On October 2, 2020, the Small Business Administration ("SBA") released a Procedural Notice to Paycheck Protection Program ("PPP") lenders providing guidance regarding what steps are necessary if a PPP borrower wants to complete a change of ownership transaction. This is significant guidance-previously, the SBA had notified lenders that SBA approval would be required in the sale of a business/change of ownership context when the target company has accepted a PPP loan, but had provided little in the way of guidance regarding what that actually required. Many PPP borrowers and lenders have requested but not received SBA approval, and buyers and sellers have had to attempt to structure transactions in an attempt to alleviate and allocate risk associated with this issue. In many ways, this Procedural Notice resolves some of those issues, most notably in providing a mechanism to close a transaction without having to wait for a response from the SBA. A summary of the Procedural Notice is below.

What qualifies as a change of ownership?

A change of ownership is deemed to have occurred under the following circumstances:  

  1. At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions; or
  2. A PPP borrower sells or otherwise transfers at least 50% of its assets based on fair market value, whether in one or more transactions; or
  3. A PPP borrower is merged with or into another entity.

All PPP borrowers, or their successor-in-interest in the case of a merger, remain responsible for the performance of all obligations under their loan, the certifications made in the application for same, and compliance with all PPP requirements. Any documentation required to be provided to a lender or servicing lender shall also remain the responsibility of the PPP borrower. Under all circumstances, the SBA has recourse against any party who uses PPP loan funds for an unauthorized purpose.

To initiate the process for approval, the PPP borrower must provide written notice to any PPP lender of proposed transactions and provide copies of all agreements related to such transaction. As set forth below, subsequent procedures may be required to complete any proposed transaction.

Required Procedures

  1. If the PPP Note is fully satisfied, there are no restrictions or additional procedures required prior to any proposed change of ownership. Full satisfaction includes both full repayment of the PPP Note or completion of the loan forgiveness process.
  2. If the PPP Note is not fully satisfied, the nature of the proposed sale or transaction will determine which additional required procedures apply.
    1. SBA prior approval is not required and may be approved unilaterally by the PPP lender if:
      1. If a change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger, and the sale or transfer is for: (i) 50% or less (calculated by the aggregate of all transactions since approval date of the PPP loan) of the common stock or other ownership interest of the PPP borrower; or (ii) a forgiveness application reflecting use of all PPP loan proceeds is completed and submitted, together with the establishment of an interest-bearing escrow account controlled by the PPP lender in an amount equal to the outstanding loan balance. After completion of the forgiveness process, the escrow funds must first be used to repay the remaining PPP balance plus interest.

        Additional mandatory requirements are set forth in Section 2.c. below.
      2. If change of ownership is structured as an asset sale, a sale of 50% or more of its assets may be completed without SBA approval if: (i) a forgiveness application reflecting use of all PPP loan proceeds is supplied to the PPP lender, and (ii) an interest-bearing escrow account controlled by the PPP lender is established equal to the amount of the remaining loan balance. After completion of the forgiveness process, the escrow funds must first be used to repay the remaining PPP balance plus interest, and the appropriate SBA Loan Servicing Center must be provided with escrow information within five business days of the transaction being completed.
    2. SBA prior approval is required for any circumstances other than those described in Section 2.a above, and SBA determinations will be provided within 60 calendar days of a complete request. A PPP lender must submit a request to the appropriate SBA Loan Servicing Center to obtain approval of the proposed sale or transfer.  All requests must include the reason the PPP borrower cannot fully satisfy the PPP Note or escrow funds; details of the transaction; a copy of the executed PPP Note; any letters of intent; purchase and sale agreement referencing responsibilities of PPP borrower, seller, and buyer; disclosure of buyer PPP loans including the loan number; and a list of owners of 20% or more of the purchasing entity. The SBA may require additional measures as a condition of approval.

      Any sale consisting of 50% or more of the assets of a PPP borrower are contingent upon the purchasing entity's assumption of all of the PPP borrower's obligations under the PPP loan as evidenced by language in the purchase or sale agreement or separate assumption agreement.
    3. For all sales or other transfers of common stock or ownership interest or merger. If any new owner or successor has a separate PPP loan, then where a purchase or other transfer of common stock or other ownership interest occurs, the borrower and new owner(s) must segregate and delineate PPP funds and expenses and provide documents to show compliance with PPP requirements; and in the case of a merger, the successor is responsible for the segregation, delineation, and documentation described above for both PPP loans.

      The SBA Loan Servicing Center must be notified by the PPP lender within five business days of completion of the transaction, including identity of new owners, ownership percentage, tax identification for equity owners holding 20% or more; and escrow account information, if escrow is required.

For additional explanation of the change of ownership required procedures, the full Notice can be accessed here.

To locate the appropriate SBA Loan Service Center, see https://www.sba.gov/document/sop-50-57-7a-loan-servicing-and-liquidation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.