The Small Business Administration (SBA) recently issued a Procedural Notice (the Notice) containing details about the required procedure that Paycheck Protection Program borrowers (PPP borrowers) must follow when engaging in a transaction that involves a change of ownership.

The Notice states that a “change of ownership” will be considered to have occurred when:

• At least 20% of common stock or other ownership of a PPP borrower (including a publicly traded entity) is sold or transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
• The PPP borrower sells or otherwise transfers at least 50% of the assets of the entity (measured by fair market value), whether in one or more transactions; or
• A PPP borrower is merged with another entity.

The Notice also states that regardless of a change of ownership occurring, the PPP borrower will remain responsible for:

• Performance of all obligations under the PPP loan;
• The certifications made in connection with the PPP loan application, including the certification of economic necessity; and
• Compliance with all other applicable PPP requirements. 

The PPP borrower will also remain responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to their PPP lender or the lender servicing the PPP loan.

Prior to the closing of any transaction in which a change of ownership occurs, the PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements that would effectuate the transaction. There are different procedures to be followed under the Notice depending on the circumstances of the change of ownership. The procedures are:

1. 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:
   • a) Repaid the PPP note in full; or
   • b) Completed the loan forgiveness process in accordance with PPP requirements; and
     • i) SBA has remitted funds to the PPP lender in full satisfaction of the PPP note; or
     • ii) The PPP borrower has repaid any remaining balance on the PPP loan.
2. The PPP note is not fully satisfied. If the PPP note has not been fully satisfied prior to the closing of the transaction, consider the following requirements:
   • a) Transfer of Common Stock or Other Ownership Interest or Merger: If the following conditions are met for a change of ownership structured as a sale or transfer of common stock, a merger, or other change in ownership interest – an individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower entity without prior approval of SBA only if:
     • i) The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
     • ii) The PPP borrower completes the forgiveness application reflecting its use of all of the PPP loan proceeds and submits it with any required documentation 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. After the forgiveness process is complete, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
   • b) Change of Ownership Structured as an Asset Sale: A PPP borrower is permitted to sell 50% or more of its assets without prior approval only if the PPP borrower completes a forgiveness application and submits it with any required supporting documentation to the PPP lender, and the PPP borrower deposits in an interest-bearing escrow account funds equal to the outstanding balance of the PPP loan. After the forgiveness process is complete, the funds in escrow must be disbursed first to repay any remaining PPP loan balance. The PPP lender must notify the appropriate SBA Loan Servicing Center of the escrow account location and the amount of funds in escrow within five business days of the completion of the transaction.
   • c) SBA Prior Approval Required: If a PPP borrower experiencing a change of ownership cannot satisfy the procedure applicable above, it will be required instead to secure prior SBA approval. To obtain SBA’s prior approval, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center, and the request must include:
     • i) The reason that the PPP borrower cannot fully satisfy the escrow requirement;
     • ii) The details of the requested transaction;
     • iii) A copy of the executed PPP note;
     • iv) Any letter of intent and the purchase or sale agreement setting for the responsibilities of the PPP borrower;
     • v) Disclosure of whether the buyer has an existing PPP loan, and, if so, the SBA loan number; and
     • vi) A list of all owners of 20% or more of the purchasing entity.

       Notably, SBA approval of any change of ownership involving the sale of 50% or more of the assets will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan.

   • d) Requirements for Transfer of Common Stock or Other Ownership Interest or Merger Regardless of SBA Approval Requirements: For all sales or other transfers of common stock or other ownership interests (equity) or mergers, whether or not the sale requires SBA’s prior approval – the PPP borrower (and, in the event of a merger of the PPP borrower into another entity, the successor to the PPP borrower) will remain subject to all obligations under the PPP loan. If the new owner(s) use PPP funds for unauthorized purposes, SBA can have recourse against all responsible parties. If a new owner or the successor entity has a separate PPP loan, following consummation of the transaction:
     • i) In the case of a purchase or other transfer of common stock or other interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements for each loan; and
     • ii) In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans. 

Additionally, regardless of whether SBA prior approval is required, within five business days after completion of the transaction, the PPP lender must notify the SBA Loan Servicing Center of the:

• i) Identity of the new owner(s) of the common stock or other ownership interest;
• ii) New owner(s)’ percentage of ownership;
• iii) Tax ID number(s) for any owner(s) holding 20% or more equity in the business; and
• iv) The location of and the amount of funds in the escrow account, if an escrow account is required.