Change-In-Ownership Guidance for PPP Borrowers and Lenders

By Gordon W. Prince, Esq.

Since the conception of the Paycheck Protection Program (PPP) loan program back in March of this year, the Small Business Administration (SBA) has continued to issue new information and guidance related to the administration of the loans. The latest information from the SBA, issued in Procedural Notice No. 5000-20057, has important implications for PPP recipients who have, are in the midst of, or are contemplating effecting a change in ownership of their entity. Of importance, certain changes of ownership will require the approval of the SBA, or, at the very least notice to the SBA.

What is a Change of Ownership?

The SBA has provided that, for PPP loan purposes, a change of ownership occurs when:

(1)        at least 20% of the common stock or other ownership interest of a PPP borrower is 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 sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or

(3)        a PPP borrower is merged with or into another entity.

Transactions Outside of the Scope of the Change of Ownership Definition

Even if the PPP borrower’s transaction does not fit into the definition of a change of ownership, the borrower still has responsibilities going forward. The SBA makes clear that, regardless of if a change of ownership has occurred, 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;

(3)        compliance with all other applicable PPP requirements; and

(4)        obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP Lender (or lender servicing the PPP loan) or to the SBA upon request.

SBA Approval

Even if the borrower’s transaction fits into the definition of a change of ownership, the borrower can take steps to avoid seeking SBA approval of the transaction by meeting certain conditions.

SBA approval is not needed if the PPP Note (the promissory note evidencing the PPP loan) is fully satisfied. A PPP Note is considered fully satisfied if, prior to closing the transaction:

• The borrower has paid the PPP Note in full; or
• The borrower has completed the PPP loan forgiveness process. This includes the SBA paying funds to the PPP Lender in full satisfaction of the PPP Note or the borrower repaying any remaining balance on the PPP loan.

Approval of the transaction by the SBA can still be avoided, regardless of whether or not the PPP Note is fully satisfied. The following circumstances permit a PPP Lender to approve the transaction, avoiding the SBA approval process.

Sales of Ownership Interest and Mergers

SBA approval of the change of ownership is not needed in the sale of stock or other entity ownership interest or for mergers if:

• The sale or transfer is of 50% or less of the ownership interest of the PPP borrowing entity (the 50% is calculated on an aggregate basis with any other transactions by the PPP borrower since the PPP loan was approved); or
• The PPP borrower submits a PPP loan forgiveness application and any required documentation to the PPP Lender, AND establishes an interest-bearing escrow account that is controlled by the PPP Lender in an amount equal to the outstanding balance of the PPP loan.

Asset Sales

In regards to an asset sale, SBA approval of asset sales of 50% or more (calculated by fair market value) of the PPP borrower’s assets is not required where the PPP borrower submits a PPP loan forgiveness application and any required documentation to the PPP Lender, AND establishes an interest-bearing escrow account that is controlled by the PPP Lender in an amount equal to the outstanding balance of the PPP loan.

Obtaining SBA Approval

If a PPP borrower is unable to avoid obtaining the approval of the SBA as provided above, the PPP Lender, on behalf of the borrower, must submit to the following to the SBA:

(1)        The reason that the PPP borrower cannot fully satisfy the PPP Note or escrow funds as described above;

(2)        The details of the requested transaction;

(3)        A copy of the executed PPP Note;

(4)        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.

(5)        Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

(6)        A list of all owners of 20% or more of the purchasing entity.

Moreover, asset sales involving 50% or more of the assets of the PPP borrower that are required to be approved by the SBA must be conditioned on the purchasing entity assuming all of the borrower’s obligations under the PPP loan and its terms. In order to do so, the agreement between the parties must include language to that effect, or a separate assumption agreement must be submitted to the SBA.

The SBA stated that it will review and provide a determination on whether or not the change of ownership is approved within 60 days of receipt of the request.

PPP Loans on Both Sides of the Transaction

In the scenario where, subsequent to the purchase or transfer of stock or other ownership interest, the buyer (or new owner) of the selling PPP borrower’s entity also has its own PPP loan, the new owner and the PPP borrowing seller are responsible for separating and delineating PPP funds and expenses, as well as providing the SBA with documentation that demonstrates both PPP loans are in compliance with PPP requirements.

Similarly, if two PPP borrowers are merging, the successor entity is responsible for separating and delineating PPP funds and expenses, as well as providing the SBA with documentation that demonstrates both PPP loans are in compliance with PPP requirements.

Notice to the PPP Lender and the SBA

Regardless of whether or not SBA approval is required, the PPP borrower must inform the PPP Lender of these changes in ownership because, within 5 business days of the completed transaction, the PPP Lender must notify the SBA of:

(1)        the identity of the new owner(s) of the common stock or other ownership interest;

(2)        the new owner(s)’ ownership percentage(s);

(3)        the tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and

(4)        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.

Guidance and Questions Going Forward

It is important to note that this guidance is related to the SBA approval. The documents executed by and between the PPP borrower and the PPP Lender in connection with the PPP loan may very well have other restrictions on the transfer or sale of ownership interest or assets. Thus, a careful review of those documents is required before entering into any type of transaction.

As is the common theme when the SBA issues PPP loan guidance, some questions are answered but more questions are raised. For example, this SBA Notice was effective on October 2, 2020. How do these change of ownership rules effect transactions that occurred prior to this date? Another looming question is, what are the consequences of failing to obtain SBA consent or failing to otherwise comply with this guidance? We hope to have answers to these questions in the coming weeks.

Gawthrop Greenwood and its team of lawyers will continue to review legislation and governmental decisions as they unfold, as we are committed to providing guidance to our clients. If you have any questions, please do not hesitate to call us at 610-696-8225.