Recently, the SBA issued Procedural Notice 5000-20057 (the “Guidelines”) [www.sba.gov/document/procedural-notice-5000-20057-paycheck-protection-program-loans-changes-ownership ] on the effect of ownership changes of the PPP Loan Borrower. These Guidelines will change how the buyer and seller handle PPP loans in a change of ownership transaction. Failure to follow the SBA Guidelines could result in a loss of PPP loan forgiveness or put the PPP loan in default.
Examples of “Change of Ownership” of the Borrower under the PPP rules:
All transactions since the PPP loan was approved are aggregated to determine whether a “Change in Ownership” occurred.
The Guidelines make it clear that any “Change of Ownership” transaction means the Borrower remains liable on the PPP loan and is responsible for any compliance obligations.
If Borrower has a minor “Change of Ownership” – Only Lender Notification Required
The following “Change of Ownership” transactions are considered minor and only require that the Borrower alert the Lender. The Lender must alert the SBA of the new owners within five business days of the closing:
The SBA will permit a major “Change of Ownership”, without SBA preapproval, if the Borrower does one of the following:
If Borrower will have a “Change of Control” of more than 50% of the equity or assets, or has a merger, but lacks cash to repay the Entire PPP Loan in Full before Closing
If the Borrower is unable to fund the escrow in fully or repay the entire PPP loan, then the Lender has to seek SBA pre-approval before the closing of the M&A deal. The Lender must make a formal presentation to the SBA telling why the Borrower is unable to fully fund the escrow or repay the PPP loan before closing. The SBA can take up to 60 days to review the paperwork received from the Lender. The Lender must supply a laundry list of documents to the SBA. The SBA reserves the right to demand additional risk mitigation measures, beyond that shown below.
Additional M&A Transaction Documentation Requirements
Asset Sales of 50% or More of the Assets – the Buyer must agree to assume the Seller’s PPP loan and compliance obligations in a formal written agreement.
Sales of 20% or More of Equity – SBA must be granted full recourse against the Buyer(s) in the event the PPP are used for unauthorized purposes. The Lender has five business days after closing to tell the SBA of the Change in Ownership and give the names and tax ID numbers of the new owners holding 20% or more of the equity.
Mergers – The Borrower and the Successor Entity are responsible for segregating PPP loans and expenses between the old Borrower and the Surviving entity, if the Surviving Entity has a PPP loan of its own. The Lender has five business days after closing to tell the SBA of the Change in Ownership and give the names and tax ID numbers of the new owners holding 20% or more of the equity.
How SMGG Can Help
These SBA Guidelines will affect how Buyers and Sellers and New Owners deal with Changes of Control. The Guidelines will affect common contract provisions and may delay closing if SBA approvals are required. Our attorneys are available to guide you and answer any questions.