Michael J. Sheppeard
Partner
212-784-6939 msheppeard@sh-law.comAuthor: Michael J. Sheppeard|October 14, 2020
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.
The Notice defines a “change in ownership” for the purposes of the PPP as a transaction where:
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.
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:
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:
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 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.
Partner
212-784-6939 msheppeard@sh-law.comThe 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.
The Notice defines a “change in ownership” for the purposes of the PPP as a transaction where:
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.
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:
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:
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 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.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.