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:
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. 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:
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:
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.