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SBA Issues Guidance to PPP Lenders for Change of Ownership Transactions 

by Dustin Timblin

Published: October, 2020

Submission: October, 2020


Since the Paycheck Protection Program (“PPP”) was passed into law earlier this year, buyers, sellers and PPP lenders in corporate transactions have struggled with the question of how to address outstanding PPP loans in the context of the sale of the business.

The PPP is a part of a Small Business Administration (“SBA”) pre-existing Section 7(a) program, and for all 7(a) loans, according to the SBA Section 7(a) Standard Operating Procedure Manual, 7(a) Lenders may not, without SBA consent, unilaterally approve any adjustment to or change in the ownership of a 7(a) borrower, including a change in percentage of ownership, for 12 months after final disbursement on any 7(a) loan. A failure to comply with this requirement could put the PPP lender’s SBA guaranty of the underlying loan at risk.

However, notwithstanding the enormous number of PPP loans made, the CARES Act and PPP-related regulations were silent on this matter, and to this point, the SBA has not clarified whether this important requirement still applies to PPP loans.

Since most PPP loan documents (including the SBA-approved form PPP promissory note) contain some form of restrictions on changes of ownership, buyers, sellers, and PPP lenders over the last 6 months have operated under a cloud of uncertainty, triggering delays and potentially endangering the closing of many transactions. Given all this, many parties have elected to either pay off a PPP loan early or negotiate to escrow the full amount of the PPP loan proceeds with the lender, pending later determination of the PPP forgiveness amount, rather than attempt to seek SBA consent to a change of ownership transaction.

Today the SBA issued a procedural notice to all PPP lenders to provide clarity on the above issue. According to the procedural notice, the SBA defines a “change of ownership”[1] transaction as one in which

(a) 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,

(b) 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

(c) a PPP borrower is merged with or into another entity. The SBA then proceeds to describe several paths depending on the current status of the PPP Loan.

Prior to closing of a change of ownership transaction, the PPP borrower must notify its PPP lender in writing of the contemplated transaction and provide them with copies of the acquisition documentation. Then, if prior to the closing a change of ownership transaction, a PPP loan has been repaid in full, or the PPP borrower has completed the loan forgiveness process and the SBA has remitted funds to the PPP Lender in satisfaction of the PPP loan (or the PPP Borrower has repaid any remaining balance on the PPP Loan), there are no restrictions on a change of ownership.

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