On October 2, 2020, the Small Business Administration (SBA) provided guidance to Paycheck Protection Program (PPP) loan borrowers who engage in transactions that result in a change of ownership. For purposes of the PPP, a “change of ownership” will have occurred when:
- 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,
- A 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 another entity.
It is important to note that for purposes of determining a change in ownership, all sales and other transfers that have occurred since the date of PPP loan approval must be aggregated to determine whether the relevant threshold has been met. For publicly traded PPP borrowers, only sales or other transfers that result in a single person or entity holding or owning at least 20 percent of the common stock or other ownership interest of the borrower must be aggregated.
Prior to the closing of any transaction that involves a change of ownership, the PPP borrower must notify the PPP lender in writing of the proposed transaction and provide the PPP lender with a copy of the agreements or other documents that would effectuate the transaction.
If the PPP note is fully satisfied, there are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has either:
- Repaid the PPP note in full or
- Completed the loan forgiveness process in accordance with PPP requirements, and the SBA has remitted funds to the PPP lender in satisfaction of the PPP note, or the PPP borrower has repaid any remaining balance.
However, if the PPP note is not fully satisfied prior to closing the sale or transfer, there are cases in which SBA prior approval is not required and cases in which SBA prior approval is required.
SBA prior approval is not required, and the PPP lender can unilaterally approve, if:
1) In the case of a change of ownership as a result of an equity sale or merger:
- It is structured as a sale or other transfer of 50 percent or less of the common stock or other ownership interest of the PPP borrower or
- It is structured as a sale or other transfer of more than 50 percent of the common stock or other ownership interest of the PPP borrower or as a merger if the PPP borrower (i) completes a forgiveness application reflecting its use of the PPP loan proceeds and submits any required supporting documentation and (ii) establishes an interest-bearing escrow account controlled by the PPP lender in an amount of funds equal to the outstanding balance of the PPP loan.
2) In the case of a change of ownership as a result of an asset sale:
- It is structured as a sale or other transfer of 50 percent or more of the PPP borrower assets based on fair market value and
- The PPP borrower (i) completes a forgiveness application reflecting its use of the PPP loan proceeds and submits any required supporting documentation and (ii) establishes an interest-bearing escrow account controlled by the PPP lender in an amount of funds equal to the outstanding balance of the PPP loan.
In either case where an escrow account is established, once the forgiveness process is complete, the escrow funds will be first disbursed to repay any remaining PPP loan balance plus interest.
If either of the above two cases are not met, prior SBA approval is required for the ownership change, and the PPP lender may not unilaterally approve the change of ownership. To obtain the SBA’s prior approval, the PPP lender (not the PPP borrower) must submit the request to the appropriate SBA loan servicing center. The request must include:
- The reason the PPP borrower cannot fully satisfy the PPP note or escrow 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 (if different from 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.
SBA approval of any change in ownership involving the sale of 50 percent or more of the assets 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 PPP loan terms. Consequently, the purchase or sale agreement must then include appropriate language regarding assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity. A separate assumption agreement submitted to the SBA will also suffice. The SBA may require additional risk mitigation measures as a condition to approve the transaction and will provide a determination within 60 calendar days of receipt of a complete request.
Whether or not the sale requires the SBA’s prior approval, the PPP borrower will remain subject to all obligations under the PPP loan. Additionally, if the new owner(s) use PPP funds for unauthorized purposes, the SBA will have recourse against the new owners for the unauthorized use. If any of the new owners or the successor has a separate PPP loan, then, following the consummation of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and for providing documentation demonstrating compliance with PPP requirements by each PPP borrower. In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and for providing documentation demonstrating compliance with respect to both PPP loans.
Within five business days of completion of the transaction, the PPP lender must notify the appropriate SBA loan servicing center of the:
- Identify of the new owner(s) of the common stock or other ownership interest,
- New owner(s)’ ownership percentage(s),
- Tax identification number(s) for any owner(s) holding 20 percent or more of the equity in the business, and
- Location of, and the amount of funds in, the escrow account under the control of the PPP lender, if any escrow account is required.
Finally, regardless of a change in ownership, the PPP borrower remains responsible for the following:
- Performance of all obligations under the PPP loan,
- The certifications made in connection with the PPP loan application, including the “economic necessity” certification,
- Obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing and forms and supporting documentation to the PPP lender, the lender servicing the PPP loan, or the SBA upon request, and
- Compliance with all other applicable PPP requirements.
If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.