Earlier this month, the Small Business Administration (SBA) announced its new policies and procedures in relation to change of company ownership when the company(s) in question have taken out PPP loans. The policy, known as Procedural Notice No. 5000-20057, goes into detail about when SBA approval is needed or not when it concerns a PPP loan that has not been paid in full when negotiations are in progress. The full announcement follows.
If you have any questions or concerns about this policy, please contact Johnson & Bell Shareholder, Mark D. Belongia, who works with a number of corporate, family held and privately held companies.
Change of Ownership Procedures When a PPP Loan is in Play
On October 2nd, 2020, the Small Business Administration (SBA) addressed “change of ownership” procedures when a borrower receives a loan under the Paycheck Protection Program (PPP) by issuing Procedural Notice No. 5000-20057. A change of ownership of the PPP borrower is defined by when:
- at least 20% of the common stock or other ownership interest (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity.
- sells or transfers 50% of assets in one or more transactions; or merged into another entity. The PPP borrower must provide the PPP lender with a written notice and a copy of all proposed transaction documents.
There will be no restrictions on a change of ownership if the PPP loan is paid in full, or the loan forgiveness process has been completed and the SBA has remitted funds to the PPP lender in full satisfaction of the PPP loan, or the PPP borrower has repaid any remaining balance on the PPP loan.
If the PPP loan has not been fully satisfied, it is still possible for a change of ownership to occur without SBA approval. This can occur when:
- a sale or other transfer of 50% or less of the common stock or other ownership interest of the PPP borrower.
- a sale or transfer of common stock or ownership interest when the PPP borrower has used all of the PPP loan proceeds, a forgiveness application has been submitted, an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan, and the forgiveness process is complete and the escrow funds have been disbursed after the loan has been repaid.
- a sale of 50% or more of the PPP borrower’s fair market value assets when: the borrower has submitted the forgiveness application (with supporting documentation), the lender has established an interest-bearing escrow account with funds equal to the outstanding PPP loan balance, and the escrow funds are disbursed after the forgiveness process has been completed.
The SBA is required to approve of any change of ownership that has not been structed in the ways mentioned above. The SBA will provide a decision within 60 days of the request being received.
If the entity that is working to acquire the ownership of a company also has a PPP loan, the PPP 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. Both parties must review all PPP loan documents for any agreements or default provisions which may come into play during the transaction, regardless of whether the above “change of ownership” definition is met.