New SBA Guidance on Change in Ownership for PPP Loan Borrowers 

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■ ■ ■  November 11, 2020

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In October 2020, the Small Business Administration (SBA) issued a procedural notice in which they gave additional guidance as to the notification and approval requirements for PPP Loan borrowers planning a change of ownership.

 

I. What is a "Change of Ownership"?

 

The guidance starts off by clarifying what constitutes a change of ownership. According to the SBA, a change of ownership occurs when:

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1. 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 transaction or over time, including to an affiliate or an existing owner of the entity;

2. the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in transaction or over time; or

3. the PPP borrower is merged with or into another entity.

 

For purposes of calculating the sales and other transfers, the PPP borrower must add all sales and transfers that have taken place from the date the PPP loan was approved to determine whether the relevant threshold has been met.

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II. If a "Change of Ownership" Occurs, What's Next?

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A. Notifying the PPP Lender

 

Once it is determined that a change of ownership will occur based on the SBA definition, then the PPP borrower must determine who needs to be notified. First, the PPP borrower must notify the PPP lender in writing of the contemplated transaction. Second, the PPP borrower is required to provide the lender with "a copy of the proposed agreements or other documents that would effectuate the proposed transaction." If any of the following criteria are met, then the PPP borrower only needs to notify the PPP lender:

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1. The PPP loan is paid in full or forgiven by the SBA and any unforgiven amount is paid in full.

2. In a stock sale or merger:

   • The sale or transfer is for less than 50%, whether in one transaction or over time, of the borrower's stock/ownership; or

   • The PPP borrower applies for loan forgiveness and reflects its use of all loan proceeds spent and deposits funds equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender.

3. In an asset sale of 50% or more of the borrower's assets if the PPP borrower applies for loan forgiveness and reflects its use of all loan proceeds spent and deposits funds equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender.

 

B. Notifying the SBA

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If the change of ownership does not fall under any of the conditions specified above, then prior approval from the SBA of the change of ownership will be required.

 

In order for the PPP borrower to obtain the SBA's prior approval the following must be submitted to the SBA:

1. the reason that the PPP borrower cannot fully satisfy the PPP Note or escrow the funds as described in the notice requirements above;

2. the details of the requested transaction;

3. a copy of the executed PPP Note;

4. the letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, the seller (if different from the PPP borrower), and the purchaser;

5. disclosure of whether the purchaser has or purchasers have an existing PPP loan and, if so, the SBA loan number;

6. a list of all owners of 20% or more of the purchasing entity; and

7. any other information that the SBA may deem appropriate "for additional risk mitigation measures as a condition of its approval of the transaction."

 

In addition, the purchasing entity must assume all of the PPP borrower's obligations under the PPP loan, meaning the purchase or sale agreement must specifically provide for the purchaser's assumption of the PPP borrower's obligations under the PPP loan, or a separate assumption agreement must be submitted to the SBA.

 

III. Provisions Applicable to Any Change of Ownership

 

The following provisions are applicable regardless of whether only the PPP lender must be notified of the change of ownership or both the PPP lender and SBA must be notified:

 

A. Equity Change of Ownership

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• The PPP borrower, and in a merger the successor, will remain subject to all obligations under the PPP loan.

• If any of the new owners has a separate PPP loan, the PPP borrower and new owner are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance.

• PPP lender must notify the SBA Loan Servicing Center within 5 business days after the closing of the transaction:

  • Identity of new owner

  • New owner's equity interest

  • Tax identification of any owner holding 20% or more of the equity of PPP borrower

  • Location and amount of funds in, the escrow account under the control of the PPP lender, if an escrow account was required.

 

B. Asset Sale

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• The PPP Lender must notify the appropriate SBA Loan Servicing Center, within 5 business days after the closing of the transaction, of the location of, and the amount of funds in, the escrow account under the control of the PPP lender.

 

It is important for companies considering a change in ownership to understand and comply with the notice and approval requirements established by the SBA as failing to do so may result in a breach of the SBA loan and put at risk their opportunity at forgiveness. Our attorneys at MDO Partners are very closely monitoring the updates released by the SBA and can help guide you through any change of ownership transaction.

About MDO Partners
 
MDO Partners is a boutique law firm that focuses on Corporate, International, and Real Estate Law, as well as Global Compliance and Business Ethics. The firm is comprised of a solid team of attorneys and advisors with more than 100 years of combined experience who are committed to the business goals and best interests of their clients. The firm delivers value-added services of the highest caliber and serves as a trusted advisor to its clients with a practical and business-savvy approach.

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If you have questions or comments regarding this Alert, please contact one of the attorney's or advisor's listed below.

 

Richard Montes de Oca

Managing Partner

305.704.8452

rmontes@mdopartners.com

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Claudia Herbello

Associate Counsel

305.704.8456

cherbello@mdopartners.com