In a recently issued procedural notice, the Small Business Association (“SBA”) addressed a lingering question of borrowers and lenders related to the Paycheck Protection Program (“PPP”) process: What procedures are required for changes of ownership of an entity that has received PPP funds?
The notice, issued on October 2, describes when change of ownership is considered to have occurred and what impact such change has on a PPP borrower’s responsibilities under the program.
Definition of a Change of Ownership
For the purposes of the PPP, a “change of ownership” takes place when one of the following occurs:
- At least 20% 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;
- 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.
A PPP borrower must aggregate all sales and other transfers occurring since the date of approval of the PPP loan in determining whether the relevant threshold has been met.
Is a Borrower Required to Obtain SBA Consent?
If a PPP borrower fails to satisfy one of the criteria below, SBA consent is required for a change in ownership to ensure the repayment of any unforgiven PPP loan amounts.
- The PPP loan has been paid in full or forgiven by the SBA.
- In the case of a stock sale or merger:
(a) The sale or transfer involves less than 50% of the borrower’s stock/ownership interest; or
(b) 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.
- In the case of an asset sale of 50% or more of the borrower’s assets, 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.
If SBA consent is required, 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 and provide a decision within 60 days of receipt of a complete request.
Borrower’s Responsibilities in the Event of a Change in Ownership
The PPP borrower remains responsible for all obligations under its PPP loan in the event of change of ownership, including performance obligations under the PPP loan, certifications it made in connection with its loan application, retention of records and providing records in connection with a request from the PPP lender or the SBA, as well as other applicable PPP requirements.
In addition, before undergoing a change of ownership, a PPP borrower must notify its PPP lender in writing and provide the lender with copies of relevant documentation related to the transaction prior to closing.
Regardless of whether SBA approval is required and/or obtained, if change in ownership involves a sale of equity interest or a merger, the new owner is responsible for all obligations under the PPP loan. If the new owners use PPP funds for unauthorized purposes, the SBA will have recourse against them. If the new owner also had a PPP loan, the PPP loan funds must be segregated and properly allocated among the two borrowers.
While the notice clarifies a great deal about change in ownership issues related to PPP loans, there remain unanswered questions. Among those questions are:
- What are the consequences of failing to obtain SBA consent for a change in ownership transaction?
- What rules apply for changes in ownership that occurred prior to the issuance of the notice?
- What should PPP borrowers do if their PPP lenders have not yet opened application portals for seeking loan forgiveness?
We will continue to monitor and keep you abreast of new developments related to PPP forgiveness. In the meantime, if you have questions or require assistance, please contact your Fraser Trebilcock attorney.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Edward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He may be contacted at firstname.lastname@example.org or 517-377-0845.