On October 2, 2020, the Small Business Administration (SBA) issued a much-awaited notice clarifying the procedures for change of ownership for entities that have received Paycheck Protection Program (PPP) funds.
The SBA issued a Procedural Notice, detailing required procedures impacting PPP borrowers and lenders if: (i) twenty percent or more of the common stock or other ownership interest of the PPP borrower (an Equity Interest), including a publicly-traded entity, is sold or otherwise transferred, whether in one or more transactions since the date that the PPP loan was approved, including to an affiliate or existing equity owner (a 20% Equity Transfer); (ii) the PPP borrower sells or otherwise transfers fifty percent or more of its assets, measured by fair market value, whether in one or more transactions (a 50% Asset Transfer); or (iii) the PPP borrower merges with or into another entity. This article outlines the procedures and the potential serious consequences to both a PPP lender and a PPP borrower for failing to comply with the procedures.
The Procedural Notice deems all of the above transactions to constitute a “change of ownership” requiring the PPP borrower to notify its lender in writing and provide copies of the agreements that would effectuate these transactions. PPP borrowers desiring to undergo a change of ownership will need to review their loan documents to determine if PPP lender consent is required and should consider the potential impact of this on the timing of their transaction. If a borrower’s PPP loan documents require that the borrower obtain the lender’s consent to a change of ownership, then failure to do so may result in the borrower being in default, acceleration of the loan payment obligations and loss of potential forgiveness of the principal and/or interest that may otherwise have been forgivable under the PPP.
In addition, SBA consent is required for the sale or other transfer of over fifty percent of the PPP borrower’s Equity Interests (an Over 50% Equity Transfer) or if a PPP borrower merges or desires to undergo a 50% Asset Transfer, then the onus is on the lender to obtain the SBA’s consent. Failing to obtain SBA consent could have disastrous results for the lender – loss of the SBA guaranty of the PPP loan, which could result in the lender not being repaid if the PPP borrower defaults.
In the event a PPP borrower is contemplating a change of ownership, it must notify its PPP lender in writing of the contemplated transaction and provide the lender with any deal documentation. However, depending upon the status of the PPP loan and the details of the contemplated transaction, the particular rules applicable to the PPP borrower will differ. In any event, the PPP lender is required to notify the SBA within five business days of a closing of a transaction resulting in a change of ownership of a PPP borrower.
How to Obtain SBA Approval of Requests for Changes of Ownership
To obtain SBA’s prior approval of requests for changes of ownership, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center. The request must include: (i) the reason that the PPP borrower cannot perform Full PPP Note Satisfaction or comply with the Escrow Account Process; (ii) details of the requested transaction; (iii) a copy of the signed PPP note; (iv) any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if other than the PPP borrower) and buyer; (v) disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and (vi) a list of all owners of 20% or more of the purchasing entity.
SBA approval of a 50% asset sale will be conditioned upon the buyer assuming the borrower’s PPP loan obligations in the purchase agreement and in an assumption agreement submitted to the SBA. The SBA will determine if consent will be given within 60 days after receipt of a complete request.
If the PPP borrower’s PPP loan is satisfied in full, then no approval is required.
The SBA has provided that no restrictions apply to the change of ownership of a PPP borrower so long as, prior to the closing of the contemplated transaction, that borrower has:
- repaid the PPP loan in full; or
- completed the loan forgiveness process and either (A) the SBA has remitted the funds to the lender in full satisfaction of the PPP loan, or (B) the borrower has repaid the remaining balance on the PPP loan.
Simply put, if all PPP loan amounts have either been forgiven or repaid, then the PPP borrower should be able to proceed with a change of ownership without either the PPP lender’s or the SBA’s approval. Full forgiveness and/or repayment is therefore ideal, but understandably, parties may not wish (or it may be impossible) to delay closing on a transaction for the timeframe it takes for this to occur.
Potential Impact on Borrowers for Failing to Obtain Lender Consent
If a borrower’s PPP loan documents require that the borrower obtain the lender’s consent to a change of ownership, then failure to do so may result in the borrower being in default, acceleration of the loan payment obligations and loss of potential forgiveness of the principal and/or interest that may otherwise have been forgivable under the PPP.
Borrowers should note that the process to obtain the SBA’s prior written consent may take up to 60 days from the time the lender submits its consent request to the SBA. As a result, borrowers should consider raising this issue with their lenders as early in the deal process as possible. Finally, in a change of ownership, if the new owners use PPP funds for unauthorized purposes, SBA will have recourse against the owners for the unauthorized use.
In any case, working with your lender remains key. Weston Hurd attorneys have worked on multiple deals where the seller’s PPP loan has been an obstacle. If you have questions about the process, please contact your counsel at Weston Hurd to help you through the process.