What Businesses Receiving PPP Funds Need to Know About Changing Ownership

On October 2, 2020, the Small Business Association (SBA) issued a procedural notice providing information concerning the required procedures for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds. The SBA considers a “change of ownership” to have occurred when any of the following conditions are met:

• At least 20 percent 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,^[1] including to an affiliate or an existing owner of the entity
• The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions
• A PPP borrower is merged with or into another entity

Previously, there had been an open question as to a PPP borrower’s obligations in connection with disclosing a change of ownership to its PPP Lender.^[2] Critically, the procedural notice now imposes an obligation on all PPP borrowers to notify their respective PPP Lenders in writing, prior to the closing of any change of ownership transaction, of the contemplated transaction. A borrower must also provide its PPP Lender with “a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”

Irrespective of any change of ownership, the PPP borrower remains 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 borrower also remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing these forms and supporting documentation to the PPP Lender or to the SBA upon request.

The procedural notice also makes clear that the SBA will apply different procedures depending on the circumstances of the change of ownership. For example, there are no restrictions on a change of ownership, and SBA prior approval will not be required, where the borrower has already (1) repaid the PPP note in full or (2) completed the loan forgiveness process in accordance with the PPP requirements and either the SBA has remitted funds to the PPP Lender in full satisfaction of the PPP note, or the borrower has repaid any remaining balance on the PPP loan.

If the PPP note has not been fully satisfied prior to closing the sale or transfer, the PPP Lender may still approve the change of ownership and prior SBA approval will not be required where:

• The sale or transfer is 50% or less of the common stock or other ownership interest of the borrower, or the borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. Once the forgiveness process is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
• The borrower sells 50 percent or more of its assets, but only if the borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. Once the forgiveness process is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must also notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction.

In all other cases, prior SBA approval of the change of ownership is required and the PPP Lender may not unilaterally approve the change of ownership.

Regardless of whether prior SBA approval is required, as noted above, a PPP borrower remains subject to all obligations under the PPP loan. And in the event of a merger, the successor will also be subject to all obligations under the PPP loan. Moreover, if any of the new owners or the successor to the borrower holds a separate PPP loan, then, following consummation of the transaction:

• In the case of a purchase or other transfer of common stock or other ownership interest, the borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.
• In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.

For its part, the PPP Lender retains responsibility for notifying the SBA, within 5 business days of completion of the transaction, of the: (1) identity of the new owner(s) or the common stock or other ownership interest; (2) the new owner(s)’ ownership percentage(s); (3) tax identification number(s) for any owner(s) holding 20 percent or more of the equity in the business; and (4) the location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.

While the new guidance answers many questions, others remain open, including what, if any, penalties may be imposed on borrowers for failing to comply with these procedures. Barton’s team of multidisciplinary attorneys are available to assist all stakeholders, including borrowers, lenders, and acquiring parties, in assessing these novel and complex issues. If you have any further questions, please contact Christopher McNamara, Eric Sleeper, or William Newman.

[1] For purposes of determining a change of ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.

[2] The SBA provides a form PPP loan promissory note containing certain restrictions regarding changes in the business and ownership without PPP Lender consent. However, PPP Lenders were under no obligation to use that form and were expressly permitted to use their own form instrument. Thus, where such an instrument did not contain a restriction on unapproved changes of ownership, there was nothing under the SBA regulations or guidance otherwise preventing the borrower from proceeding with a transaction that would result in such a change.