On Oct. 2, 2020, the U.S. Small Business Administration (SBA) issued Procedural Notice Control No. 5000-20057 (the SBA Guidance), which clarifies approval requirements for Paycheck Protection Program (PPP) borrowers upon a change of ownership. Previous guidance and communications with both PPP lenders and local SBA offices resulted in some confusion around whether the PPP lender, the SBA or both needed to approve the change of ownership.

Under the SBA Guidance, a “change of ownership” occurs when, in one or more transactions, (1) at least 20% of the ownership interest of a PPP borrower is sold or otherwise transferred, 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, or (3) a PPP borrower is merged with or into another entity.

Regardless of any change of ownership or the structure of the transaction, the PPP borrower remains responsible for performance of all obligations under the PPP loan, including the certifications made in connection with the loan application and completion of all required PPP forms and supporting documentation.

Prior to the closing of any change of ownership transaction, 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 transaction documents.

There are no restrictions on a change of ownership if, prior to the closing of the transaction, the PPP borrower has either (1) repaid the PPP note in full or (2) completed the loan forgiveness process and (a) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or (b) the PPP borrower has repaid any remaining balance of the PPP loan.

However, if the PPP note is not fully satisfied prior to the closing of the transaction, whether SBA prior approval is required depends on the transaction structure.

The PPP lender may unilaterally approve the change of ownership and the SBA’s prior approval is not required in the following circumstances:

1. The change of ownership is structured as a sale or other transfer of ownership interest in the PPP borrower, or as a merger, and either:

• the sale or transfer is of 50% or less of the ownership interest of the PPP borrower, or
• the PPP borrower (1) completes and submits its forgiveness application and supporting documentation showing its use of all of the PPP loan proceeds to the PPP lender and (2) establishes an interest-bearing escrow account controlled by the PPP lender in an amount equal to the outstanding balance of the PPP loan.

1. The change of ownership is structured as an asset sale of 50% or more of its assets and the PPP borrower (1) completes and submits its forgiveness application and supporting documentation showing its use of all of the PPP loan proceeds to the PPP lender and (2) establishes an interest-bearing escrow account controlled by the PPP lender in an amount equal to the outstanding balance of the PPP loan.

If the above conditions are not met by the proposed transaction, prior SBA approval of the change of ownership is required and the PPP lender may not unilaterally approve the change of ownership. The PPP lender must submit the request for the SBA’s prior approval of a change of ownership to the appropriate SBA Loan Servicing Center. This request must include various details about the proposed transaction, including (1) the reason why the PPP borrower cannot fully satisfy the PPP note or escrow funds as described above; (2) copies of the letter of intent, the purchase agreement and the executed PPP note; (3) disclosure of whether the buyer has an existing PPP loan; and (4) a list of all owners of 20% or more of the purchasing entity.

SBA approval of any change of ownership involving the sale of 50% or more of the assets of a PPP borrower will be conditioned on the purchaser assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The SBA Guidance further explains that, in such cases, the purchase agreement must include appropriate language detailing this assumption, or a separate assumption agreement must be submitted to the SBA.

The SBA will review and provide a determination on the change of ownership within 60 calendar days of its receipt of a complete request. However, the SBA Guidance does not specify the timing for its review of the initial request for completeness or what additional information may be needed for a complete request.

Finally, for all sales or transfers of ownership interest in a PPP borrower, or a merger of the PPP borrower into another entity, regardless of whether SBA approval is required or not:

1. The SBA will have recourse against the new owner(s) if the PPP funds are used for unauthorized purposes after the closing of the transaction, even though the PPP borrower remains subject to all obligations under the PPP loan.
2. If the new owner(s) or successor arising from the transaction has a separate PPP loan, then (1) following a sale of ownership interests, both the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses to demonstrate compliance with PPP requirements by each PPP borrower, but (2) following a merger, the successor is the only party responsible for demonstrating such compliance with respect to both PPP loans.
3. The PPP lender must notify the appropriate SBA Loan Servicing Center within five business days of completion of the transaction of the identity and ownership percentage(s) of the new owner(s), provide tax ID number(s) for holders of 20% or more of the equity, and provide details on any required escrow account, all of which are further outlined in the SBA Guidance.