New Guidance From SBA Regarding Approval for a Transfer of Ownership or Sale of Assets of a PPP Borrower
On October 2, the Small Business Administration’s (“SBA”) issued guidance regarding the Paycheck Protection Program (“PPP”). This new guidance set forth the rules regarding when SBA approval may be required when a PPP borrower has a change in ownership of its business.
The PPP was created under the CARES Act and is part of the SBA's 7(a) loan program. As a type of 7(a) loan, PPP loans are generally subject to the 7(a) loan servicing limitations, such as the limitation that SBA approval must be obtained prior to any changes of ownership of PPP borrowers made within the twelve (12) months following the PPP loan disbursement. Despite that requirement, up until October 2 there was no explicit guidance for what constituted a change of ownership of a PPP borrower for purposes of the SBA consent requirement.
SBA Procedural Notice 5000-20057, Paycheck Protection Program Loans and Changes of Ownership, issued on October 2, 2020 (the “Notice”), provides some much needed guidance on the SBA approval requirements when a PPP borrower has a “Change of Ownership” and outlines the procedures PPP lenders and PPP borrowers must follow in regard to Change of Ownership Transactions.
CHANGE OF OWNERSHIP TRANSACTIONS
The Notice provides clarity as to which transactions constitute Change of Ownership Transactions. For purposes of determining a Change of Ownership, all sales and other transfers occurring since the approval date (not the disbursement date) of the PPP loan must be aggregated to determine whether the threshold amounts have reached. A “Change of Ownership Transaction” includes the following transactions (which can be aggregated to include one or more transactions):
- The sale or transfer of at least twenty percent (20%) of the common stock or other ownership interest of a PPP borrower. This includes transfers to affiliates or existing owners of the PPP borrower and can also include transfers involving publicly traded entities in cases where the transaction results in one person or entity holding or owning at least 20% of the common stock of the publicly traded entity;
- The sale or transfer of at least fifty percent (50%) of a PPP borrower’s assets (as determined by fair market value); or
- The merger of a PPP borrower with or into another entity.
Prior to the closing of any Change of Ownership Transaction, a PPP borrower must provide the lender with written notice of the Change of Ownership Transaction. Depending on various factors, SBA approval of a Change of Ownership Transaction may be required.
WHEN SBA APPROVAL IS NOT REQUIRED
In cases where a PPP borrower has fully repaid its PPP loan, the PPP borrower is not required to obtain the prior approval of the SBA before completing a Change of Ownership Transaction. Additionally, prior SBA approval will not be required when a PPP borrower has applied for loan forgiveness, and the loan forgiveness process has been completed. If the entire PPP loan is not forgiven, completion of the loan forgiveness process includes payment by the PPP borrower of any remaining PPP loan balance.
Where a PPP borrower has not yet fully satisfied the PPP Note, SBA approval is nonetheless not required if the proposed Change of Ownership Transaction is a(n):
- Sale or other transfer of fifty percent (50%) or less of the common stock or other ownership interest of the PPP borrower;
- Other sale or transfer of common stock or other ownership interest or a merger, and an escrow account is established in accordance with the requirements described below; or
- Sale or other transfer of fifty percent (50%) or more of the PPP borrower’s assets and an escrow account is established in accordance with the requirements described below.
If an escrow account procedure is used as set forth above, the following steps must be followed:
- First, the PPP borrower must complete and deliver a PPP loan forgiveness application to the lender reflecting the PPP borrower’s use of all of the PPP loan funds;
- Then, an interest-bearing escrow account which is controlled by the lender must be established with funds equal to the outstanding balance of the PPP loan; and
- Finally, once the forgiveness process (and any appeal of the SBA’s decision, if applicable) has been completed, any disbursement from the escrow account must first repay any remaining PPP loan balance plus interest before being otherwise returned to the borrower.
WHEN PRIOR SBA APPROVAL IS REQUIRED
Where a Change of Ownership Transaction does not meet the criteria set forth above exempting the transaction from SBA approval, the PPP lender must submit a request to the SBA requesting approval of the Change of Ownership Transaction. The lender submission must include the following:
- The reason that the PPP borrower cannot fully satisfy the PPP Note or utilize escrow funds as described above;
- The details of the Change of Ownership Transaction;
- A copy of the executed PPP Note;
- A copy of the 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 twenty percent (20%) or more of the buyer.
The SBA is to provide a determination within sixty (60) calendar days of its receipt of the lender submission. Any SBA approval of a Change of Ownership Transaction will be conditioned on the buyer assuming all of the PPP borrower’s obligations under the PPP loan. Where appropriate, the SBA may require additional risk mitigation measures as a condition of its approval of the transaction.
POST CHANGE OF OWNERSHIP REQUIREMENTS
Once a sale or other transfer of common stock or other ownership interest or merger is completed, whether or not the transaction required SBA’s prior approval, the lender is required to notify the appropriate SBA Loan Servicing Center, within 5 business days of completion of the transaction, of (i) the identity of the new owner(s) of the common stock or other ownership interest, (ii) the new owner(s)’ ownership percentage(s), (iii) the tax identification number(s) for any owner(s) holding twenty percent (20%) or more of the equity in the business, and (iv) the location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required. This requirement does not apply to transactions structured as transfers of assets.
Additionally, in cases where any of the new owners or the successor arising from such a transaction has a separate PPP loan, the PPP borrower and each new owner (or the new entity in event of a merger) are required to segregate and delineate PPP funds and expenses and provide documentation to demonstrate compliance with PPP requirements with respect to each PPP loan.
The guidance provided in the Notice gives PPP borrowers and PPP lenders some much needed information for navigating corporate transactions involving PPP borrowers. That being said, because the guidance in the Notice only addresses scenarios in which SBA consent is necessary for a PPP borrower’s Change of Ownership, PPP borrowers contemplating such transactions must remain mindful of whether the terms of their specific PPP loan agreements require the consent of the PPP lender as well.
If you have questions on the Paycheck Protection Program, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.