any owner(s) holding 20+% of the business’ equity; and
  • Location of, and amount of funds in, the escrow account under control of the PPP lender (if applicable).

 

[1] NOTE: The Procedural Notice does not address procedural requirements resulting from a PPP borrower issuing additional ownership interests.

[2] NOTE: all sales or other transfers since the PPP loan approval date must be aggregated in order to determine whether this 50% threshold is met.