On October 2, 2020, the U.S. Small Business Administration (“SBA”) published a procedural notice aimed at clarifying the required procedures for changes of ownership of an entity that has received Paycheck Protection Program (“PPP”) funds (a “PPP Borrower”). The PPP, which is part of SBA’s 7(a) Loan Program, was enacted under Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.
Under the procedural notice, the SBA clarified what constitutes a “change of ownership” for purposes of the PPP, indicating that a “change of ownership” will be considered to have occurred when:
- At least 20% of the common stock or other ownership interest of a PPP Borrower is sold or transferred, whether in one or more transactions,
- The PPP Borrower sells or transfers at least 50% 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.
If a PPP Borrower engages in any of the above transactions that constitute a change of ownership, the first step that the PPP Borrower must take is to provide written notice of the pending transaction to its PPP lender, prior to closing the transaction, as well as provide a copy of the proposed agreements or other documents that will effectuate the transaction.
Whether or not the PPP lender must obtain prior approval from the SBA before approving the proposed change of ownership depends on the type of transaction and other factors. Below, we lay out the criteria for when SBA approval is not required as well as the conditions that must be satisfied when SBA prior approval is required:
1. Sale/Transfer of Common Stock or Merger
In transactions where a PPP Borrower is transferring or selling 50% or less of its common stock (or other ownership interest), SBA prior approval is not required. If a PPP Borrower is transferring or selling 50% or more of its common stock (or other ownership interest) or merging, SBA prior approval is not required if:
- The PPP Borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds, together with any required supporting documentation, and submits it to the PPP Lender, and
- The PPP Borrower establishes an interest-bearing escrow account, controlled by the PPP lender, with funds equal to the outstanding balance of the PPP loan.
If the above conditions are not met, then SBA prior approval is required. In these situations, the PPP lender must take certain steps in order to obtain SBA approval. See Section III below for a discussion of these requirements. From a timing perspective, PPP borrowers should be aware that SBA indicates in the procedural notice that SBA will review and provide a determination on its consent within 60 calendar days of receipt of a complete request.
It is important to note that for all sales/transfers of common stock or mergers constituting a change of ownership, regardless of whether SBA prior approval is required, the PPP lender must notify the appropriate SBA Loan Servicing Center, within five business days of completion of the transaction, of the:
- Identity of the new owner(s) of the common stock or other ownership interest;
- New owner(s)’ ownership percentage(s);
- Tax ID number(s) for any owner(s) holding 20% or more of the equity in the business; and
- Location of, and the amount of funds, in the escrow account controlled by the PPP lender, if applicable.
The PPP Borrower will remain subject to all obligations under the PPP loan. Additionally, if the new owner(s) (or successor(s) in the case of a merger) also carry a separate PPP loan, then the PPP Borrower and new owner(s)/successor(s) will be responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP Borrower.
2. Asset Sale
If the change of ownership of the PPP Borrower is structured as a sale of 50% or more of its assets (measured by fair market value), SBA prior approval is not required 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 documentations, 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.
Further, within five days of the completion of the transaction, the PPP lender must notify the appropriate SBA Loan Servicing Center of the location of and amount of funds in the escrow account.
If the conditions for prior approval cannot be met, then SBA approval will be required. See Section III below for an explanation of steps that must be taken to obtain required SBA prior approval.
3. Requirements to Obtain SBA Prior Approval
If a PPP Borrower involved in a change of ownership transaction cannot comply with the requirements set forth in either Section I or II above, prior SBA approval of the change of ownership transaction is required. In order to obtain the SBA’s prior approval, the PPP Lender must submit a request to the appropriate SBA Loan Servicing Center that includes:
- The reason that the PPP Borrower cannot fully satisfy the PPP note (i.e., repay the note or complete and submit the forgiveness application) or the procedures required related to the escrowing of funds;
- 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 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% or more of the purchasing entity.
Additionally, in asset purchase transactions where SBA prior approval is required, the SBA will require the purchasing entity to assume all of the PPP Borrower’s obligations under the PPP loan.
Todd H. Eveson, Stuart M. Rigot, and S. Blake Leger are members of the Banking & Financial Institutions, Capital Markets, and Mergers & Acquisitions practice groups of Wyrick Robbins. They regularly represent public and private companies in strategic combinations and financing transactions, with a particular focus on the financial services industry. Wyrick Robbins publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.