SBA Releases Long-Awaited Guidance on Change in Ownership Consent Requirements for PPP Borrowers

On Friday, October 2, the SBA released long-awaited guidance (the “Guidance”) applicable to Paycheck Protection Program (“PPP”) borrowers undergoing changes in the ownership of their business.

Below is a high-level overview of this new guidance, although PPP loan borrowers should review the procedural notice for more detailed information.  A link to the procedural notice is here.

What constitutes a “Change of Ownership”?

For purposes of determining what to do if there is a potential transaction involving the PPP loan borrower, the threshold question is to determine whether the transaction involves a “change of ownership”.  Under the terms of the Guidance, a PPP borrower will be deemed to have a “change of ownership” if one of the following:

1. at least 20 percent of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred (including to an affiliate or an existing owner of the entity), whether in one or more transactions;
2. 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
3. a PPP borrower is merged with or into another entity.

What to do if a PPP borrower undergoes a “Change of Ownership”?

The Guidance makes it clear that there are no restrictions or SBA consent required for the “Change of Ownership” if the PPP Loan has been fully repaid or the PPP Loan borrower had completed the loan forgiveness process in accordance with the PPP requirements and the loan was forgiven prior to closing the “Change of Ownership”.  In addition, no SBA consent is required if the sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower.  In any other case, the PPP borrower must either (i) complete a forgiveness application AND deposit funds equal to the outstanding balance of the PPP loan into an interest-bearing escrow account controlled by the PPP Lender or (ii) request prior approval of the Change of Ownership” transaction (refer to pages 3-4 of the procedural notice for all documents that must be submitted to the SBA through the PPP Lender in order to obtain this consent) and the SBA will have up to 60 calendar days to review and complete a request for consent.

Additional Considerations

• For sales of 50% or more of the PPP borrower’s assets, the SBA’s approval of the “Change of Ownership” will be conditioned on the buyer assuming all of the borrower’s obligations under the PPP loan so the asset sale agreement must include language to this effect or the buyer must sign a separate assumption agreement to be submitted to the SBA with the request for consent.
• Before closing any change of ownership transaction, the PPP borrower must notify its lender in writing of the proposed change and provide copies of any agreements or documents to effect the change.
• Even after a change of ownership, the PPP borrower is still responsible for (1) performing all obligations under the loan, (2) all certifications made in the initial PPP application and (3) complying with all other PPP requirements. This means that if the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the prior owner(s) for the unauthorized use.  Thus, the seller(s) in the “Change of Ownership” transaction will want the sale agreement to provide for indemnification of the seller(s) from the buyer.

Attorneys in the Corporate Group and Financial Services & Restructuring Group at Levenfeld Pearlstein have experience with the COVID-era corporate complexities, including PPP loan issues, and we can help you understand whether your business changes have consent requirements. Please don’t hesitate to reach out.