Although the mergers and acquisitions market may have slowed down back in the spring, with many transactions being put on hold due to the uncertainty surrounding the COVID-19 pandemic, the market seemed to rapidly pick back up during the summer. As of June 30, 2020, the U.S. Small Business Administration (the “SBA”) had approved nearly 4.9 million Paycheck Protection Program (“PPP”) loans totaling more than $521 billion, which has provided American businesses with some much-needed financial aid during these uncertain and volatile times. As our firm has seen, several of the businesses that applied for and received PPP loans were or are in the process of a “change of ownership” (as described below), and numerous questions have been asked on how to properly handle the PPP loan in each “change of ownership” transaction.
SBA Procedural Notice 5000-20057
The SBA recently released SBA Procedural Notice 5000-20057 (effective October 2, 2020) (the “Notice”) outlining the required procedures for change of ownership of an entity that has received PPP funds. According to the Notice, a “change of ownership” occurs when either:
(a) as least twenty percent (20%) of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred (whether in one (1) or more transactions, including, to an affiliate or an existing owner of the entity);
(b) the PPP borrower sells or otherwise transfers at least fifty percent (50%) of its assets (in terms of fair market value of the PPP borrower’s assets); or
(c) the PPP borrower is merged with or into another entity.
According to the Notice, irrespective of a “change of ownership”, the PPP borrower is still responsible for (i) performing all obligations under the PPP loan it received, (ii) the certifications made by the PPP borrower in connection with its PPP loan application, (iii) obtaining, preparing, and retaining required PPP loan forms and supporting documents and providing those to the SBA or the PPP lender or lender servicing its PPP loan upon their respective requests, and (iv) complying with all other PPP requirements.
Change of Ownership PPP Loan Procedures
In every “change of ownership”: (i) the PPP borrower must notify the PPP lender in writing (before closing) of the planned “change of ownership” transaction and provide the PPP lender with a copy of all proposed agreements and other documentation relating to that transaction; and (ii) the PPP lender must continue submitting the monthly 1502 report until the PPP loan is fully satisfied. However, depending on the facts of the “change of ownership”, different procedures must be followed.
If the PPP Note is Fully Satisfied:
If, before the closing of the “change of ownership” transaction, the note evidencing the PPP loan (the “PPP Note”) is fully satisfied, there are not restrictions on that “change of ownership” transaction. The PPP Note is considered fully satisfied if the PPP borrower has: (a) repaid the PPP Note in full; or (b) completed the PPP loan forgiveness process in accordance with PPP requirements and (i) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP Note or (ii) the PPP borrower has repaid the remaining balance of the PPP loan.
If the PPP Note is Not Fully Satisfied:
SBA Approval Not Required under the following circumstances:
If the PPP Note is not fully satisfied before the closing, there are certain instances in which the PPP lender may approve the “change on ownership” and the SBA’s prior approval is not required.
(a) For a “change of ownership” that is structured as a sale or other transfer of common stock or other ownership interest or as a merger, the transaction may close without the SBA’s prior approval if: (i) the sale or other transfer is of fifty percent (50%) or less of the common stock or ownership interest of the PPP borrower; or (ii) the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it (including, supporting documentation) 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.
(b) For a “change of ownership” structured as an asset sale, the transaction mat close without the SBA’s prior approval if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it (including, supporting documentation) 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 Notice sets forth additional obligations (of the PPP borrower, PPP lender, and new owner(s) or successor) and procedures that must be followed in the circumstances described in subsections (a) and (b) immediately above, but those are beyond the scope of this post.
SBA Approval is Required under the following circumstances:
If the PPP Note is not fully satisfied before the closing and the “change of ownership” does not meet the conditions of subsections (a) and (b) immediately above, then the SBA’s prior approval of the “change of ownership” is required. To obtain the SBA’s approval, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center, and that request must include: (a) the reason why the PPP borrower is unable to fully satisfy the PPP Note or escrow funds equal to the outstanding balance of the PPP loan; (b) the transaction’s details; (c) a copy of the executed PPP Note; (d) any letter of intent and the purchase or sale agreement stating the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer; (e) disclosure of whether the buyer has an existing PPP loan (if so, include the SBA loan number); and (f) a list of all owners of twenty percent (20%) or more of the purchasing entity. The SBA could take up to sixty (60) calendar days after receipt of the request to provide its determination regarding the request. Additionally, the SBA’s approval of any “change of ownership” involving the sale of fifty percent (50%) or more of the PPP borrower’s assets will be conditioned upon the purchasing entity assuming all of the PPP borrower’s obligations under that PPP loan, and either the purchase or sale agreement must contain language regarding that assumption or the parties must submit a separate assumption agreement to the SBA.
What does this mean for you?
If you are looking to buy or sell a business that received a PPP Loan it will be pertinent to have your attorney assure that the language used in documents correctly identifies the type of change of ownership. By working with your attorney and your lender or the seller’s lender, you can make sure that any PPP Loan is properly identified, whether fully satisfied or not.
If you have any questions regarding buying or selling a business, or the recent changes for PPP Loans, please call our Gerbers Law business attorneys today at 920-499-5700.
References: A copy of SBA Procedural Notice 5000-20057 can be found at: https://www.sba.gov/document/procedural-notice-5000-20057-paycheck-protection-program-loans-changes-ownership.