PPP: SBA Provides Process for a Change of Ownership

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On October 2, 2020, the SBA provided notice to PPP lenders regarding the process by which PPP borrowers may undertake a “change of ownership” while a loan is outstanding. Previously there was little guidance provided to lenders, resulting in inconsistent treatment of borrowers that were targets in M&A transactions, with some borrowers informed that they could not close unless the loan was paid in full or forgiven and other borrowers permitted to proceed with a portion of proceeds held in escrow in the event the borrower did not qualify for full forgiveness post-closing.

What is a change of ownership? For purposes of the PPP, a “change of ownership” occurs if (i) at least 20% of the outstanding equity interest of a borrower is sold or otherwise transferred in one or more transactions, including to an affiliate or existing equity holder of the borrower, (ii) at least 50% of the assets (measured by fair market value) are transferred by a borrower, or (iii) a borrower is merged with or into another entity.

What documents do I need to provide to the lender? Prior to closing, the borrower must notify the lender in writing of the proposed transaction and provide the lender with a copy of the proposed transaction documents. A borrower should be in communication as early as possible with its lender to inform them of a change of ownership transaction and should ensure that the lender is carved out from any confidentiality obligation the borrower owes to its potential acquiror resulting from its obligation to provide, pre-closing, the lender with a copy of the transaction documents for purposes of determining loan forgiveness eligibility.

What procedures do I need to follow to be able to proceed with my change of ownership transaction? If, prior to closing, the borrower has paid its loan in full or completed the forgiveness process (which includes the remittance of funds from the SBA to the lender), then no restrictions exist on a change of ownership and the borrower can proceed with the transaction. If the loan remains outstanding, then the borrower may still proceed without SBA consent as follows:

  • Stock sale or merger: If the transaction is a sale of equity or merger in which (i) 50% or less of the equity is transferred, or (ii) the borrower completes and submits to the lender a forgiveness application reflecting its use of all of the PPP loan proceeds and also establishes an interest-bearing escrow account controlled by the lender in an amount equal to the outstanding PPP loan balance that would be first used to satisfy said outstanding balance upon completion of the forgiveness process.
  • Asset sale: If the transaction is structured as an asset sale and an escrow account following the rules set forth above in “Stock sale or merger” is incorporated in the transaction documents.

If these conditions are not satisfied, SBA consent must be obtained prior to closing the transaction. The lender must submit a written request to the SBA containing the following information:

  • The reason the borrower cannot satisfy the conditions required to avoid SBA consent;
  • The details of the transaction;
  • A copy of the executed PPP note;
  • A copy of the letter of intent or transaction agreements;
  • Disclosure regarding whether the buyer has an existing PPP loan; and
  • A list of all owners of 20% or more of the buyer.

Furthermore, if the transaction involves the sale of 50% or more of the assets of a borrower, the SBA’s consent will be conditioned on the buyer assuming the obligations of the borrower for the PPP loan.

The SBA’s deadline to consent is 60 calendar days from the date the request is made.

For what is the borrower still responsible after the change of ownership transaction? Regardless of any change of ownership, the borrower is still responsible for the performance of all PPP loan obligations, certifications made in connection with the application (including economic necessity), and all other compliance obligations.

What should I do if I anticipate undertaking a change of ownership transaction? Given the complexity in obtaining SBA consent, a borrower and acquiror should structure the transaction in a manner that qualifies for automatic approval. This could result in lenders serving as escrow agent for both the PPP escrow and the indemnity escrow. Additionally, borrowers should ensure that they are able to submit the forgiveness application prior to closing (which includes having used all of the PPP proceeds for authorized purposes).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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