SBA Releases Procedural Guidance Regarding Change of Ownership of a PPP Borrower

On Oct. 2, the Small Business Administration (SBA) released a procedural notice addressing changes of ownership of a borrower of a Paycheck Protection Program (PPP) loan. Notably, the procedural notice provides additional guidance concerning circumstances in which PPP lender and/or SBA prior approval is required. The SBA procedural notice can be found here: Guidance on PPP Loans and Changes of Ownership. Additionally, on Oct. 8, the SBA issued an interim final rule, which can be found here, in connection with its release of an alternative loan forgiveness application (SBA Form 3508S, found here), which is available to PPP borrowers of loans of $50,000 or less, other than any borrower that together with its affiliates received loans totaling $2 million or more.

Prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance, including with respect to PPP forgiveness. Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide.

Overview

• No SBA/Lender Approval Required for Change of Ownership: No prior approval will be required in order for a PPP borrower to consummate a change of ownership if the PPP note has been fully satisfied (by repayment, forgiveness or a combination of the two).
  
  
• SBA Approval Not Required for Change of Ownership: Prior SBA approval will not be required if the PPP note has not been fully satisfied prior to the closing of change of ownership structured:
  
  
  • As a sale of stock or merger, if the borrower has received PPP lender consent and either the sale is for less than 50% of the equity or the borrower has submitted a forgiveness application and funded a lender-controlled escrow account in the amount necessary to repay the PPP loan in full.
    
    
  • As a sale of 50% or more of its assets, if the borrower has received PPP lender consent and has submitted a forgiveness application and funded a lender-controlled escrow account in the amount necessary to repay the PPP loan in full.
    
    
• Additional Relief for Recipients of PPP Loans of $50,000 or Less: The SBA has enacted a new de minimis exception for borrowers of loans of $50,000 or less, whereby the PPP loan will not be subject to any reductions in the PPP loan forgiveness amount related to reductions in full-time-equivalent employees or reductions in employee salary or wages. Additionally, the SBA has released a new simplified form of forgiveness application for such recipients of PPP loans of $50,000 or less.

Change of Ownership

As a general matter, a "change in ownership" of a PPP borrower while the PPP loan is outstanding will require the prior approval of the PPP lender and, in certain circumstances, the SBA. For purposes of the PPP, a change in ownership will be deemed to have occurred in the following circumstances:

1. Equity Sale: 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;
   
   
2. Asset Sale: 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
   
   
3. Merger: A PPP borrower is merged with or into another entity.

For purposes of determining whether a change in ownership has occurred, all sales and other transfers since the date of approval of the borrower’s PPP loan must be aggregated; however, for publicly traded PPP borrowers, only sales or other transfers that result in one person or entity holding at least 20% of the common stock or other ownership interest must be aggregated.

PPP Borrower Responsibilities

Despite any change of ownership, the original PPP borrower will remain 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.

The PPP borrower will also remain responsible for preparing and retaining all PPP forms and supporting documentation and providing them to the PPP lender or lender servicing the loan or to the SBA upon request. Additionally, all SBA Loan Program Requirements (as defined under 13 CFR 120.10) must be met if the buyer or seller (or both) has an outstanding PPP loan and finances the change of ownership transaction in whole or in part with a 7(a) loan. The 7(a) loan that finances the change of ownership transaction may not be used to finance the escrow account if an escrow is required in the circumstances described below.

SBA Approval Not Required for Change of Ownership

PPP Note Has Been Satisfied

If prior to the closing of the change of ownership transaction, the PPP borrower has:

1. Repaid the PPP note in full; or
   
   
2. Completed the loan forgiveness process in accordance with PPP requirements and (i) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or (ii) the PPP borrower has repaid any remaining balance on the PPP loan.

In such circumstances, neither SBA nor lender prior approval will be required to consummate the change of ownership transaction.

PPP Note Has Not Been Satisfied — Sale or Other Transfer of Stock or Merger

If the PPP note has not been repaid or forgiven in full prior to the closing of a change of ownership transaction structured as a sale or other transfer of common stock or other ownership interest or as a merger, prior SBA approval will not be required if the PPP lender has approved the change of ownership and either:

1. The sale or transfer is for 50% or less of the common stock or other ownership interest of the PPP borrower (all sales or transfers since the date of PPP loan approval being aggregated); or
   
   
2. The PPP borrower has completed and submitted a forgiveness application to the PPP lender, including supporting documentation, and has established an interest-bearing escrow account controlled by the PPP lender including funds equal to the outstanding balance of the PPP loan. After the forgiveness process, including any SBA appeals process, the escrow funds must be disbursed first to repay any remaining PPP loan balance (including accrued interest), with any remaining escrow amount released to the borrower.

