By: Barry K. Jones
On October 2, 2020, the Small Business Administration (“SBA”) issued SBA Procedural Notice 5000-20057 providing guidance concerning changes of ownership interests in businesses that are receiving Paycheck Protection Program (“PPP”) funds. For purposes of PPP, a change of ownership occurs when, (1) at least twenty percent (20%) of the common stock or other ownership interest of a PPP borrower 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 fifty percent (50%) of its assets based on fair market value whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.
As provided in the SBA Procedural Notice, regardless of any change of ownership, the PPP borrower remains responsible for, (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms, and supporting documentation and providing those forms and supporting documentation to the PPP lender or to SBA upon request. Prior to the closing of 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.
There are no restrictions on the change of ownership, prior to the closing of the sale or transfer, if the PPP borrower has, (1) repaid the PPP note in full, or (2) completed the loan forgiveness process in accordance with PPP requirements and the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or the PPP borrower has repaid the remaining balance of a PPP loan.
If the PPP note is not fully satisfied prior to the closing of the sale or transfer for, (1) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger, or (2) a change of ownership structured as an asset sale, the PPP lender may approve the change of ownership and the prior approval of SBA is not required. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without prior SBA approval if (1) the sale or other transfer is of fifty percent (50%) or less of the common stock or other ownership interest of the PPP borrower, or (2) the PPP borrower completes a forgiveness application reflecting its use 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 is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
A PPP borrower may sell fifty percent (50%) or more of its assets based on fair market value without prior SBA approval only if the PPP borrower completes a forgiveness application reflecting the use of the PPP loan proceeds and submits it, together with the 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 is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds held in the escrow account within five (5) business days of the closing of the transaction.
If a change of ownership of a PPP borrower does not meet the conditions outlined above, prior approval from the SBA of the change in ownership is required and the PPP lender may not unilaterally approve the change of ownership. In order to obtain prior approval of the SBA of request for change of ownership, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center. The request must include, (1) the reason that the PPP borrower cannot fully satisfy the PPP note, (2) the details of the requested transaction, (3) a copy of the executed PPP note, (4) any letter of intent and the purchase and sale agreement setting forth the responsibilities of the PPP borrower and the buyer, and (5) disclosure of whether the buyer has an existing PPP loan, the loan number, and a list of all owners of twenty percent (20%) or more of the purchasing entity. SBA approval of a change of ownership involving the sale of fifty percent (50%) or more of the assets based on fair market value of the PPP borrower will be conditioned on the purchasing entity assuming all of the obligations of the PPP borrower under the PPP loan, including responsibility for compliance with the PPP loan terms. In addition, the purchase or sale agreement must include appropriate language regarding the assumption of the obligations of the PPP borrower under the PPP loan by the purchasing person or entity, or a separate assumption agreement. SBA states it will review and provide a determination within sixty (60) calendar days of the receipt of a complete request to approve a change of ownership.
If there is a sale or other transfer of common stock or other ownership interest in a PPP borrower, or merger of a PPP borrower with or into another entity, the PPP borrower or successor to the PPP borrower will remain subject to all other obligations under the PPP loan. In addition, if the new owner(s) uses PPP funds for unauthorized purposes, SBA will have recourse against the new owner(s) for such unauthorized use. If any of the new owners or the successor PPP borrower has a separate PPP loan, then, after 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 to the PPP borrower is responsible for segregating and delineating PPP funds and expenses and for providing proper documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.
A PPP lender must notify the appropriate SBA Loan Servicing Center, within five (5) business days of the completion of a transaction of, (1) the identity of the new owner(s) of the common stock or other ownership interest, (2) the new owner(s) ownership percentage(s), (3) tax identification number(s) for any owner(s) holding twenty percent (20%) or more of the equity in the business, and (4) the location of and the amount of funds in, the escrow account under the control of the PPP lender, if an escrow account is required.
If you are a business owner contemplating any of the transactions discussed above, and have a PPP loan, you should consult legal counsel to ensure that you are meeting the applicable PPP requirements set forth in the Procedural Notice in connection with the transaction.
