Melissa McCord, Partner

Publications & Media

SBA Issues Guidance on PPP Borrower Changes of Ownership

Business Law Alert Patrick J. Maxwell, Melissa McCord

close up shot of ppp loan

The U.S. Small Business Administration (the “SBA”) recently provided much-needed guidance in the form of a Procedural Rule to small businesses that received Paycheck Protection Program (“PPP”) loans during the COVID-19 pandemic and desire to engage in a “change of ownership” as defined below.

The PPP makes available low-interest and potentially forgivable loans to businesses that employ fewer than 500 people (generally). PPP loans are meant to help small businesses pay for certain overhead costs and to encourage small businesses to keep their workers employed through the COVID-19 crisis. The SBA administers the PPP, which was created in March under the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”), as modified by the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) and the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). Find our prior alerts about the program here.

The Procedural Rule issued October 2 clarifies when a PPP lender, the SBA, or both must consent to a change of ownership of a PPP borrower, and this guidance may enable many PPP borrowers to effect changes of ownership without obtaining SBA consent.

“Change of Ownership” Defined

A “change of ownership” of a PPP borrower has occurred when:

  • at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
  • the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or
  • a PPP borrower is merged with or into another entity.

The Procedural Rule indicates that “all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.”

Changes of Ownership, Notification, and Consent

When No Consent or Notification is Required. A PPP borrower is not required to notify or obtain the consent of either the PPP lender or the SBA to a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:

  • repaid the PPP loan in full; or
  • completed the loan forgiveness process in accordance with the PPP requirements and: (i) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP loan; or (ii) the PPP borrower has repaid any remaining balance on the PPP loan.

When Borrowers Must Notify and Obtain Consent of Lender. A PPP borrower with an outstanding PPP loan must notify its PPP lender in writing of any contemplated change of ownership transaction and provide the PPP lender with a copy of the proposed transaction agreement.

Further, many, if not most, SBA loans were documented on a form note provided by the SBA (the “Form Note”). A PPP borrower defaults under the Form Note if it “reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Thus, a PPP borrower should notify its PPP lender of any contemplated changes of ownership and in most cases will be required to obtain prior written consent to the change of ownership from its PPP lender.

When Borrowers Must Obtain SBA Consent. In addition to obtaining PPP lender consent, a PPP borrower also must obtain the SBA’s consent to any change of ownership unless the PPP borrower satisfies the following requirements:

  • Stock Sales and Mergers:
    • The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower (aggregated from the date of issuance of the PPP loan); or
    • The PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it, together with any required supporting documentation, 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 appeal of the SBA’s decision) is completed, the PPP lender will disburse the escrow funds first to repay any remaining PPP loan balance plus any accrued interest and then to the PPP borrower.
  • Asset Sales: A PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of SBA only if the PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it, together with any required supporting documentation, 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 appeal of SBA’s decision) is completed, the PPP lender will escrow funds first to repay any remaining PPP loan balance plus interest and then to the PPP borrower.

How to Obtain SBA Consent

To obtain SBA’s prior approval of changes of ownership, the PPP lender (and not the PPP borrower), must submit the request to the appropriate SBA Loan Servicing Center. The request must include:

  • the reason that the PPP borrower cannot fully satisfy the PPP loan or escrow funds as described above;
  • the details of the proposed transaction;
  • a copy of the executed PPP promissory note;
  • any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
  • disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
  • a list of all owners of 20 percent or more of the purchasing entity.

The SBA will condition its approval of any sale of 50 percent or more of the assets on the purchaser's assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. In such cases, the transaction agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchaser, or the PPP borrower must submit a separate assumption agreement to the SBA.

The SBA will review and provide a determination within 60 calendar days of receipt of a complete request.

While the guidance outlined above is helpful for understanding the process for obtaining the SBA’s consent, the Procedural Rule does not establish clear standards for predicting when and under what circumstances the SBA will grant its consent to a PPP borrower's change of ownership.

Indeed, the Procedural Rule indicates that the SBA “may require additional risk mitigation measures as a condition of its approval of the transaction as it deems appropriate.” Under the SBA’s regular 7(a) loan program, when a borrower’s ownership changes, the SBA must assess whether such a change weakens the credit profile of the borrower. Here, where most PPP loans are expected to qualify for forgiveness, it is not clear what risks the SBA is focused on and how exactly it plans to mitigate those risks.

After a Change of Ownership

New Owner’s Obligations. If a change of ownership occurs and the new owners of the PPP borrower use PPP funds for unauthorized purposes, the SBA will have recourse against the new owners for the unauthorized use of such funds.

If any new owner or other successor has a separate PPP loan, then, following consummation of the transaction: (1) in the case of a transfer of ownership interest, the PPP borrower and the new owners are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower, and (2) in the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.

PPP Borrower’s Continuing Obligations. Regardless of any change of ownership, a PPP borrower remains responsible for the PPP borrower’s (1) performance of all PPP loan obligations; (2) certifications to the PPP lender, including the certification that the PPP loan was an economic necessity; and (3) compliance with all other applicable PPP requirements.

A PPP borrower that has undergone a change of ownership remains responsible for obtaining, preparing, and retaining all required forms and documentation and providing them to the PPP lender or to the SBA upon request. PPP borrowers should note that the SBA specifically reserves all rights and remedies available to it under the law in the event of fraud, false statements, and/or unauthorized uses of PPP loan proceeds.

Additional Information. The SBA may issue more guidance on this topic in the future. The complete text of (i) the CARES Act is here, (ii) the PPP Enhancement Act is here, and (iii) the PPP Flexibility Act is here.

PPP borrowers should discuss any potential stock sales or asset transfers with their legal counsel and their PPP lender to ensure compliance with the most recent guidance from the SBA. For more information, please contact your Quarles & Brady attorney or: