SBA Announces New Guidelines on Consent Requirements for Change of Ownership of PPP Borrowers | Perkins Coie

The U.S. Small Business Administration (SBA) issued a procedural notice (the Notice) on October 2, 2020 that outlines the process and requirements that Paycheck Protection Program (PPP) borrowers and lenders must follow if the ownership of the PPP changes -Change borrower. The notice provides a roadmap for how PPP borrowers and their potential acquirers and investors can structure transactions to avoid the need for prior SBA approval.

Although CARES did not require PPP loans to be documented on any particular form of promissory note, many PPP lenders used a promissory note based on the SBA’s promissory note form for other loans made under the 7 (a) business loan program of the SBA were awarded. This form provides that a PPP borrower is in default if the borrower “[r]reorganize, merge, consolidate, or otherwise change ownership or business structure without the prior written consent of the lender. ”This form of promissory note provides that a change of ownership transaction with the lender’s consent will not cause default, but the previous SBA guidelines indicated that lenders For 12 months after the loan is paid off. The SBA takes the view that these earlier guidelines apply equally to PPP lenders and PPP loans. As a result, many PPP lenders have so far been unwilling to approve transactions without the prior consent of the SBA.

Summary: definition of change of ownership

The notice begins by defining “change of ownership” as:

  1. At least 20% of the common stock or other ownership interest in a PPP borrower is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the PPP borrower.
  2. The PPP borrower sells or otherwise transfers at least 50% of their assets (based on market value).
  3. A PPP borrower is merged with or in another company.

For private companies, all sales and other transfers since the PPP loan application was approved must be aggregated to determine if the appropriate threshold has been met. For example, a private company that has seen multiple transactions involving change of ownership of shares since receiving a PPP loan would need to aggregate the transferred shares for the purposes of the 20% test. For publicly traded borrowers, only sales or other transfers that result in an individual or legal entity holding or owning at least 20% of the common stock or other ownership interest in the borrower need to be aggregated. The announcement does not specifically state whether it applies to new share issues (e.g., in a financing) or to transfers only, but prior to this announcement, many practitioners viewed financing as much as a share transfer. The notice also does not indicate whether the 20% test is measured on a fully diluted basis or on the basis of the borrower’s shares or interests outstanding (i.e., it is not clear whether a transaction that leads to a transfer of more than 20% of a shares outstanding in the PPP borrower but less than 20% of that borrower’s shares outstanding on a fully diluted basis would trigger the 20% threshold).

The notice provides that the PPP borrower must notify the PPP lender in writing of the proposed transaction and provide the PPP lender with a copy of the final purchase agreement prior to entering into a “change of ownership” transaction (i.e., above the 20% test) (en). The notice does not specify whether this requirement applies in situations where the PPP promissory note did not require consent to change ownership, but it appears to apply more broadly to all PPP loans. While we would expect most lenders to follow the SBA definition of “change of ownership”, this is not required. Accordingly, a PPP borrower considering a transaction should carefully review their PPP promissory note with an attorney for an independent decision on whether consent is required or advisable.

Summary: Change of ownership rules that apply to various transaction structures

The notice describes the following procedures that will apply depending on the change of ownership circumstances, including whether the PPP loan has been fully satisfied or waived.

In situations where the PPP loan has been repaid in full or the loan waiver process is fully completed and the SBA has returned the waived portion of the loan to the PPP lender, no SBA approval or other requirements will apply.

In situations where the PPP loan has not yet been repaid or waived, including when the borrower may have started but not yet completed the waiver process, SBA approval or other procedures are required:

Minority transactions. Changes of ownership involving the sale or other transfer of 50% or less of the common stock or other ownership interest of the PPP borrower do not require SBA approval and the PPP lender may unilaterally approve the change of ownership as long as the PPP lender notifies that relevant SBA Loan Servicing Center within five working days of the transaction being completed via the following (the new owner information):

  • Identity of the new owner (s) of the common stock or other ownership interest.
  • Ownership percentage (s) of the new owner (s).
  • Tax identification number (s) for all owners who hold 20% or more of the company’s equity.

