SBA Issues New Guidance Regarding Changes of Ownership for PPP Borrowers

By Ferdinand Ruplin

On October 2, 2020, the Small Business Administration published new guidance outlining the procedures that PPP borrowers and lenders must follow in the event that a PPP borrower undergoes a “change of ownership.” For parties to a merger, acquisition, or sale in which the target company or seller has received a PPP loan, the new guidance includes important requirements applicable to (i) the drafting and negotiation of the purchase agreement, and (ii) the timing for submission of the forgiveness application.

What constitutes a “Change of Ownership”?

The SBA’s new guidance clarifies that a “change of ownership” is deemed to have occurred in the following three instances:

  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 owner 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 SBA guidance notes that if a transaction constitutes a change of ownership, then the PPP borrower must notify the lender in writing of the proposed transaction and provide a copy of the transaction agreements prior to the closing of any such transaction, regardless of whether SBA consent is also required.

When is consent for a Change of Ownership NOT required?

Unless the PPP loan documents indicate otherwise, consent is not required from either the lender or the SBA if:

  1. There is a transfer of less than 20 percent of the common stock or other ownership interest of a PPP borrower;
  2. There is a transfer of less than 50 percent of the assets of the PPP borrower (measured by fair market value);
  3. The PPP note has been repaid in full; or
  4. The loan forgiveness process has been completed and (i) SBA has remitted funds to the PPP lender or (ii) the borrower has repaid any remaining balance.

When can a lender approve a change of ownership without SBA consent?

Absent language in the loan documents to the contrary, a lender may unilaterally approve a change of ownership (i.e., without SBA consent) in the following circumstances:

  1. For a stock sale or transfer of ownership interest, either (i) the sale or transfer involves 50% or less of the common stock or other ownership interest of the PPP borrower, or (ii) the PPP borrower submits its forgiveness application to the PPP Lender and establishes an interest bearing escrow account controlled by the PPP lender for the outstanding loan balance prior to the closing of the transaction.
  1. For an asset sale, the PPP borrower submits its forgiveness application to the PPP Lender and establishes an interest bearing escrow account controlled by the PPP lender for the outstanding loan balance prior to the closing of the transaction.

Even if a lender can unilaterally approve a change of ownership, the lender is still required to provide the SBA with certain information within five business days after the closing of the transaction, including (i) the identity of the new owners and their ownership percentages, (ii) tax identification numbers for any owner(s) with 20 percent or more of equity, and (iii) the location and amount of funds in escrow, if an escrow account is needed.

When is SBA consent required?

If a transaction is deemed to be a change of ownership and it does not meet any of the exceptions described above, then consent must be obtained from both the lender and the SBA prior to closing. The guidance states that the SBA will review and determine whether to approve the transaction within 60 calendar days of receipt of documentation evidencing the following:

  1. The reason that the PPP borrower cannot fully satisfy the PPP note or fully fund the escrow as described above.
  2. The details of the requested transaction.
  3. A copy of the executed PPP note.
  4. Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer.
  5. Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number.
  6. A list of all owners of 20 percent or more of the purchasing entity.

The key takeaway here is that PPP borrowers involved in a merger, acquisition or sale process constituting a change of ownership should apply for forgiveness as expeditiously as possible. Otherwise, the borrower will have to escrow significant funds while awaiting a forgiveness decision and/or submit the transaction for review and approval by the SBA, which may delay the closing.

Continuing obligations after a change of ownership

Regardless of whether SBA consent is required, in the event of a change of ownership, the PPP borrower (or, in the case of a merger, the successor to the PPP Borrower) will remain subject to all obligations under the PPP loan. In addition, the purchasing entity will be responsible for ensuring that any remaining PPP funds are used only for authorized purposes, and the purchasing entity is subject to liability for any unauthorized use of the funds.

If the purchasing entity and the selling entity each have PPP loans, the purchasing entity is responsible for segregating and delineating PPP funds and expenses, and is required to provide documentation to demonstrate compliance with PPP requirements with respect to each separate PPP loan.

If you have any questions regarding your PPP loan, contact your primary Tonkon attorney. Tonkon Torp corporate finance attorneys Ferdie Ruplin (503.802.2029, ferdie.ruplin@tonkon.com), Jeff Cronn (503.802.2048, jeff.cronn@tonkon.com), Drea Schmidt (503.802.5703, drea.schmidt@tonkon.com), and Betsy Judd (503.802.5769, betsy.judd@tonkon.com) are also available to answer your questions on these matters.

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