Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), the loan program intended to allow employers to continue to pay their employees and assist with certain other expenses resulting from the COVID-19 pandemic.
On October 2, 2020, the SBA released a procedural notice (Notice) – available here – addressed to SBA employees and PPP lenders clarifying the required procedures for changes of ownership of an entity that has received PPP funds.

In the Notice, the SBA clarified what constitutes a “change of ownership” for purposes of the PPP. A “change of ownership” will be considered to have occurred when:

• at least 20% of the common stock or other ownership interest of a PPP recipient is sold or transferred, whether in one or more transactions;
• the PPP recipient sells or transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
• a PPP recipient is merged with or into another entity.

If a PPP recipient engages in any of the above transactions, which constitute “a change of ownership,” the PPP recipient must provide its PPP lender with written notice of the pending transaction, prior to closing the transaction, as well as provide a copy of the proposed agreements or other documents that will effectuate the transaction.

The SBA’s Standard Operating Procedures – available here – for loans originated under the SBA’s 7(a) program, of which the PPP is a part of, state that prior to a change of control the of a 7(a) loan recipient the lender must first obtain approval of the SBA. In the Notice, the SBA explained that whether or not the PPP lender must first obtain prior approval from the SBA before approving the proposed change of ownership depends on the type of transaction and other factors.

Below are the criteria for when SBA approval is not required as well as the conditions that must be satisfied when SBA prior approval is required:

1. Sale/Transfer of Common Stock or Merger

In transactions where a PPP recipient is transferring or selling 50% or less of its common stock (or other ownership interest), SBA prior approval is not required. If a PPP recipient is transferring or selling 50% or more of its common stock (or other ownership interest) or merging, SBA prior approval is not required if:

• the PPP recipient completes a forgiveness application reflecting its use of all of the PPP loan proceeds, together with any required supporting documentation, and submits it to the PPP lender; and
• the PPP recipient establishes an interest-bearing escrow account, controlled by the PPP lender, with funds equal to the outstanding balance of the PPP loan.

If the above conditions are not met, then the PPP lender must obtain prior approval from the SBA. PPP recipients should be advised that from a timing perspective, the Notice indicates that SBA will review and provide a determination on its consent within 60 calendar days of receipt of a complete request.

Lenders should be aware that for all sales/transfers of common stock or mergers constituting a change of ownership, regardless of whether SBA prior approval is required, the PPP lender must notify the appropriate SBA Loan Servicing Center, within five business days of completion of the transaction, of the:

• identity of the new owner(s) of the common stock or other ownership interest;
• new owner(s)’ ownership percentage(s);
• tax ID number(s) for any owner(s) holding 20% or more of the equity in the business; and
• location of, and the amount of funds, in the escrow account controlled by the PPP lender, if applicable.

Regardless of whether the change of control requires SBA approval, the PPP recipient will remain subject to all obligations under the PPP loan. Additionally, if the new owner(s) (or successor(s) in the case of a merger) also carry a separate PPP loan, then the PPP recipient and new owner(s)/successor(s) will be responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP recipient.

2. Asset Sale

If the change of ownership of the PPP recipient is structured as a sale of 50% or more of its assets (measured by fair market value), SBA prior approval is not required if:

• the PPP recipient completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentations, 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.

The PPP lender must notify the appropriate SBA Loan Servicing Center within five days of the completion of the transaction of the location of and amount of funds in the escrow account.

If, however, the conditions for prior approval cannot be met, then SBA approval for the transaction will be required.

3. Requirements to Obtain SBA Prior Approval

If a PPP recipient involved in a change of ownership transaction cannot comply with the requirements set forth above, the PPP lender must obtain prior SBA approval. In order to do so, the PPP lender must submit a request to the appropriate SBA Loan Servicing Center that includes:

• the reason that the PPP recipient cannot fully satisfy the PPP note (i.e., either repay the note or complete and submit the forgiveness application) or the procedures required related to the escrowing of funds;
•  the details of the requested transaction;
• a copy of the executed PPP Note;
• any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP Borrower, seller and buyer;
• disclosure of whether the buyer has an existing PPP loan and if so, the SBA loan number; and
• a list of all owners of 20% or more of the purchasing entity.

Additionally, in asset purchase transactions where SBA prior approval is required, the SBA will require the purchasing entity to assume all of the PPP recipient’s obligations under the PPP loan.

If you have any questions, please contact Tarter Krinsky & Drogin’s COVID-19 response team at CV19team@tarterkrinsky.com.

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