SBA PPP: Guidance on Changes of Ownership
On October 2, 2020, the Small Business Administration (“SBA”) published a Procedural Notice regarding a change in ownership of a borrower of a Paycheck Protection Program (“PPP”) loan. The Notice provides the procedures that a borrower must satisfy prior to completing a change of ownership during the term of its PPP loan.
The Notice defines a “change of ownership” as (1) a transfer of at least 20% of the borrower’s stock, including to an affiliate, (2) the sale of at least 50% of its assets, or (3) a merger of the borrower with or into another entity.
Prior to a change of ownership, the borrower must obtain approval of its PPP lender. Depending on the method of the change, further procedures may be required, such as obtaining SBA approval or establishing an escrow account from which the PPP loan may be satisfied. If SBA approval is required, the SBA has 60 days to review the request and make its determination, which may affect the timing of closing.
In all cases, the borrower remains responsible for all obligations under the loan and all certifications made in its loan application. Further, the new owner must not use PPP funds for unauthorized purposes. If the new owner also has a PPP loan, then they must segregate the two PPP loans and the uses thereof.
Unrelatedly, on October 7, 2020, the SBA published FAQ #52, which clarified that the extension of the deferral period provided under the Paycheck Protection Program Flexibility Act of 2020 applies automatically to all PPP loans. Lenders are not required to modify promissory notes and instead shall give immediate effect to the extension. Lenders should also notify borrowers of the change to the deferral period.
When analyzing eligibility, compliance, or other issues related to the PPP loans, both lenders and borrowers should ensure they have consulted the proper sources. We encourage you to consult the other articles we have published regarding PPP loans, which can be found on our COVID-19 Hub. If you have any questions regarding the SBA PPP loans, or other aspects of the CARES Act, please contact a Baird Holm LLP attorney.