Small Business Administration (SBA) Issues Procedural Notice regarding Paycheck Protection Program (PPP) Loans and Changes of Ownership / M&A

On October 2, 2020, the U.S. Small Business Administration (SBA) issued a Procedural Notice relating to the impact of certain change of ownership transactions on PPP loans and borrowers.  The Procedural Notice is critical and immediately relevant to participants in M&A transactions, equity sales or issuances, recapitalizations and similar transactions, even where these transactions may be strictly between affiliated entities or individuals.

For purposes of the Procedural Notice, a “change of ownership” will be deemed to have occurred when:

• at least 20% of the common stock or other ownership interests of a PPP borrower are sold or otherwise 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 its assets (measured by fair market value), whether in one or more transactions; or
• a PPP borrower is merged with or into another entity.

All sales and other transfers occurring since the date of PPP loan approval must be aggregated to determine whether the relevant threshold has been met for a particular PPP borrower.

While the definition of “change of ownership” effectively means that transfers of less than 20% of the common stock or other ownership interests of a PPP borrower or less than 50% of the assets of a PPP borrower (measured by fair market value) do not require SBA approval, these transactions may or may not require the PPP lender’s approval depending on the underlying PPP loan documentation with the lender, which should still be reviewed in tandem with the SBA’s Procedural Notice.

In addition, before consummating 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 agreements (or other documents) that would effectuate the proposed transaction.

Depending on the type and circumstances of the change of ownership, different procedures will then apply:

• PPP Note Already Fully Satisfied. There are no restrictions on a change of ownership transaction if, before completing the sale or transfer, the PPP borrower has:
  • Repaid the PPP loan in full; or
  • Completed the loan forgiveness process in accordance with the PPP requirements and SBA has remitted funds to the PPP lender in full satisfaction of the PPP note and/or the PPP borrower has repaid any remaining balance on the PPP loan.
• PPP Note not yet Fully Satisfied. If the PPP Note has not yet been fully satisfied before closing the sale or transfer, the following requirements and procedures will apply:
  • Prior SBA Approval not Required. The PPP lender may approve the change of ownership and SBA’s prior approval will not be required if the following conditions are satisfied for (i) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger or (ii) a change of ownership structured as an asset sale:
    • Equity Sale or Merger. An individual or entity may sell or otherwise transfer common stock or other ownership interests in a PPP borrower without prior SBA approval only if:
      • The sale or other transfer is of 50% or less of the common stock or other ownership interests of the PPP borrower (aggregating all sales or other transfers since the approval date of the PPP loan); or
      • The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting 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 (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
    • Asset Sale. A PPP borrower may sell 50% or more of its assets (measured by fair market value) without prior SBA approval only if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting 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 (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
  • Prior SBA Approval Required. If a change of ownership of a PPP borrower does not meet the conditions described above, prior SBA approval of the change of ownership is required and the PPP lender may not unilaterally approve the change of ownership.  To obtain SBA’s prior approval of changes of ownership, the PPP lender must submit the request to the appropriate SBA loan servicing center. The request must include:
    • the reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds as described above;
    • the details of the proposed transaction;
    • a copy of the executed PPP note;
    • any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower and other relevant parties;
    • disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
    • a list of all owners of 20% or more of the buyer.

SBA will review and provide a determination within 60 calendar days of receipt of a complete request.

If required based on the above, SBA approval of any change of ownership involving the sale of 50% or more of the assets (measured by fair market value) of a PPP borrower will be conditioned on the buyer assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. In addition, in such cases where SBA approval is required, the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the buyer, or a separate assumption agreement must be submitted to SBA.

For all sales or other transfers of common stock or other ownership interest or mergers, whether or not the sale requires SBA’s prior approval:

Regardless of whether prior SBA approval is required, in the event of a sale or other transfer of common stock or other ownership interest in the PPP borrower, or a merger of the PPP borrower with or into another entity, 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. In addition, if the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the owner(s) for the unauthorized use.

If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction: (1) in the case of a purchase or other transfer of common stock or other ownership 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 by each PPP borrower, and (2) 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.

The PPP lender must notify the appropriate SBA loan servicing center, within 5 business days of completion of the transaction, of the:

• identity of the new owner(s) of the common stock or other ownership interest;
• new owner(s)’ ownership percentage(s);
• tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and
• if an escrow account is required, the location of, and the amount of funds in, the escrow account under the control of the PPP lender.

We will continue to track guidance from SBA as well as legislative developments related to the PPP.  We also encourage PPP borrowers to reach out to their Miller Johnson contacts to learn more about our flat-fee PPP Audit and Compliance Preparedness Program.  This program offers clients a strategic solution to identify, gather and organize relevant documents and performance data to ensure their business is best positioned to comply with the ever-changing forms and rules governing the PPP.  The program also involves identifying key legal arguments so that clients are prepared for any potential enforcement action or inquiry.  Additional details regarding this program are available here.