By: Barry K. Jones
On October 2, 2020, the Small Business Administration (“SBA”) issued SBA Procedural Notice 5000-20057 providing guidance concerning changes of ownership interests in businesses that are receiving Paycheck Protection Program (“PPP”) funds. For purposes of PPP, a change of ownership occurs when, (1) at least twenty percent (20%) of the common stock or other ownership interest of a PPP borrower 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 fifty percent (50%) of its assets based on fair market value whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.
As provided in the SBA Procedural Notice, regardless of any change of ownership, the PPP borrower remains responsible for, (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms, and supporting documentation and providing those forms and supporting documentation to the PPP lender or to SBA upon request. Prior to the closing of 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.
There are no restrictions on the change of ownership, prior to the closing of the sale or transfer, if the PPP borrower has, (1) repaid the PPP note in full, or (2) completed the loan forgiveness process in accordance with PPP requirements and the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or the PPP borrower has repaid the remaining balance of a PPP loan.
If the PPP note is not fully satisfied prior to the closing of the sale or transfer for, (1) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger, or (2) a change of ownership structured as an asset sale, the PPP lender may approve the change of ownership and the prior approval of SBA is not required. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without prior SBA approval if (1) the sale or other transfer is of fifty percent (50%) or less of the common stock or other ownership interest of the PPP borrower, or (2) the PPP borrower completes a forgiveness application reflecting its use 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 is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
A PPP borrower may sell fifty percent (50%) or more of its assets based on fair market value without prior SBA approval only if the PPP borrower completes a forgiveness application reflecting the use of the PPP loan proceeds and submits it, together with the 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 is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds held in the escrow account within five (5) business days of the closing of the transaction.
If a change of ownership of a PPP borrower does not meet the conditions outlined above, prior approval from the SBA of the change in ownership is required and the PPP lender may not unilaterally approve the change of ownership. In order to obtain prior approval of the SBA of request for change of ownership, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center. The request must include, (1) the reason that the PPP borrower cannot fully satisfy the PPP note, (2) the details of the requested transaction, (3) a copy of the executed PPP note, (4) any letter of intent and the purchase and sale agreement setting forth the responsibilities of the PPP borrower and the buyer, and (5) disclosure of whether the buyer has an existing PPP loan, the loan number, and a list of all owners of twenty percent (20%) or more of the purchasing entity. SBA approval of a change of ownership involving the sale of fifty percent (50%) or more of the assets based on fair market value of the PPP borrower will be conditioned on the purchasing entity assuming all of the obligations of the PPP borrower under the PPP loan, including responsibility for compliance with the PPP loan terms. In addition, the purchase or sale agreement must include appropriate language regarding the assumption of the obligations of the PPP borrower under the PPP loan by the purchasing person or entity, or a separate assumption agreement. SBA states it will review and provide a determination within sixty (60) calendar days of the receipt of a complete request to approve a change of ownership.
If there is a sale or other transfer of common stock or other ownership interest in a PPP borrower, or merger of a PPP borrower with or into another entity, the PPP borrower or successor to the PPP borrower will remain subject to all other obligations under the PPP loan. In addition, if the new owner(s) uses PPP funds for unauthorized purposes, SBA will have recourse against the new owner(s) for such unauthorized use. If any of the new owners or the successor PPP borrower has a separate PPP loan, then, after 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 to the PPP borrower is responsible for segregating and delineating PPP funds and expenses and for providing proper documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.
A PPP lender must notify the appropriate SBA Loan Servicing Center, within five (5) business days of the completion of a transaction of, (1) the identity of the new owner(s) of the common stock or other ownership interest, (2) the new owner(s) ownership percentage(s), (3) tax identification number(s) for any owner(s) holding twenty percent (20%) or more of the equity in the business, and (4) the location of and the amount of funds in, the escrow account under the control of the PPP lender, if an escrow account is required.
If you are a business owner contemplating any of the transactions discussed above, and have a PPP loan, you should consult legal counsel to ensure that you are meeting the applicable PPP requirements set forth in the Procedural Notice in connection with the transaction.
