New Procedural Notice Released by the Small Business Administration (“SBA”) on the Paycheck Protection Program

Client Alerts / October 2020

The SBA issued a Procedural Notice on October 2, 2020 addressing the notification and consent requirements for changes in ownership transactions for borrowers of PPP loans.

  • What constitutes a “Change in Ownership” transaction?
    • At least 20% of the common stock or other ownership interest of the PPP borrower is sold or transferred in one or more transactions;
    • The PPP borrower sells or transfers at least 50% of its assets (measured by fair market value); or
    • The PPP borrower is merged with or into another entity.

For each “Change in Ownership” transaction, the PPP borrower must notify its lender before the transaction closes and provide the lender with a copy of the transaction agreement and other documents that would effectuate the proposed transaction.

  • Is SBA consent required for a “Change in Ownership” transaction? Unless a PPP borrower satisfies one of the criteria below, SBA consent is required for a “Change in Ownership” transaction:
    • The PPP loan is fully satisfied at the time the transaction closes, which means either:
      • The loan is paid in full by PPP borrower; or
      • The SBA has provided its forgiveness determination, remitted payment to the lender for any amounts forgiven and the PPP borrower has paid in full any unforgiven amount.
    • In a stock sale or merger:
      • The transaction is for 50% or less of the PPP borrower’s ownership interest; or
      • The PPP borrower submits a loan forgiveness application to the lender and puts in an interest-bearing escrow account controlled by the lender funds equal to the outstanding balance of the PPP loan.
    • In an asset sale:
      • The PPP borrower submits a loan forgiveness application to the lender and puts in an interest-bearing escrow account controlled by the lender funds equal to the outstanding balance of the PPP loan.
  • How to receive SBA consent, if needed? The lender must submit a request for approval to the SBA and include the following information:
    • The reason the PPP borrower cannot repay the PPP loan or place funds in escrow with the lender as described above;
    • Details of the transaction;
    • A copy of the PPP loan promissory note;
    • A copy of the letter of intent and transaction agreement evidencing the “Change in Ownership” transaction;
    • Disclose whether the buyer has an existing PPP loan; and
    • List of all owners holding 20% or more ownership interests in the PPP borrower.

Once all the documents have been received, the SBA will issue its decision within 60 days. The SBA may condition its approval on additional risk mitigation measures, which could mean adding language to the transaction agreement that the buyer is required to assume the PPP loan, including responsibility for compliance with the PPP loan terms.

  • Other considerations for parties involved in a “Change in Ownership” transaction, regardless if SBA consent is required or not:
    • The PPP borrower remains responsible for (a) performing all obligations under the PPP loan; (b) certifications made in connection with the PPP loan application, and (c) compliance with all PPP requirements (including retaining all necessary documents evidencing compliance with PPP requirements).
    • If the buyer uses any PPP funds for unauthorized purposes, the SBA will have recourse against the buyer for the unauthorized use.
    • If the buyer has an existing PPP loan, such PPP loan funds must be segregated from the seller’s PPP loan funds and separate documentation must be provided evidencing compliance with PPP requirements for both PPP loans.
    • The lender must notify the appropriate SBA Loan Servicing Center within 5 business days of closing of the transaction of the following:
      • Identity of the buyer;
      • The ownership interest held by buyer in the PPP borrower (if applicable);
      • Tax identification numbers of any owners holding 20% or more ownership interests in the PPP borrower (if applicable); and
      • Location and amount of funds being held in escrow under the control of the lender (if applicable).

Link to the full text of the Procedural Notice can be found here.

Information contained in this alert is for general information purposes only. It should not be considered as legal advice or the sole source of information when analyzing and resolving a legal issue. If you have specific questions regarding your particular circumstances, please do not hesitate to contact your CH& counsel.