On October 2, 2020, the U.S. Small Business Association issued a Procedural Notice providing “information concerning the required procedures for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds.” For purposes of the notice, a “change of ownership” occurs when (1) at least 20% of the company’s ownership interests (e.g. common stock, membership interests) are sold or transferred, (2) at least 50% of the company’s assets are sold or transferred, or (3) the company is merged with or into another entity. Before closing on the transaction, the borrower must notify the lender in writing of the proposed transaction and provide the lender with a copy of the underlying change of ownership agreement. While the borrower will remain responsible for all of the obligations under the PPP loan regardless of whether a change of ownership occurs, there are different procedures to be followed depending on the circumstances of the transaction.
If, before the closing, the loan is fully satisfied by the borrower or forgiven (and the SBA has satisfied the loan or the borrower has repaid any remaining balance), there are no restrictions on the change of ownership. If the loan remains outstanding before the closing, SBA approval is not required if: (i) the company is transferring 50% or less of its ownership interests; or (ii) the company is transferring more than 50% of its ownership interests or 50% or more of its assets, the company has submitted a forgiveness application, and the company has established an escrow account holding funds equal to the outstanding balance of the loan. If the change of ownership does not meet the above conditions, the SBA must approve the transaction, which may require the purchasing entity to assume the borrower’s obligations under the loan. Further details regarding changes of ownership and PPP loans can be found here.
The SBA’s notice provides additional clarity regarding the interplay of changes of ownership and PPP loans. Stock and asset purchasers and sellers should carefully review the notice and other rules and documents regarding these loans before closing on a transaction. Peter C. Bolton and Eric A. Zacks of Wolfson Bolton’s M&A team are available to assist with any questions.