SBA Should Sign Off on Change of Ownership for PPP Borrowers

The Small Business Association (SBA) recently issued a Procedural Notice regarding the procedures required when an entity that has received Paycheck Protection Program (PPP) funds is contemplating a change in ownership...

The Small Business Association (SBA) recently issued a Procedural Notice regarding the procedures required when an entity that has received Paycheck Protection Program (PPP) funds is contemplating a change in ownership. Notably, the Notice outlines when a business needs to obtain the SBA’s consent before the change in ownership in order to avoid defaulting on the loan.

What Is Considered a Change in Ownership?

The Notice defines a “change in ownership” for the purposes of the PPP as a transaction where:

• At least 20 percent 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 percent 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.

The SBA advises that for the purposes of determining a change of ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.

In 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. In addition, regardless of any change of ownership, the PPP borrower remains responsible for (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. The PPP borrower will also remain responsible for obtaining, preparing, and retaining all required forms and documentation and providing these forms and documents to the PPP lender, servicer, or SBA upon request.

Transactions Not Requiring SBA Approval (But Lender Approval Needed)

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. In addition, there are also no restrictions if the PPP borrower has completed the loan forgiveness process in accordance with the PPP requirements, and 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.

In addition, SBA approval is not required in the following situations:

• Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger: 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: a)  The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or b)  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 SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
• Change of ownership is structured as an asset sale. A PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of 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 SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within five days of completion of the transaction.

Transactions Requiring SBA Approval

If the transaction does not fall into one of the exceptions described above, SBA approval is required. Accordingly, the PPP Lender may not unilaterally approve the change of ownership.

As set forth in the Notice, to obtain 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:

• The reason that the PPP borrower can’t fully satisfy the PPP Note or escrow funds as outlined 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 percent or more of the purchasing entity.

In some cases, the SBA may require additional risk mitigation measures as a condition of its approval of the transaction. In addition, SBA approval of any change of ownership involving the sale of 50 percent or more of the assets (measured by 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 SBA. Notably, the SBA states that it will review and provide its determination within 60 days of receipt of a completed request. Thus, the parties must be prepared to build this response time into the transaction.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.