SBA Explains What Approvals Are Needed for Transactions Involving PPP Loans
Over the past several months, proper management of the Paycheck Protection Program (PPP) loan has become a critical issue during transactions. Sellers and buyers, eager to move their deals along, were left wondering whether the PPP loan should be repaid and what, if any, notifications or approvals were needed – either to the SBA, the lender, or both.
The SBA’s newly-issued Procedural Notice on PPP loans and changes of ownership answers many of these questions, providing some clarity for loan recipients, lenders, and potential acquirers on how to move forward with their transactions.
What Is Categorized as a Change of Ownership?
According to the notice, the SBA defines a change in control as the following:
- At least 20% of the common stock or other ownership interest of a PPP borrower is sold or transferred (including to affiliates).
- The PPP borrower sells or transfers 50% or more of its assets (at fair market value).
- The PPP borrower merges into another entity.
Who Has to Approve Changes of Ownership?
There are no restrictions regarding change in control if a PPP loan is fully satisfied, meaning the borrower repaid the PPP note in full or the borrower completed the loan forgiveness process in accordance with PPP requirements (i.e., SBA remitted funds to PPP lender to satisfy the note or PPP borrower repaid any remaining balance on PPP loans).
If the PPP note is not fully satisfied, the PPP borrower must notify the PPP lender in writing prior to the closing of any change of ownership transaction and provide proposed transaction agreements or documents. For the following cases, the lender can approve the change of ownership without the approval of the SBA:
- For sales of interests and mergers, SBA approval is not required if 1) a sale or merger is of less than 50% of the ownership of the PPP borrower or 2) if the PPP borrower completes a forgiveness application reflecting the use of all the PPP loan proceeds, submits the application with documentation to the PPP lender, and an interest-bearing escrow account (containing funds equal to the outstanding PPP loan) is established and controlled by the PPP lender. SBA approval is not required for sales or transfers of 50% or less of the ownership interest of the borrower.
- For asset sales of 50% or more, SBA approval is not required if the PPP borrower completes a forgiveness application reflecting the use of all the PPP loan proceeds, submits the application with documentation to the PPP lender, and an interest-bearing escrow account (containing funds equal to the outstanding PPP loan) is established and controlled by the PPP lender. SBA approval is not required for asset sales of less than 50% of its assets.
If transactions do not meet these criteria, they must be approved by the SBA.
In addition, where SBA approval is required for a sale of 50% or more of the assets of a PPP borrower, the purchaser must assume all the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The purchase agreement must include language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchaser.
What Is Required for SBA Approval?
To obtain approval, the PPP lender must submit the following to the SBA:
- The reason the PPP borrower cannot fully satisfy the PPP loan (either by repaying the PPP loan or obtaining forgiveness via SBA remittance of funds to the lender)
- Details of the transaction
- Copy of the executed PPP note
- Letter of intent and purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller, and buyer
- Disclosure regarding whether the buyer has an existing PPP loan and, if so, the loan number
- List of all owners of 20% or more of the purchasing entity
After receiving the request, the SBA will provide a determination within 60 calendar days.
What Should I Do Now?
Make sure you are familiar with all of the guidance provided in the notice to ensure you are fully compliant with these new procedures. If you’re considering a transaction, it’s important to discuss the implications of this notice with your transaction attorney to determine the best way to move forward with your deal.
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