By Ronald S. Nixon

On October 2, 2020, the Small Business Administration (SBA) issued a Procedural Notice regarding ownership changes by Payroll Protection Program (PPP) loan borrowers.  The procedure essentially requires SBA approval prior to closing of a transaction involving a change in ownership if 50% or more of a PPP borrower’s common stock or assets are sold unless the PPP borrower pays off the PPP loan or applies for forgiveness and sets up an escrow account to cover the loan.  SBA approval may take up to sixty days.  In other cases, only approval of the PPP lender will be required.

For the purpose of a PPP loan, a “change of ownership” occurs when a PPP borrower (1) transfers in one or more transactions at least 20 percent of its common stock or other ownership interest, including transfers to affiliates or existing owners, (2) transfers in one or more transactions of at least 50 percent of its assets (measured by full market value), or (3) merges with or into another entity.  All transfers occurring after the PPP loan is approved must be aggregated to determine if these two thresholds are met. For publicly traded companies, only transfers that result in one person or entity owning at least 20% of the common stock or ownership should be counted.

Prior to closing any change of ownership transaction, the PPP borrower must notify the PPP lender in writing of the proposed transaction and provide it with a copy of the proposed agreement and other documents intended to effectuate the transaction.

No additional procedures apply if the PPP note is fully satisfied prior to closing.  The note may be satisfied either by the borrower paying off the PPP lender directly or by completing the forgiveness process and having the SBA pay the lender the amount forgiven with the borrower making up the difference. If the PPP note is not fully satisfied, different procedures apply depending on the circumstances of the sale. 

The PPP lender alone may approve the transaction in the following two circumstances: (1) the transfer involves less than 50 percent of the common stock or other ownership interest of the borrower, or (2) the PPP borrower completes the forgiveness application and submits all supporting documents to the PPP lender and then establishes an escrow account under the lender’s control in the amount of the PPP loan.  In the latter case, once the forgiveness process is complete (including any appeals of the SBA’s decision), the escrow funds must be disbursed to repay any remaining PPP loan balance plus interest.  If the transaction is funded with a SBA 7(a) loan, that loan’s proceeds may not be used to fund the escrow account.

If neither of those two circumstances exist, PPP lender must submit a request to the SBA for approval prior to the change in ownership. The request must include (1) the reasons the PPP borrower cannot fully satisfy the loan or set up an escrow account; (2) the details of the transaction; (3) a copy of the executed PPP Note; (4) any letter of intent and the purchase or sale agreement setting forth the responsibilities of the parties to the transaction; (5) whether the buyer has PPP loan and its number; and (6) a list of all owners of 20 percent or more of the purchasing entity.  In a sale of 50 percent or more of a PPP borrower’s assets, the SBA conditions approval on the buyer assuming all of the borrower’s obligations under the PPP.

The SBA states that it will approve the transaction within 60 days of a completed request.

Regardless of any change of ownership, the PPP borrower (or its successor in the case of a merger) remains responsible for performing all obligations and requirements under the PPP loan, including the certification made in connection with that loan.  If the new owners misuse PPP loan funds, the SBA will also have recourse against them.  In a change of ownership involving multiple parties with PPP loans, each PPP borrower or its successor is responsible for segregating and delineating use of PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.


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