In determining whether a sale or other transfer exceeds the 50% threshold, it is necessary to aggregate all sales and other transfers that have occurred since the date the borrower’s PPP loan application was approved.

Majority transactions. Changes of ownership involving the sale or other transfer of more than 50% of the common stock or other ownership interest of the PPP borrower, including transactions structured as a merger, do not require SBA approval and the PPP lender may unilaterally change the of property as long as:

  • The PPP borrower fills out and submits a waiver application that reflects their use of all PPP loan proceeds.
  • The PPP borrower places funds equal to the outstanding balance of the PPP loan in an interest bearing escrow account controlled by the PPP lender.
  • The PPP lender will notify the relevant SBA loan service center within five business days of the transaction being completed of the following:
    • The new owner information.
    • The location and amount of funds in the escrow account are under the control of the PPP lender.

Sale of assets. Changes of ownership structured as the sale of 50% or more of a PPP borrower’s assets (by market value) do not require SBA approval and the PPP lender may unilaterally approve the change of ownership provided that:

  • The PPP borrower fills out and submits a waiver application that reflects their use of all PPP loan proceeds.
  • The PPP borrower places funds equal to the outstanding balance of the PPP loan in an interest bearing escrow account of the PPP lender.
  • The PPP lender will notify the relevant SBA Loan Servicing Center within five business days of the transaction being completed of the location and the amount of funds in the escrow account under the control of the PPP lender.

SBA approval process. If a change of ownership does not meet the conditions described above, so that prior approval of the transaction by the SBA is required and the PPP lender cannot unilaterally approve the change of ownership, the following applies:

  • The PPP lender must submit the application for approval to the SBA, which must include:
    • The reason the PPP borrower is unable to repay or hold in trust the outstanding balance of the PPP loan.
    • The details of the requested transaction.
    • A copy of the executed PPP note.
    • Any letter of intent and purchase or sale agreement that sets out the responsibilities of the PPP borrower, the seller (if different from the borrower), and the buyer.
    • Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number.
    • A list of all owners of 20% or more of the buying unit.
  • As a condition for its approval of the transaction, the SBA can demand additional risk reduction measures “if it deems this appropriate”.
  • The SBA’s approval of a change of ownership, which involves the sale of 50% or more of the assets of a PPP borrower (measured by market value), is made conditional on the buyer assuming all of the borrower’s obligations under the PPP loan, including these Acceptance is documented in the asset purchase agreement or a separate transfer agreement.
  • The SBA will review and provide a decision within 60 calendar days of receiving a complete application.

Summary: Considerations for New Owners of PPP Borrowers

The memo stated that the SBA will take recourse against a new owner of a PPP borrower who has used PPP funds for unauthorized purposes.

In cases where a new owner or successor to a PPP loan has a separate PPP loan, the notice provides:

  • If the change of ownership is structured as a transfer of common stock or other ownership interest, the PPP borrower and the new owner (s) are responsible for the segregation of PPP funds and expenses and the provision of documents to ensure everyone’s compliance with PPP requirements Proof of PPP borrowers.
  • If the transaction of change of ownership is structured as a merger, the successor will be responsible for segregating and demarcating PPP funds and expenditures, as well as providing documents to demonstrate compliance with PPP requirements in relation to both PPP loans.

The central theses

  • PPP borrowers need to check whether a transaction requires their PPP lender’s approval. Transactions that do not require SBA approval to change ownership typically still require approval from the PPP lender.
  • In determining whether to meet the 20% or 50% thresholds for stock transactions, PPP borrowers should consider the aggregation rules that have looked back on all stock sales and transfers since the date of approval of the relevant PPP loan application.
  • For change of control transactions that require funds to be deposited with the PPP lender, transaction participants should allow sufficient lead time to complete documentation with the lender.
  • Disposals of assets that sell more than 50% of the borrower’s assets may require additional procedures to document the acquirer’s assumption of obligations under the PPP loan by the borrower.
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