On Oct. 2, 2020, the Small Business Administration (SBA) issued a Procedural Notice changing the rules regarding when and how the SBA defines a “change of ownership” event. This notice provides information concerning required procedures for changes of ownership of an entity that received Paycheck Protection Program (PPP) funds.

New “Change of Ownership” Definition

A “change of ownership” takes place when:

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

With respect to the first bullet above, the notice states “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.”

Continuing PPP Borrower Liability

Additionally, even if a change of ownership occurs, the SBA states the original PPP borrower remains responsible for the PPP loan, except as noted below under Section 1(b):

• All obligations under the PPP loan,
• All certifications made under the PPP loan application and it has included the later added (under the FAQs, and Interim Final Rules (IFRs)) economic necessity certification,
• Compliance with all other applicable PPP requirements, which include sections of the U.S. Small Business Act, Title 13 of the Code of Federal Regulations, the SBA’s Standard Operating Procedures, the SBA/Department of Treasury PPP Loan FAQs, and all issued IFRs (24 in total to date),
• Obtaining, preparing, and retaining all required PPP forms and supporting documentation, and
• Providing the same to the PPP lender or SBA upon request.

SBA Financed Transactions

If a change of ownership is financed with a traditional SBA loan, those SBA funds cannot be used to finance the required PPP escrow account held by the PPP lender. See below for more information regarding escrow account requirements.

SBA Consent and Procedural Changes

Under all circumstances when a change of ownership event is being contemplated, the PPP borrower must notify its PPP lender in writing and provide the PPP lender with a copy of the proposed agreements and documentation that would effectuate the proposed change in ownership.

1. SBA consent is no longer required and a PPP borrower must only seek PPP lender approval under certain circumstances consisting of:
   1. Stock Sale: “A change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger” may take place without SBA consent only if:
      1. The sale or transfer is 50% or less of common stock or other ownership interest in the PPP borrower (remember aggregation requirement¹), or
      2. The PPP borrower has completed its forgiveness application reflecting its use of all of the PPP loan proceeds, and it has been submitted with all supporting documentation to the PPP lender, and
      3. An interest-bearing escrow account controlled by the PPP lender is established in an amount sufficient to cover the outstanding balance of the PPP loan. The escrow account will only be released upon final SBA loan forgiveness determination and the application of escrow funds to any unforgiven PPP loan amount including interest.
      4. In the event the first item (i) above is chosen and the loan forgiveness covered period is not completed, there are additional considerations to take into account and the PPP borrower remains liable for the new owner’s actions with PPP loan funds. Reach out to one of our SBA Task Force members to better understand these considerations.
   2. Asset Sale: A PPP borrower may sell 50% or more of its assets (measured by fair market value) without SBA consent only if:
      1. 1. The PPP borrower completes a forgiveness application reflecting its use of all PPP loan funds and submits it to the PPP lender, together with any required supporting documentation, and
         2. An interest-bearing escrow account controlled by the PPP lender is established in an amount sufficient to cover the outstanding balance of the PPP loan. The escrow account will only be released upon final SBA loan forgiveness determination and the application of escrow funds to any unforgiven PPP loan amount including interest.

      Additionally, under this Section 1(b), asset sales will also be conditioned upon the proposed buyer assuming all of the PPP borrower’s responsibilities and obligations under the PPP loan. In this instance, the purchase agreement must clearly include language to effectuate this assumption of obligations.

2. SBA consent is still required when the items noted in Section 1 above are not fulfilled. In this case, to obtain SBA consent, the following must be included in a request by the PPP lender provided to the appropriate SBA loan servicing center:
   1. An explanation of why section one above could not be complied with,
   2. Details of the requested transaction,
   3. A copy of the executed PPP note,
   4. The letter of intent (LOI) (if applicable), and purchase/sale/transfer agreement,
   5. Disclosure of whether the proposed buyer has a PPP loan along with its SBA loan number, and
   6. A list of all owners with 20% or more of the proposed buyer.

   Additionally, under this Section 2, asset sales will also be conditioned upon the proposed buyer assuming all of the PPP borrower’s responsibilities and obligations under the PPP loan. In this instance, the purchase agreement must clearly include language to effectuate this assumption of obligations.

The SBA will provide a determination within 60 days upon receipt of all items requested.

For further information, please contact any member of Taft’s SBA Task Force. Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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¹See last paragraph of definition section