On October 2, 2020, the Small Business Administration (the “SBA”) issued a procedural notice providing guidance on the notification and consent requirements for changes in ownership of entities that are borrowers (the “Borrower” or “Borrowers”) under the Paycheck Protection Program (“PPP”). The SBA considers a change of ownership (“COO”) to occur when the Borrower:

  • Sells or transfers, in one or more transactions, at least twenty percent (20%) of common stock or other ownership interest, including to an affiliate or existing owner (emphasis added);
  • Sells or transfers, in one or more transactions, at least fifty percent (50%) of its assets as measured by fair market value (“FMV”); or
  • Merges with or into another entity.

When reviewing a proposed COO, Borrowers must consider the following:

  • The notice requirements of their PPP lender;
  • Whether SBA prior approval is needed; and
  • Any continuing PPP obligations and liabilities.

PPP Lender Notice Requirements

Prior to the closing of any transaction involving a COO, the Borrower must notify its PPP lender in writing. Included with the written notification must be details of the transaction and copies of the proposed agreements to effectuate the transaction.

SBA Prior Approval

Depending on the type of transaction involving a COO, the SBA’s prior approval may be required. However, the SBA’s prior approval is not required if the Borrower satisfies one of the following:

  • Has repaid the PPP note in full prior to the COO;
  • Has completed the entire loan forgiveness process prior to the COO (e., the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or the Borrower has paid any remaining loan balance);
  • Is involved in a sale or transfer of ownership of fifty percent (50%) or less of the common stock or other ownership interest (aggregated from the date of PPP loan approval);
  • Is involved in an asset sale of less than fifty percent (50%) of its assets (as measured by FMV); or
  • Prior to the COO, has submitted a forgiveness application to its PPP lender and has established an interest-bearing escrow account with funds equal to the outstanding PPP loan balance.

If a COO does not satisfy any of the above, the SBA’s prior approval is required. The PPP lender must submit the request to the applicable SBA Loan Servicing Center, which must include:

  • The reason the Borrower cannot satisfy the entire PPP loan balance or submit the forgiveness application and establish an escrow account;
  • The details of the proposed transaction;
  • An executed copy of the PPP note;
  • Copies of the proposed transaction documents, such as the purchase or sale agreement and a letter of intent;
  • Disclosure of the potential buyer’s PPP loan, if applicable, and, if so, the SBA loan number; and
  • Disclosure of all owners of twenty percent (20%) or more of the purchasing entity.

Upon receiving notification of a proposed COO, the SBA will review and provide a determination within sixty (60) calendar days.

PPP Obligations and Liabilities

Asset Sales

For COOs involving the sale of fifty percent (50%) or more of the Borrower’s assets, the SBA’s approval is conditioned on the purchaser assuming all of the Borrower’s obligations under the PPP loan. Therefore, any proposed agreements must state that the purchaser is assuming such obligations.

Stock Sales

For any COO due to the sale or transfer of common stock or other ownership interest or a merger, whether or not the sale requires SBA prior approval, the Borrower will remain responsible for:

  • Performance of all PPP loan obligations;
  • The certifications made in connection with the PPP loan application;
  • Compliance with all other PPP requirements, including the use of the funds for authorized purposes only; and
  • Obtaining, preparing, and retaining all PPP forms and supporting documentation and providing such documentation when requested by the PPP lender or the SBA.

Additionally, if any of the new owners or successors arising from the proposed COO have a separate PPP loan, following the closing of the transaction:

  • The PPP Borrowers must, in the case of a purchase or transfer or common stock or other ownership interest, segregate PPP funds and expenses and provide documentation demonstrating compliance by each Borrower; and
  • The successor, in the case of a merger, remains responsible for segregating PPP funds and expenses, and providing documentation demonstrating compliance with respect to both PPP loans.

Regardless of whether SBA prior approval was necessary, within five (5) business days of closing a COO transaction, the PPP lender must notify the appropriate SBA Loan Servicing Center of the:

  • New owners’ identities;
  • Ownership percentages of the new owners;
  • Tax identification numbers for any new owners holding twenty percent (20%) or more of the business’s equity; and
  • Location of and the amount of funds in the escrow account, if required.

Based on the SBA’s newest guidelines on transactions involving changes of ownership for Borrowers, it is important to consider the above information in order to limit liability and ensure continued compliance with PPP requirements. The Business and Corporate attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist clients with various business matters, including matters pertaining to the Paycheck Protection Program. Please contact Dvorak Law Group for specific questions and recommendations regarding your business.