COVID-19 Response: Change of Ownership Transactions Involving PPP Borrowers - New Rules Apply
Washington, D.C. (October 7, 2020) - With the closure of the loan application phase of the Paycheck Protection Program (PPP) and attention shifting to loan forgiveness, another issue has emerged: how a PPP borrower should handle PPP indebtedness when it wants to transfer some or all of its ownership interests. On October 3, 2020, the Small Business Administration (SBA) issued a Procedural Notice that provided instructions for entities that have received PPP funds (PPP borrower) and their lenders (PPP lender), laying out the requirements that both must follow before a PPP borrower transfers an ownership interest. Since its inception, the PPP loan program has generated confusion – including changing government advice – and affected parties should review the new instructions carefully.
Overview: The Notice requires PPP borrowers to obtain either their lender’s or the SBA’s consent prior to transferring (1) 20 percent or more of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) or (2) 50 percent or more of assets. In addition, lender or SBA approval is required prior to merging a PPP borrower with or into another entity. (Note that these procedures are in addition to any requirements or restrictions in the PPP loan documents executed by the PPP borrower and lender.) The Notice sets out different procedures that PPP borrowers and lenders should follow depending on the status of the PPP loan. In addition, the PPP lender will have different reporting responsibilities depending on whether the transfer of ownership involves assets or ownership interests.
Summary of key provisions:
If the PPP Note is fully satisfied: No prior approval is required from the PPP lender or the SBA on a change of ownership if, prior to closing the sale of transfer, the PPP Note has been fully repaid either by the borrower or through loan forgiveness.
If the PPP Note is outstanding:
1. Only lender prior approval is needed where:
a. The sale or transfer is of 50 percent or less of the common stock or other ownership interest of the PPP borrower; or
b. the PPP borrower has submitted the loan forgiveness application to the PPP lender and
i.establishes an escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan; and
ii.the escrow account, upon completion of the loan forgiveness process (including any appeal of the SBA’s decision), is disbursed first to repay any remaining PPP loan balance.
2. SBA prior approval is needed where a loan forgiveness application has not been submitted to the lender:
Where there is a sale of ownership interest in excess of 50 percent or a transfer of assets in excess of 50 percent and the borrower has not applied for loan forgiveness, the PPP lender must submit the transfer of ownership request to the appropriate SBA Loan Servicing Center, providing specified information. The SBA will have 60 days to review and provide a determination and/or require that additional terms be added to the transaction agreement.
Transfer of Assets: SBA approval of any transfer of ownership interest in excess of 50 percent or more of a PPP borrower’s assets will be conditioned on the buyer’s assuming all of the PPP borrower’s obligations under the PPP loan. In such a case, the purchase or sale agreement must include appropriate language.
Transfer of Ownership Interests: The PPP borrower will remain obligated under the PPP loan. If the new owner also has a PPP loan, additional requirements will apply regarding segregating funds.
3. Lender Reporting Requirements:
a. Transfer of Assets: The PPP lender will need to provide notice to the SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within five business days of completion of the transaction.
b. Transfer of Ownership Interests: The PPP lender must notify the appropriate SBA Loan Servicing Center within five days of the completion of the transaction, and will need to provide information about the escrow account along with additional information about the new owners.
Questions: As has become commonplace with the PPP, the SBA Procedural Notice raises some questions.
(1) The provisions regarding the escrow accounts create a potential conflict with the SBA’s loan forgiveness appeals process. Pursuant to the SBA’s August 11, 2020 final rule (see our prior alert on this topic), a borrower appealing an SBA loan forgiveness decision must begin repayment of PPP principal and accrued interest while the appeal is pending. Under the Notice, the funds in the escrow account cannot be released until the forgiveness process – which, according to the Notice, is inclusive of the appeals process – is completed. A borrower that is sold while the forgiveness process is ongoing and then later appeals the SBA’s forgiveness decision could be put in the position of having to repay the PPP loan while the appeal is pending but be unable to access the escrow funds that were set aside to repay the loan.
(2) The Notice does not address PPP borrowers that have experienced a change of ownership prior to its issuance.
The SBA Procedural Notice is a reminder that the PPP remains very much a work in progress, and that borrowers and lenders need to be wary of additional rules, instructions, and guidance. Lewis Brisbois’ attorneys have the expertise to assist borrowers and lenders with understanding the PPP processes and maximizing the value of this program in transactional and regulatory client matters.
For more information on this new process, contact the authors of this alert. Visit our COVID-19 Response Resource Center for more alerts on the many areas of law impacted by the pandemic.
Thomas A. Brooks, Partner
Katherine I. Funk, Partner
Jane C. Luxton, Partner