New SBA change-in-ownership procedures under Paycheck Protection Program

On October 2, 2020, the US Small Business Administration (SBA) released new guidance on when SBA consent is required in connection with a change in ownership of an entity that has received Paycheck Protection Program (PPP) funds under the CARES Act (a PPP Borrower).

Definition of change in ownership

One of the uncertainties causing difficulty in administering change-in-ownership requests to date has been ascertaining what sort of transactions require SBA consent. The new guidance specifies that SBA consent is now required only for a change of more than 50 percent of the ownership interest of a PPP Borrower, although filings and lender consent with respect to a transaction is required for any change of more than 20 percent of a PPP Borrower’s ownership. The percent ownership test is cumulative and is measured starting at the time the loan was approved. As a consequence, PPP Borrowers are urged to keep track of multiple small transactions over time that may add up to an aggregate 20 percent or 50 percent change in ownership.

Notwithstanding the new SBA guidance, PPP Borrowers are encouraged to examine the terms of the PPP promissory note to determine whether lender consent is separately required. Change in ownership for the purposes of requiring SBA approval also includes the sale or transfer of 50 percent or more of a PPP Borrower’s assets (measured by fair market value) in one or more transactions and the merger of a PPP Borrower into another entity.

When notification and consent is required

Prior to the closing of any transaction that would result in a change in ownership of more than 20 percent, the PPP Borrower must notify the PPP lender in writing and provide the lender with a copy of the proposed agreements related to such transaction. Most promissory notes that PPP Borrowers sign state that a change of ownership is an "event of default," unless the bank consents to the change.

If, prior to the closing of the change-in-ownership transaction, the PPP note has been repaid in full, whether through forgiveness or repayment (or a combination of both) SBA consent will not be required.

SBA consent will not be required with respect to a 50 percent change in ownership, a merger transaction or an asset sale if, prior to the closing of the transaction, the PPP Borrower completes a forgiveness application reflecting its use of all PPP loan proceeds and any other required documents for forgiveness and the PPP Borrower funds an interest-bearing escrow account with the PPP lender with an amount equal to the outstanding balance of the PPP loan. Any funds in the escrow account would be released upon forgiveness of the PPP loan, minus any amounts that were not forgiven (plus interest), which would be required to be repaid out of the escrow funds.

To obtain SBA approval in connection with any transaction that results in a change of more than 50 percent of ownership interest of a PPP Borrower or for which the PPP Borrower has not yet applied for forgiveness or is unable to fund the required escrow account, the PPP Borrower and lender must submit a request for consent to the SBA. Any such request must include (i) the reason the PPP Borrower cannot repay the note or satisfy the forgiveness application and escrow requirements; (ii) the details of the requested transaction; (iii) a copy of the PPP note; (iv) copies of any agreements associated with the change-in-ownership transaction; (v) disclosure of whether the purchasing entity has an existing PPP loan; and (vi) a list of all owners of 20 percent or more of the purchasing entity. If the transaction is an asset sale, in order to obtain SBA approval, the purchaser of the assets would also have to assume all obligations in connection with the PPP loan, including compliance with the PPP loan terms.

The new guidance gives the SBA 60 days to respond to a change-in-control consent request. As a result, PPP borrowers considering change-in-ownership transactions likely to require SBA consent are encouraged to seek such consent as early in the process as possible to avoid delays to the consummation of the transaction.

Continuing obligations

In all change-in-ownership transactions and mergers, whether or not SBA consent is required, the PPP Borrower (or, in the case of a merger, the successor to the PPP Borrower) will remain subject to all obligations under the PPP loan. The purchasing entity will be responsible for ensuring that any PPP funds are used only for authorized purposes and SBA will have recourse against the purchaser for any unauthorized use.

If the purchasing entity is itself a PPP Borrower, the purchasing entity will be responsible for segregating and delineating PPP funds and expenses and will be required to provide documentation to demonstrate compliance with PPP requirements with respect to each separate PPP loan.

Further guidance is needed to clarify a number of issues, including the penalties for failure to comply. We will continue to monitor developments in PPP guidance, including change-in-ownership requirements.

Additional information

Visit www.sba.gov and www.treasury.gov for the most up-to-date information on the Paycheck Protection Program.

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If you have any questions regarding this development, please contact the authors or your DLA Piper relationship attorney.

This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.