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On October 2, 2020, the U.S. Small Business Administration issued guidance in the form of a procedural notice (the “Notice”) regarding change of ownership transactions involving entities that have received Paycheck Protection Program (“PPP”) funds. The PPP was established as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which became law on March 27, 2020, and was intended to provide aid to U.S. businesses dealing with the COVID-19 pandemic.
When does a change of ownership occur?
The Notice provides that a change of ownership occurs when:
1. At least 20% 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 transfer to an affiliate or an existing owner of the entity;
2. The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
3. A PPP borrower is merged with or into another entity.
PPP Borrowers must aggregate all sales and other transfers that have occurred since the date of approval of the PPP loan to determine whether the change of ownership threshold has been met.
Is the SBA’s approval required for a change of ownership?
Generally, the SBA’s approval is required for a change of ownership transaction. The SBA will have 60 days to review and provide its determination. However, the SBA’s approval is not required in the following scenarios:
1. The PPP loan is fully satisfied, which means that (a) the loan has been repaid in full or (b) the loan has been forgiven by the SBA and any unforgiven amounts have been paid repaid in full;
2. In a stock sale or merger: (a) the sale or transfer involves less than 50% of the borrower’s stock/ownership or (b) the PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan;
3. In an asset sale of 50% or more of the borrower’s assets, if the PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan.
What responsibilities do PPP borrowers have when a change of ownership occurs?
Before closing any change of ownership transaction, a PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the lender a copy of the relevant transaction documents.
When a change of ownership occurs, the PPP borrower remains responsible for:
1. Performance of all obligations under the PPP loan;
2. Certifications made in connection with the PPP loan application;
3. Compliance with other PPP requirements; and
4. Obtaining, preparing, and retaining all required PPP forms and documentation as well as providing them to the PPP lender or SBA upon request.
Issues to Note
The Notice does not address involuntary transfers such as transfers as a result of the death of a business owner, or similar transfers resulting from donations or retirements. If one is planning to donate an interest in a business with a PPP loan outstanding before year end, be aware that additional consents may be required.
Please contact our tax law group with any questions regarding this topic.
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The information contained within this newsletter does not constitute legal advice and is not intended to create an attorney-client relationship. You should consult an attorney for individual advice regarding your own particular situation.