SBA Releases Procedural Notice for PPP Loans and Changes of Ownership
Last updated November 3, 2020
On October 2, 2020, the Small Business Association (“SBA”) released a Procedural Notice (the “Notice”) outlining the required procedures for changes of ownership of entities that have received funds under the Paycheck Protection Program (the “PPP”). Specifically, the Notice sets forth when prior SBA approval is required before a change of ownership, depending on whether the change of ownership relates to a stock sale or merger, or to an asset sale. A “change of ownership” is defined in the Notice as (1) a sale or other transfer (whether in one or more transactions) of 20% or more common stock or other ownership interest of a PPP borrower (including to an affiliate or existing owner); (2) at least 50% of assets (measured by FMV) are sold by a PPP borrower; or (3) a merger with or into another entity. This threshold encompasses the aggregate of all sales and other transfers that have occurred since the date of approval of the PPP loan. The Notice states that in all instances, PPP borrowers must notify the PPP lender in writing of any contemplated transaction and provide the lender with a copy of any agreements or other related documents prior to any change of ownership.
Additionally, the Notice states that ”regardless of any change in ownership, the PPP borrower remains responsible for (i) all performance obligations under the loan; (ii) the certifications made in connection with the loan application; and (iii) compliance with all other applicable PPP loan requirements.” The PPP borrower also remains responsible for obtaining, preparing, and retaining all required PPP forms and providing the required forms to the lender.
PPP Note Fully Satisfied
There are no change of ownership restrictions where, prior to a closing sale or transfer, the PPP note has been repaid in full, or the PPP borrower has completed the loan forgiveness process in accordance with all applicable PPP requirements and either remitted the funds to the PPP lender or repaid any remaining balance on the loan.
PPP Note Not Fully Satisfied
Where the PPP note has not been fully satisfied, the SBA has imposed different requirements contingent on whether the change of ownership relates to a stock sale or merger, or a sale of assets.
Stock Sale or Merger
Where the change of ownership is structured as a sale or other transfer of common stock or ownership interest, SBA approval is required unless either: (i) the sale is 50% or less of stock or other ownership interest (measured by all sales and transfers occurring since the date of the PPP loan approval); or (ii) the PPP borrower submits a forgiveness application to the PPP Lender reflecting the use of all PPP loan proceeds, and creates an escrow account controlled by the PPP lender equal to the outstanding balance of the PPP loan.
The Notice also outlines additional conditions applicable to stock sales or mergers regardless of whether SBA approval is required. For instance, in the event the new owner (or successor) has a separate PPP loan, the PPP borrower and new owner (or successor) are responsible for segregating and delineating the PPP funds and expenses. Additionally, the PPP borrower (or successor PPP borrower in the event of a merger) remains subject to all obligations under the PPP loan. The Notice also requires the PPP lender to notify the appropriate SBA Loan Servicing Center within five days of a change of ownership and provide the Loan Servicing Center with the identity of the new owners, the new ownership percentages, the tax ID numbers for any owners with more than 20% equity in the business, and, if applicable, the location and amount of any escrow funds.
In the event the change of ownership is structured as an asset sale where 50% or more of the PPP borrower’s assets are sold (measured by fair market value), SBA prior approval is required unless the PPP borrower (i) submits a forgiveness application to the PPP lender reflecting the use of all PPP loan proceeds; and (ii) creates an escrow account equal to the outstanding balance of the PPP loan, to be disbursed first to pay any remaining balance on the PPP loan.
Obtaining SBA Prior Approval
To obtain prior approval from the SBA, the Notice specifies that PPP lenders must submit a request to the appropriate SBA Loan Servicing Center which includes: (i) the reason that the PPP borrower cannot fully satisfy the loan or provide escrow funds for the remaining balance of the loan; (ii) details of the requested transaction; (iii) a copy of the executed PPP note; (iv) any letter of intent and the purchase sale agreement setting forth the responsibilities of the borrower (and seller, if applicable) and buyer; (v) disclosure of any existing PPP loan by the buyer and the SBA loan number; and (vi) a list of all owners of 20% or more of the purchasing entity.
Additionally, for a change of ownership structured as an asset sale, SBA approval will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, which must be appropriately reflected in the purchase or sale agreements, or a separate assumption agreement submitted to the SBA.
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