Furthermore, in either case of (1) or (2) above, the additional procedures summarized under Additional Requirements for Stock Sales and Mergers Regardless of SBA Approval below apply.

PPP Note Has Not Been Satisfied — Asset Sale

If the PPP note has not been repaid or forgiven in full prior to the closing of a change of ownership transaction structured as a sale of 50% or more of the PPP borrower’s assets (based on fair market value), prior SBA approval will not be required if the PPP lender has approved the change of ownership and:

1. The PPP borrower has completed and submitted a forgiveness application to the PPP lender, including supporting documentation; and
   
   
2. The PPP borrower has established an interest-bearing escrow account controlled by the PPP lender including funds equal to the outstanding balance of the PPP loan.

After completion of the forgiveness process, including any SBA appeals process, the escrow funds must be disbursed first to repay any remaining PPP loan balance (including interest). The PPP lender must notify the appropriate SBA service center of the location and the amount of the funds in the escrow account within five business days of the closing of the change of ownership transaction.

SBA Approval Required for Change of Ownership

If the PPP note has not been repaid or forgiven in full prior to the closing of a change of ownership transaction and does not meet the conditions described above, both prior SBA and PPP lender approval of the change of ownership will be required and the lender will not be permitted to unilaterally approve the change of ownership.

In order to obtain SBA approval, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center, and the request must include the following:

1. The reason that the PPP borrower cannot fully repay the PPP note prior to the change of ownership or escrowed the funds necessary to repay the note in full as described above;
   
   
2. The details of the requested change of ownership transaction;
   
   
3. A copy of the executed PPP note;
   
   
4. Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
   
   
5. Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
   
   
6. A list of all owners of 20% or more of the purchasing entity.

SBA approval of an asset sale of a PPP borrower (as described above) will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including compliance with all PPP loan terms. The purchase agreement will need to include language documenting the assumption of the PPP borrower’s loan by the buyer, or a separate assumption agreement must be submitted to the SBA.

The SBA will review and provide a decision within 60 calendar days of receipt of a request for consent. The SBA may require additional risk mitigation measures as a condition of its approval of a change of ownership transaction.

Additional Requirements for Stock Sales and Mergers Regardless of SBA Approval

If the PPP note has not been repaid or forgiven in full prior to the closing of a change of ownership transaction structured as a sale or other transfer of common stock or other ownership interest or as a merger, regardless of whether or not prior SBA approval is required as discussed above, the PPP borrower (or the successor to the PPP borrower) will remain responsible for all obligations under the PPP loan. If the new owners use PPP funds for unauthorized uses, the SBA will have recourse against the owners for such unauthorized use.

Additionally, in the case of a purchase or transfer of common stock or other ownership interest, if the PPP borrower and the new owner have separate PPP loans, then the PPP borrower and the new owner are responsible for separating the PPP funds and expenses and providing documentation to show compliance with PPP requirements by each PPP borrower. Likewise, in the case of a merger, if the successor and the target had separate PPP loans, the successor is similarly responsible for separating the PPP funds and expenses and providing documentation to show compliance with PPP requirements for both PPP loans.

Within five days of the completion of such change of ownership transaction, the PPP lender must provide the appropriate SBA Loan Servicing Center with the following information:

1. Identity of the new owner(s) of the common stock or other ownership interest;
   
   
2. New owner(s)’ ownership percentage(s);
   
   
3. Tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and
   
   
4. Location of, and the amount of funds in, the escrow account under the control of the PPP lender, if an escrow account was funded.

Forgiveness and Loan Review Procedures for PPP Loans of $50,000 or Less

The Oct. 8 interim final rule provides a new de minimis exception for borrowers of loans of $50,000 or less, other than any borrower that together with its affiliates received PPP loans totaling $2 million or more. For such borrowers, the PPP loan will not be subject to any reductions in the PPP loan forgiveness amount related to reductions in full-time-equivalent employees or reductions in employee salary or wages.

New Alternative Loan Forgiveness Application

In addition to the new de minimis exception for certain small borrowers, the SBA issued an alternative Loan Forgiveness Application, SBA Form 3508S, which is likewise available to borrowers of loans of $50,000 or less, other than any borrower that together with its affiliates received PPP loans totaling $2 million or more. Borrowers must still retain and submit certain documentation with the form. However, SBA Form 3508S does not require the borrower to submit calculations with the application.