New Procedures for SBA Approval for Changes of Ownership

Over the last few months, M&A lawyers have been pointing out various issues faced by a borrower having received a loan under the Paycheck Protection Program (“PPP”), and wanting to sell its business either through an asset or equity sale transaction. For instance, many of the PPP promissory notes signed by borrowers include a provision requiring consent of the PPP lender to a sale of the equity or of substantially all of the assets of a borrower; however, questions remain as to how to obtain this consent from a PPP lender when such PPP lender is likewise required to obtain consent from the U.S. Small Business Administration (the “SBA”).

SBA Notice and Consent Procedures in Connection with a Change of Ownership

Effective October 2, 2020, the SBA issued a Procedural Notice regarding PPP loans and what the SBA is calling “changes of ownership.” For purposes of the PPP, a “change of ownership” occurs when (i) at least 20% of the ownership interest of a PPP borrower is sold or transferred, whether in one or more transactions, including to an affiliate or existing owner, (ii) the PPP borrower sells or transfers at least 50% of its assets, whether in one or more transactions, or (iii) a PPP borrower is merged with and into another entity.

The SBA is quick to point out that regardless of the change of ownership, the PPP borrower will remain responsible for (i) all obligations under the PPP loan, (ii) all certifications made in connection with the PPP loan application, (iii) compliance with all PPP requirements, and (iv) obtaining, preparing and retaining all PPP forms and supporting documentation and providing such documentation to the PPP lender or SBA upon request.

On the other hand, to assist PPP borrowers, this new Procedural Notice also sets forth certain notice and consent procedures for PPP borrowers to meet in connection with a change of ownership in order to not be in breach of ones PPP loan documents:

STEP 1: Notify the PPP Lender in writing of the contemplated change of ownership transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

STEP 2: Obtain consent of the SBA to the proposed change of ownership, unless any of the below exceptions in (A) apply.

1. Prior SBA approval will not be necessary if:
   1. The proposed transaction is an equity sale or merger:
      1. The sale or transfer is of less than 50% of the ownership interest of the PPP borrower; OR
      2. A loan forgiveness application is submitted 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, including any appeals, the escrow funds must be disbursed first to repay any portion of the PPP loan that is not forgiven plus interest.
   2. The proposed transaction is an asset sale:
      1. A loan forgiveness application is submitted 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, including any appeals, the escrow funds must be disbursed first to repay any portion of the PPP loan that is not forgiven plus interest.

Even though SBA consent may not be required, a PPP borrower may still need to obtain consent from its PPP Lender.

Process for Obtaining SBA Approval

The Procedural Notice further provides guidance for instances when SBA approval is necessary. To obtain SBA approval, the following procedures must be followed:

1. The PPP lender must submit a request to the appropriate SBA Loan Servicing Center, which request must include:
   1. The reason why the PPP borrower cannot fully satisfy the PPP Note or escrow funds as described in Section A(i) or Section A(ii) above;
   2. The details of the proposed transaction;
   3. A copy of the PPP Note;
   4. Any letter of intent or purchase agreement setting forth the responsibilities of the PPP borrower, seller and buyer;
   5. Disclosure of whether the buyer has an existing PPP loan and if so, the SBA loan number; and
   6. A list of all owners of 20% or more of the purchasing entity.
2. With a sale of 50% or more of the assets of a PPP borrower, such sale must be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, and the purchase agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan or a separate assumption agreement must be submitted to the SBA.

Finally, the Procedural Notice indicates that the SBA has 60 calendar days to respond to a request for approval of the change of ownership and points out that after closing of the change of ownership, if the new owner of the equity or assets or the successor by merger has its own PPP loan, PPP funds need to remain segregated and separate documentation must be kept to demonstrate compliance with PPP requirements by each PPP borrower.