Changes of ownership and PPP loans
On Oct. 2, 2020, the U.S. Small Business Administration (SBA) released a long-anticipated Procedural Notice related to changes of ownership in an entity that has received a Paycheck Protection Program (PPP) loan. While this guidance was released to all SBA employees and PPP lenders, it is relevant for PPP borrowers looking to undergo a change of ownership, as well as for buyers and sellers of PPP borrowers. Importantly, borrowers with PPP loans which undergo a change of ownership will not forfeit the chance to have their PPP loan forgiven.
For purposes of the PPP, the SBA will consider the following events to be a “change of ownership:”
- 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, including to an affiliate or an existing owner of the entity;
- 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
- A PPP borrower is merged with or into another entity.
Regardless of any change of ownership, the PPP lender is required to continue submitting monthly 1502 reports until the PPP loan is fully satisfied (as defined below), and the PPP borrower is still required to:
- Perform all of its obligations under the PPP loan;
- Remain responsible for all certifications made in connection with the PPP loan application, including the certification of economic necessity; and
- Comply with all other applicable PPP requirements, such as using the PPP loan only for the authorized purposes.
The PPP borrower must also obtain, prepare and retain all required PPP forms and supporting documentation and provide those forms and supporting documentation to the PPP lender or lender servicing the PPP loan or to the SBA upon request. In the Procedural Notice, the SBA explicitly reserved all rights and remedies available under the law in the event of fraud, false statements, or unauthorized uses of PPP loan proceeds.
When a PPP loan is fully satisfied prior to the closing of a transaction that constitutes a “change of ownership,” there are no restrictions on that transaction. A PPP loan is fully satisfied if the PPP borrower has:
- Repaid the PPP note in full; or
- Completed the loan forgiveness process in accordance with the PPP requirements and:
- The SBA has remitted funds to the PPP lender in full satisfaction of the PPP note; or
- The PPP borrower has repaid any remaining balance on the PPP loan.
Restrictions if the PPP loan is not fully satisfied
No SBA approval required
An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of SBA only if:
- The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
- The PPP borrower submits its forgiveness application with all required supporting documentation to its PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.
A PPP borrower may sell 50% or more of its assets (measured by fair market value) without the prior approval of the SBA only if it submits its forgiveness application with all required supporting documentation to its PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.
After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. Buyers and sellers will have to decide how to fund the escrow account and allocate the escrow amount (if any is left over after repaying any outstanding balance of the PPP loan).
SBA approval required
If a change of ownership of a PPP borrower does not meet the conditions described above (i.e., no escrow established), the PPP lender must obtain the SBA’s prior approval. To obtain the SBA’s prior approval of requests for changes of ownership, the PPP lender must submit a request to the appropriate SBA Loan Servicing Center with the following:
- The reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds as described above;
- The details of the requested transaction;
- A copy of the executed PPP note;
- Any letter 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 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 has discretion to require additional risk mitigation measures as a condition of its approval of the transaction. In order to obtain SBA approval of any change of ownership involving the sale of 50% or more of the assets of a PPP borrower, the buyer must assume all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms, and the purchase agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the buyer, or a separate assumption agreement must be submitted to the SBA.
In its Oct. 2 Procedural Notice, the SBA gave itself 60 calendar days from its receipt of a complete request to review and respond to such request. So, borrowers undergoing changes of ownership requiring SBA approval may wish to apply as soon as possible to make sure the SBA does not hold up the deal. Additionally, for these deals, it would be prudent to include SBA approval as a condition to closing. Unfortunately, it cannot be predicted how long the SBA will take to process requests for approval.
Requirements for all changes of ownership
Whether or not SBA approval is required, a PPP borrower undergoing a change of ownership must notify its PPP lender in writing of the contemplated transaction and provide its PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. Further, the PPP borrower (and the new owner of, or successor to, the PPP borrower) will remain subject to all obligations under the PPP loan.
If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following the closing of the transaction:
- In the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower; and
- In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.
The PPP lender must notify the appropriate SBA Loan Servicing Center, within five 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)’ ownership percentage(s);
- Tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and
- Location of, and the amount of funds in, the escrow account under the control of the PPP lender, if an escrow account is required.