The Small Business Administration (“SBA”) released guidance for businesses that have received funds under the Paycheck Protection Program (“PPP”) and are now considering or undergoing a change of ownership. The new Procedural Notice No. 5000-20057, released on October 2, 2020, reduces SBA oversight for many change of ownership scenarios while also introducing a list of required steps and compliance considerations for changes in ownership.
The new rules provide expanded guidelines for what types of notice or consent are required for the various types of transactions involving a change of ownership. The SBA defines a change of ownership as a transaction resulting in “(1) at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) [being] sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity, (2) the PPP borrower [selling] or otherwise [transferring] at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower [being] merged with or into another entity.”
Any sale or transfer of ownership occurring post-PPP Loan approval should be aggregated in calculating whether the 20% common stock threshold has been met. Before the closing of any change of ownership transaction as described above, the PPP borrower should notify its lender in writing of the transaction along with copies of the proposed transaction documents
Additional compliance steps depend on repayment and loan status as of the time of the proposed transaction as follows:
The Note is Satisfied – No Restrictions
If, prior to closing the sale or transfer involving a change of ownership, the PPP borrower has fully repaid the PPP Loan or the PPP Loan has been forgiven, there will be no SBA consent requirements surrounding the transaction.
The Note is Not Satisfied – Further Restrictions
If, prior to closing the sale or transfer involving a change of ownership, the PPP Note is not fully satisfied, the transaction will be subject to either SBA or Lender approval depending on the nature and details of the impacted transaction as described below.
Lender Notice Required; SBA Approval Not Required
An equity transaction or merger may be unilaterally approved by a PPP Lender if the transaction either (1) involves the sale or transfer of 50% or less of common stock or other interest of the PPP borrower or (2) the PPP Borrower completes a forgiveness application, submits the application to the PPP Lender, and establishes an interest-bearing escrow account controlled by the PPP Lender with an amount of funds equal to the outstanding balance of the PPP Loan.
An asset sale or transaction of 50% or more of the PPP Borrower’s assets (measured by fair market value) may be unilaterally approved by a PPP Lender if the PPP Borrower has completed a forgiveness application, submits the application to the PPP Lender, and establishes an interest-bearing escrow account controlled by the PPP lender with an amount of funds equal to the outstanding balance of the PPP Loan.
In both the equity and asset transactions described above, the escrow funds must be disbursed first to repay any remaining PPP loan balance, plus interest, following the SBA forgiveness process.
SBA Approval Required
Any change of ownership transaction involving a PPP Borrower that does not satisfy the requirements described above will require prior SBA approval. In order to obtain SBA prior approval, a PPP Lender must submit a request to the appropriate SBA Loan Servicing Center with the following information:
- The reason why the PPP Borrower cannot (a) take necessary actions to satisfy the PPP Loan or (b) escrow funds as required,
- Details of the requested transaction,
- A copy of the executed PPP Note,
- Any letter of intent and the purchase or sale agreement detailing the responsibilities of the PPP Borrower, seller (if different from PPP Borrower), and buyer,
- Whether the buyer has an existing PPP loan and PPP loan number if applicable, and
- A list of the owners of 20% or more of the potential buyer.
The SBA may require additional risk mitigation measures as a condition of its approval of any transaction. If a transaction involves the sale of 50% or more of assets of a PPP Borrower, SBA approval will be conditioned on the purchasing entity assuming all obligations under the PPP loan, including responsibility for compliance with PPP Loan terms. Following the receipt of SBA approval documents, the SBA will review and provide a determination within 60 calendar days.
Considerations for All Changes of Ownership
These new guidelines also provide an important reminder to all PPP Borrowers considering or undergoing a change of ownership transaction that, following any of the transactions described above, the PPP Borrower will remain subject to all PPP Loan obligations, certifications, and will otherwise be required to comply with all other applicable SBA rules regarding the PPP Loan.
If any new owners already have a separate PPP loan in place, they will be required to segregate and delineate the PPP Loan expenses and use, along with supporting documentation, in order to demonstrate compliance with PPP Loan requirements and obligations with respect to both PPP Loans.
Keeping SBA compliance issues in mind should remain a top priority for any Paycheck Protection Program Loan recipient considering a change of ownership transaction. Please contact contact your KDDK attorney or any member of the KDDK business law team for additional information and guidance on the CARES Act or any related matter.