On October 2, 2020, the Small Business Administration (“SBA”) released a Procedural Notice providing guidance to lenders about transactions involving recipients of Paycheck Protection Program (“PPP”) loans. Before the guidance was issued, some PPP lenders had been delaying transactions to obtain consent from the SBA before closing. In addition, because many PPP loan documents provide that an equity or asset sale of the borrower triggers an event of default accelerating PPP loan repayment by the borrower, borrowers anticipating forgiveness of all or a portion of a PPP loan have been looking for guidance from their PPP lender, including waivers of such events of default, in order to proceed with transactions while forgiveness is pending. The guidance clarifies that the SBA does not require PPP lenders to obtain SBA approval before conducting certain “change of ownership” transactions.
If loan amounts remain outstanding, the new guidance generally requires that at closing of the transaction the PPP borrower must have filed for loan forgiveness and established an escrow account controlled by the lender and funded at the outstanding amount of the PPP loan. Escrowing the funds is clearly a burden, but it is preferable to the alternative of returning PPP funds before closing – a step many buyers were requiring before the SBA issued its new guidance.
Defining “Change of Ownership”
The SBA guidance defines “change of ownership” as occurring when:
- At least 20% of the common stock or other ownership interest of a PPP borrower is sold or transferred, including to an affiliate or owner;
- The PPP borrower sells or transfers at least 50% of its assets; or
- A PPP borrower is merged with another entity.
SBA Approval Not Required
If the PPP loan is fully satisfied, there are no restrictions on a transaction involving change of ownership. A PPP loan is fully satisfied when the borrower has repaid the PPP loan in full or when the borrower has completed the PPP forgiveness process, SBA has remitted funds to the PPP lender, and the borrower has repaid any remaining balance.
Even when a PPP loan is not fully satisfied before closing, certain transactions do not require SBA approval. In a transaction structured as a sale, merger, other transfer of common stock or other ownership interest, a PPP lender may approve a change of ownership without SBA’s approval in two situations:
- The sale or transfer is of 50% or less of the stock or ownership interest of the borrower.
- The borrower submits a forgiveness application to the lender and establishes an escrow account controlled by the lender and funded at the outstanding loan balance. After the forgiveness process is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance and interest.
In a transaction structured as an asset sale, a PPP borrower may sell 50% or more of its assets without SBA approval only if the borrower submits its forgiveness application and establishes an escrow account as described above. The PPP lender must notify the appropriate SBA Loan Servicing Center of the location and amount of the escrow account within five business days of completion of the transaction.
Seeking SBA Approval for Other Transactions
In all other transactions involving change of ownership, the PPP lender must obtain SBA approval before closing. The SBA guidance lists the information required when seeking SBA approval, including details of the proposed transaction and the reasons why the PPP borrower cannot fully satisfy the loan or escrow funds. The SBA may require risk mitigation measures as a condition of granting approval. The guidance says that the SBA will provide a determination within 60 days of receiving a complete request.
Required Notification and Documentation
Before closing of any change of ownership transaction, a PPP borrower must notify its lender in writing of the proposed transaction and provide the lender with the relevant agreements. Within five business days after completion of a transaction, the PPP lender must notify the SBA of the new owner and its ownership percentage, the tax identification number of any new owner with 20% or more ownership, and the location and amount of any required escrow account.
Following consummation of a transaction, disciplined record-keeping remains critical. In the case of a purchase or other transfer of common stock or other ownership interest, if a new owner or successor entity has a separate PPP loan, the PPP borrower and the new owner are responsible for segregating PPP funds and expenses and maintaining records to demonstrate compliance with PPP requirements by each borrower. In the case of a merger, the successor is responsible for segregating PPP funds and expenses and maintaining records to demonstrate compliance with PPP requirements with respect to both pre-existing PPP loans.
Regardless of any change of ownership, the original PPP borrower remains responsible for performance of all obligations of the PPP loan; the certifications made in the PPP loan application, including the certification of economic necessity; and compliance with all other applicable PPP requirements. The SBA will also have recourse against the new owner if the new owner uses PPP loan funds for unauthorized purposes. The guidance notes that the SBA reserves all remedies available for fraud, false statements, and unauthorized uses of PPP loans.
