PPP Loans and Change of Ownership
SBA Procedural Notice Regarding PPP Loans and Changes of Ownership
On Friday, October 2, the SBA issued a procedural notice regarding PPP Loans and Changes of Ownership. The Notice provides some level of clarity for SBA Employees and PPP lenders as to what to do if a PPP borrower undergoes a change of ownership. While the Notice is focused on providing guidance to these parties, it is also helpful information for the many PPP borrowers who, due to COVID-19 or otherwise, are in the process of selling their businesses.
The Notice states that for the purposes of PPP, “a “change of ownership” will be considered to have occurred when (1) 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 owners of the entity, (2) the 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 (3) a PPP borrower is merged with or into another entity.
The Notice makes it clear that the PPP borrower remains responsible for all obligations under its PPP loan, including retention of records and providing same in connection with a request from the PPP lender or the SBA.
If a PPP borrower is undergoing a change of ownership, it must notify its PPP lender in writing and provide its PPP lender with copies of the transaction documents prior to closing.
If prior to closing the change of ownership transaction, the PPP borrower has either (1) repaid its PPP note in full, or (2) submitted its application for PPP forgiveness and (a) SBA has remitted funds to the PPP lender to satisfy the PPP note or (b) PPP borrower has repaid its outstanding balance on the PPP loan, there are no restrictions on a change of ownership.
If the PPP note has not been fully satisfied prior to the closing of the change of ownership transaction, SBA prior approval (in addition to PPP lender approval) may be required.
SBA prior approval is not required if the following conditions are met in the case of a change of ownership (i) structured as a sale or transfer of an equity interest or as a merger or (ii) structured as an asset sale:
(i) structured as a sale or transfer of an equity interest or as a merger, and (a) sale is of 50% or less of the common stock, or (b) the PPP borrower has completed and submitted a forgiveness application and supporting documentation, and has escrowed funds equal to the outstanding PPP loan amount with PPP lender in an interest bearing account (with said funds being used to repay any PPP loan balance after the forgiveness application is processed, if any).
(ii) Structured as an asset sale, if PPP borrower has completed and submitted a forgiveness application and supporting documentation, and has escrowed funds equal to the outstanding PPP loan amount with PPP lender in an interest bearing account (with said funds being used to repay any PPP loan balance after the forgiveness application is processed, if any).
If the foregoing conditions are not met, SBA prior approval is required.
Whether or not SBA approval is obtained, if the change in ownership involves a sale of equity interest or a merger, the PPP borrower (and its successor if the PPP borrower is not the surviving entity in a merger) remains subject to all obligations under the PPP loan. If the new owners use PPP funds for unauthorized purposes, SBA will have recourse against the owners. If the new owners also have a separate PPP loan, the two loans must be segregated so that documentation for the two loans can be delineated and separately documented.