On Friday, October 2, 2020, the Small Business Administration (SBA) released a Procedural Notice
(Notice) addressing the required procedures for changes of ownership of an entity that has received a Paycheck Protection Program (PPP) loan. The Notice is effective as of October 2, 2020.
Pursuant to the Notice, a “change of ownership” occurs when:
1. At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity; or
2. The PPP borrower sells or otherwise transfers at least 50% of its assets; or
3. A PPP borrower is merged with or into another entity.
The Notice clarifies that regardless of the change of ownership, the borrower remains responsible for all obligations under the loan, certifications made in connection with receiving the loan, compliance with PPP requirements, and preparing, submitting and retaining all PPP forms and supporting documentation.
PPP borrowers contemplating a change of ownership must notify their PPP lender prior to closing and provide the lender with a copy of the proposed agreement or other documents that would affect the proposed transaction. Depending on the structure of the transaction, a borrower must receive consent from either their PPP lender or the SBA. Within five business days after completion of the change of ownership, the lender must notify the SBA of:
• The identity of the new owner(s);
• New ownership percentages; and
• Tax identification number(s) of any owner(s) holding 20% or more of the borrower.
In some instances, it may be necessary to receive the SBA’s consent to the change of ownership. Whether the SBA’s consent or a PPP lender’s consent is required depends on the factors below.
SBA Approval Is Not Required If:
1. Note is Fully Satisfied. There are no restrictions on a change of ownership if the borrower has: (i) repaid the note in full; or (ii) completed its loan forgiveness application and either received full forgiveness or repaid any remaining balance on the PPP loan that was not eligible for forgiveness.
2. Sale or Transfer of 50% or Less of Common Stock. SBA prior approval is not required for sales or other transfers of 50% or less of the common stock or other ownership interest of the borrower.
3. Sale or Transfer of More than 50% of Common Stock. SBA prior approval is not required for transfer of 50% or more of the common stock or ownership interest of the borrower if the borrower: (i) submits to its lender a loan forgiveness application detailing its use of all PPP loan proceeds, together with supporting documentation; and (ii) establishes an interest-bearing escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan.
4. Sale of 50% or More of Assets. SBA prior approval is not required for sale of 50% or more of the assets of the borrower if the borrower: (i) submits to its lender a loan forgiveness application detailing its use of all PPP loan proceeds, together with supporting documentation; and (ii) establishes an interest-bearing escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan.
SBA Approval Is Required If:
Prior approval from the SBA is required for all changes of ownership that do not meet any of the conditions discussed above. To obtain SBA prior approval of requests for changes of ownership, the borrower’s PPP lender must submit the following information to the SBA:
• The reason that the borrower cannot fully satisfy the note or establish the account;
• The details of the requested transaction;
• A copy of the borrower’s PPP promissory note;
• Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the borrower, seller (if different from the borrower) and buyer;
• Disclosure of whether the buyer has an existing PPP loan, and, if so, the SBA loan number; and
• A list of all owners of 20% or more of the purchasing entity.
The SBA may also require additional risk mitigation measures as a condition of its approval of any transaction. The SBA will review and provide a determination within 60 calendar days of receipt of a request.
PPP Loan Obligations
In the event of a sale of stock or merger, the borrower remains subject to all obligations under the PPP loan, regardless of whether the transaction required SBA approval. If the new owner(s) uses PPP funds for unauthorized purposes, the SBA will have recourse against the owner(s) for such unauthorized use.
If a new owner or successor has a separate PPP loan, the borrower and new owner, or successor, are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with respect to those outstanding PPP loans.
For asset sales requiring SBA approval, the purchasing entity must assume all of the borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The purchase or sale agreement must include language regarding the assumption of the borrower’s obligations under the PPP loan by the purchasing entity. Alternatively, the borrower and purchasing entity may execute and submit a separate assumption agreement to the SBA.
The rules surrounding PPP loans are complex and business specific. If you have concerns about the rules, please contact Ford Turrell, Timothy Hillegonds, Rob Davies, Matthew Crowe, Charlie Goode, Jeffrey Ott or your Warner attorney