SBA Guidance on Changes in Ownership of PPP Loan Borrowers

On Friday, October 2, 2020, the Small Business Administration (“SBA”) issued a Procedural Notice¹  (the “Notice”) providing guidance on the notification and consent requirements for changes in ownership of borrowers of Paycheck Protection Program (“PPP”) loans. While the SBA’s Standard Operating Procedures for 7(a) loans requires lenders to obtain SBA consent before the lender approves a change in ownership of any PPP borrower,² the details surrounding the SBA consent process and when it applies were unclear.  Although the Notice provides further guidance on when PPP lenders are required to obtain consent of the SBA, the guidance of the SBA and U.S. Treasury still leaves uncertainty for PPP borrowers and their counterparties when undergoing a change of ownership.  

What Constitutes a Change in Ownership?

The Notice provided that a “change of ownership” occurs 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 owner of the entity,³
   
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. PPP borrower is merged with or into another entity.

Note that PPP borrowers must aggregate all sales and other transfers occurring since the date of approval of the PPP loan to determine whether the relevant threshold has been met. 

When is SBA Consent Required for a Change in Ownership?

Unless a PPP borrower satisfies one of the criteria in (1) – (3) below, SBA consent is required for a “change in ownership” to ensure the repayment of any unforgiven PPP loan amounts.

1. The PPP loan is fully satisfied, which means the loan is either:
   
   (a)  Paid in full; or 
   
   (b)  Forgiven by the SBA (i.e., the SBA has remitted payment to the lender) and any unforgiven amounts are paid in full.
   
   
2. In a stock sale or merger:
   
   (a)  A sale or transfer of less than 50% of the borrower’s stock / ownership; or
   
   (b)  The PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan.
   
   
3. In an asset sale of 50% or more of the borrower’s assets, if the PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan.

Companies involved in a pending transaction should consult with the borrower’s PPP lender, particularly where the parties have agreed to escrow funds with a third party escrow agent, as such PPP lender will likely require that such funds be held by the PPP lender as escrow agent.  

Borrower Obligations

Prior to the closing of any change of ownership transaction, the PPP borrower must notify the lender in writing of the transaction and provide the lender with a copy of the relevant transaction documents necessary to effectuate the proposed transaction.  The lender is required to submit certain documentation regarding the transaction to the SBA within five business days of the completion of the transaction.

Despite the occurrence of a change of ownership, the PPP borrower remains responsible for: (1) continued performance of all obligations under the PPP loan; (2) certifications made under the PPP loan application, including the certification of economic necessity; and (3) continued compliance with all other PPP loan requirements. The PPP borrower continues to be responsible for obtaining, preparing, and retaining all required forms and documentation and providing these forms and documents to the PPP lender, servicer, or SBA upon request.

The new owners are liable for any unauthorized uses of PPP loan proceeds by the new owner.  If the new owner also had a PPP loan, the PPP loan funds must be segregated and properly allocated among the two borrowers.

Process to Obtain SBA Consent

If SBA consent is required for the change in ownership, the PPP lender is required to submit certain documents to the SBA, including documents relating to the transaction and information about the buyer and its ownership.  The SBA will review the documents submitted by the PPP lender and provide a decision within 60 days of receipt of a complete request. 

Open Questions

While the Notice from the SBA clarifies when SBA consent is and is not required from the PPP lender for changes in ownership of PPP borrowers, it does not address the consequences to the PPP lender or PPP borrower for the PPP lender failing to obtain the SBA’s consent, either prior to or after the issuance of this Notice.  Such consequences could include, but are not limited to: (1) a denial of, or ineligibility for, loan forgiveness; (2) having the lender accelerate all obligations under the loan, and exercise rights and remedies, including setoff of bank accounts with the lender; or (3) present successor liability or fraudulent transfer risks.

The Notice also does not address the fact that several PPP lenders have not yet opened their portals for accepting forgiveness applications, so the PPP borrower may not yet be able to formally submit a forgiveness application.  Additionally, we note that the PPP loan documentation should be consulted to determine if there are different or additional standards which would apply to the change of control transaction. 

We will continue to monitor guidance issued by the SBA to see if the SBA issues any further clarifications on these open issues.

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¹ See https://home.treasury.gov/system/files/136/PPP–Procedural-Notice–PPP-Loans-and-Changes-of-Ownership.pdf.
² See https://www.sba.gov/sites/default/files/2019-02/SOP%2050%2010%205%28K%29%20FINAL%202.15.19%20SECURED%20copy%20paste.pdf at p. 255.
³ For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.