Are you selling your business or merging? … Not so fast, if you are a PPP borrower.

October 19, 2020

Although the U.S. Small Business Administration (“SBA”) has started its program to forgive loans made to businesses under the Paycheck Protection Program (“PPP”), PPP borrowers and their lenders are cautioned to comply with a recently issued procedural notice relating to a change of ownership of a PPP borrower.  That procedural notice, issued on October 2nd (well after the funding of most PPP loans), relates to all PPP borrowers that intend to effectuate or, even more concerning, may have already effectuated, a change of ownership.

Under the PPP, a “change of ownership” occurs when (1) at least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether to an affiliate, an existing owner of that entity or otherwise, (2) a PPP borrower sells or transfers at least 50% of its assets (based upon fair market value) in one or more transactions, or (3) a PPP borrower is merged with or into another entity. The determination of sales and transfers includes all sales and transfers, in the aggregate, from the date of funding of the PPP loan.

Under the SBA’s procedural notice, consent is not required for a change of ownership if the PPP note has already been repaid in full or the forgiveness process has been completed and the SBA has either repaid the PPP lender in full satisfaction of the PPP note or the PPP borrower has repaid any remaining balance of the Loan.

If, however, the PPP note is not fully satisfied prior to the proposed sale or transfer, a PPP lender may approve the transaction, without any consent by the SBA, if the sale or transfer constitutes 50% or less of the ownership interests of such PPP borrower. Similarly, a PPP lender may unilaterally approve the sale or transfer by a PPP borrower of greater than 50% of its ownership interests or 50% or more of its assets, if the PPP borrower completes and submits to the SBA a forgiveness application reflecting its use of the PPP loan proceeds and further establishes an escrow account with funds in an amount equal to the outstanding balance of the PPP loan. In all instances where an escrow account is established, following completion of the forgiveness process, any funds are first remitted to satisfy any remaining PPP loan balance and interest, before being returned to the PPP borrower.

In all other cases, the SBA must provide its approval prior to the change of ownership and a PPP lender may not unilaterally approve any such change even if the PPP loan documents provide otherwise.

To obtain that approval, a PPP borrower must submit a request describing why the PPP borrower is unable to either fully satisfy the PPP note or provide the required escrow funds, which request must disclose details of the transaction, including whether the buyer has its own existing PPP loan and a list of the owners of 20% or more of the buyer. The PPP borrower must also provide copies of the PPP note and any letter of intent or agreement setting forth, among other things, the responsibilities of parties, including the buyer. The SBA will review the information, including the agreements to ensure that the buyer expressly agrees to assume responsibility for compliance with the PPP loan, and has 60 days following receipt of the request to opine.

In addition, PPP lenders must be aware that they also have certain obligations regardless of whether the SBA must consent to the transaction. If there is a change of ownership by a sale of transfer of ownership interest or a merger, a PPP lender must notify the SBA within 5 business days after completion of the transaction, identifying the new owner of the ownership interest and its ownership percentage, the tax ID for any owners holding 20% or more the ownership interests following completion of the transaction and the location of (and amount of funds in) any required escrow account.  If such change of ownership occurs by way of an asset sale, then the PPP lender must notify the SBA of the location of, and amount of funds in, the escrow account with 5 business days of completion of the transaction.

While this appears straight-forward and easy enough to implement, many questions and concerns remain.

  • What if the transaction resulting in a change of control occurred prior to the effective date of procedural notice?  How can a PPP borrower ever comply?
  • Will a PPP borrower that has not obtained the necessary SBA consent and/or abided by all of the SBA directions be prohibited from receiving loan forgiveness?
  • What happens if a PPP borrower cannot submit its loan forgiveness application because the PPP lender is not yet accepting those applications?
  • Does a “change of ownership” occur upon the issuance of new ownership interests? Or a merger where the PPP borrower is the survivor?
  • What information and details will the SBA require for its analysis? Will a buyer (and its owners) agree to provide the necessary and, perhaps, onerous information?

Of course, if a PPP borrower can repay the note or set up an escrow account, then it can bypass the SBA’s consent requirements. However, smaller borrowers teetering on the edge of bankruptcy and looking for a way out, may not be unable to do so. With 60 days in which to reply, and without clear direction from the SBA, the sale of an interest or assets or a merger may become protracted and a purchaser may abandon an otherwise viable transaction leaving smaller PPP borrowers vulnerable.

  • Related Practice Areas: Commercial Finance & Banking, Corporate
  • Featured Attorneys: Lisa M. Vaccaro