SBA Issues Procedural Notice on Paycheck Protection Program Loans and Changes of Ownership

On October 2, the Small Business Administration (“SBA”) issued a Notice concerning the “required procedures” for changes of ownership of an entity that has received Paycheck Protection Program (“PPP”) funds (a “PPP borrower”). 

Change of Ownership Transaction.  For purposes of the PPP, a “change of ownership” is considered to have occurred when (i) 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, (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.  All sales and other transfers occurring since the date of approval of the PPP loan are aggregated to determine whether the relevant threshold has been met. 

Responsibilities of PPP Borrower.  The Notice affirms that regardless of any change of ownership, the PPP borrower is responsible for (i) the performance of all obligations under the PPP loan, (ii) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (iii) compliance with all other applicable PPP requirements.  Further, the PPP borrower is responsible for obtaining, preparing and retaining all PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (the “PPP lender”) or to the SBA upon request.

Notification to PPP Lender.  Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. 

Differing Procedures Depending on Circumstances of Change of Ownership.  Under the Notice, different procedures are required, depending on the circumstances of the change of ownership.

1. The PPP note is fully satisfied. There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has repaid the PPP note in full or completed the loan forgiveness process in accordance with the PPP requirements and (i) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note, or (ii) the PPP borrower has repaid any remaining balance on the PPP loan.
2. The PPP note is not fully satisfied. If the PPP note is not fully satisfied prior to the sale or transfer, then the following applies –
   1. SBA approval is not required
      1. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of the SBA only if (i) the sale of other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower (all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated), or (ii) the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required support documentation, to the 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 the SBA’s decision) is completed, the escrow funds are to be disbursed first to repay any remaining PPP loan balance, plus interest.   The procedures set forth in “3” below must also be followed in any circumstance described in this paragraph. 
      2. 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 the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the 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 the SBA’s decision) is completed, the escrow funds are to be disbursed first to repay any remaining PPP loan balance plus interest. 
   2. SBA approval is required
      If a change of ownership of a PPP borrower does not meet the conditions of “1” above, prior SBA approval of the change of ownership IS required and the PPP lender may not unilaterally approve the change of ownership.
      
      To obtain the SBA’s prior approval of requests for changes of ownership, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center.  The request must include: (i) the reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds, (ii) the details of the requested transaction, (iii) a copy of the executed PPP note, and (iv) any letter of intent and the purchase and sale agreements setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower) and buyer, (v) disclosure of whether the buyer has an existing PPP loan, and, if so, the SBA loan number, and (vi) a list of all owners of 20% or more of the purchasing entity.If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction.
      
      SBA approval of any change of ownership involving the sale of 50% or more the assets (fair market value) of a PPP borrower will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.  In such cases, the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.  The SBA will review and provide a determination within 60 calendar days of receipt of a complete request.
   3. For all sales or other transfers of common stock or other ownership interest or mergers, whether or not SBA approval is required.  If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction, –
      1. 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 determine compliance with PPP requirements by each PPP borrower.
      2. In the case of a merger, the successor is responsible for segregating and delineating PPP loans and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.

Observations

• If the PPP note is not fully satisfied and the change of ownership exceeds certain criteria (as discussed above), it appears that it may be beneficial to get prior SBA approval of the change in ownership to avoid the need for an escrow equal to the outstanding balance of the PPP loan.
• As part of any contemplated change of ownership by a PPP borrower, it is strongly advised that counsel be consulted to ensure that no actions are taken that violate the requirements of the PPP and the PPP loan, and/or adversely impact the loan forgiveness process.