Client Alert- Change of Control – Impact on PPP LoansDec 03, 2020
- FisherBroyles News
As many of our clients already know, the Paycheck Protection Program (“PPP” or the “Program”) created under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), has provided upwards of $670 billion in loans for qualifying small businesses to help cover their costs associated with payroll, benefits, interest, rent and utilities during the COVID-19 Pandemic. The loans were generally obtained under the premise that they would be forgiven under the Program and would be converted into tax-free grants, but what happens if a recipient company has a change of control or is trying to enter a sales transaction?
Last month, the Small Business Administration (the “SBA”) announced the procedures for entities that have received a PPP Loan and are contemplating a sale or a change of control or ownership in a Procedural Notice that went to SBA employees and the SBA’s lender base, or basically all the banks that originated PPP loans. The distilled version of that notice is provided below.
- What is a “Change of Ownership”?
A change of ownership occurs when a) at least 20% of common stock or other ownership interest of a PPP borrower is sold or transferred (whether in one or more transactions), including to an affiliate or existing owner of the entity; b) the PPP borrower sells or transfers at least 50% of its assets (whether in one or more transactions); or c) a PPP borrower is merged with or into another entity.
- What is the PPP borrower responsible for after a Change of Ownership?
A PPP borrower remains responsible for continued performance of all PPP loan obligations, the certifications made in connection with the PPP loan application, and compliance with all other PPP requirements. Further, the PPP borrower is responsible for providing all relevant documents to the PPP lender or SBA upon request. In summary, the PPP borrower remains responsible for the obligations they had prior to the change of ownership.
- There is about to be a change of ownership in my company. What do I need to do?
Prior to closing any change of ownership transaction, the PPP borrower must notify the PPP lender in writing of the forthcoming transaction and provide the lender with any relevant documents that would effectuate the transaction.
a. What if the PPP note is fully satisfied?
There are no restrictions on a change of ownership, if prior to that transaction, the PPP loan is repaid in full or the borrower has completed the loan forgiveness process and SBA has remitted the funds to the PPP lender.
b. What if the PPP note is not fully satisfied?
If the PPP note is not fully satisfied, you may need prior approval from the SBA based on the conditions below:
Cases in which SBA prior approval is not required:
Change of ownership that is structured as a sale or other transfer of common stock or other ownership interest or as a merger, if:
i) the sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower, or
ii) the PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process, the escrow funds must be disbursed first to repay any remaining PPP loan balance and interest.
Change of ownership is structured as an asset sale. A PPP borrower may sell 50% or more of its assets without prior approval only if the PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process, the funds must be disbursed to repay any remaining PPP loan balance.
Cases in which SBA prior approval is required:
If a change of ownership does not meet the conditions above, SBA approval of the change is required, and the PPP Lender may not unilaterally approve the change of ownership.
i) How do I obtain approval?
The PPP Lender must submit the request to the SBA Loan Servicing Center. It must include: a) reason the PPP borrower cannot fully satisfy the PPP Note or escrow funds; b) details of the requested transaction; c) copy of the executed PPP Note; d) any letter of intent and the purchase or sale agreement; e) disclosure of whether the buyer has an existing PPP loan (and loan number, and f) a list of all owners of 20% or more of the purchasing entity.
For all other sales or transfers of common stock or other ownership interest or mergers, whether or not the sale requires the SBA’s prior approval, the PPP borrower remains subject to all obligations under the PPP loan.
If any of the new owners has a separate PPP loan, then, following closing of the transaction:
i) In the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owners are responsible for segregating and delineating PPP funds and expenses and providing documentation to show compliance with PPP requirements by each PPP borrower, and
ii) In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to show compliance with PPP requirements with respect to both PPP loans.
The PPP Lender must notify the appropriate SBA Loan Servicing Center, within five (5) business days of completion of the transaction, of the:
i) identity of the new owners of the common stock or other ownership interest;
ii) new owners’ ownership percentage;
iii) tax identification number for any owner holding 20% or more of the equity in the business; and
iv) location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.
At FisherBroyles, we are closely monitoring this very fluid situation. Please continue to check for subsequent alerts on our FB News Site, as well as the information being disseminated on both the SBA’s informational site and the Treasury’s PPP Page. We also strongly encourage borrowers to continually check with PPP lenders to see when they intend to start accepting Forgiveness Applications and what processes they are likely to put in place to do so.
For additional information, please contact any of the following with any questions or more specific situations:
Kevin Gluntz, Partner, [email protected]
Paul Economon, Partner [email protected]
 Note that this escrow process allows a PPP borrower to sell up to 100% of its equity without any approval from the SBA if the other conditions are met and FB has found that most PPP lenders not only know this, but have a process in place to accommodate this with form escrow agreements and other documents that have already been vetted with the SBA.
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