Banking and Financial Services e-Alert

Bowles Rice Banking and Financial Services e-Alert
SBA Issues Guidance to PPP Lenders Concerning
Change of Ownership Procedures for Borrowers

Members of the Bowles Rice banking team recently authored an article for The Community Banker, a quarterly magazine published by the Community Bankers of West Virginia.

On October 2, 2020, after our article was submitted and the magazine had gone to print, the U.S. Small Business Administration (the "SBA") issued guidance to lenders participating in the Paycheck Protection Program (the "PPP") concerning the procedures that must be performed in connection with a PPP borrower's change of ownership, which was the topic of our article. This e-Alert provides an update to our article in The Community Banker.

The SBA considers a change of ownership to occur when (i) more than 20% of the equity interests or stock of a PPP borrower are transferred (a "Stock Deal"), (ii) more than 50% of the fair market value of a PPP borrower's assets are transferred (an "Asset Deal"), or (iii) when a PPP borrower undergoes a merger into another entity (a "Merger").

There are no restrictions on a change of ownership for which the PPP note has been repaid in full or for which the PPP borrower has completed the loan forgiveness process and either (i) remitted funds in full satisfaction of the PPP note or (ii) repaid any remaining PPP balance.

Regardless of whether SBA approval is required or not, a buyer in any transaction that has its own PPP loan will be obligated to segregate and account for the funds and expenses of the buyer's PPP loan and the PPP loan that it has acquired through the transaction.

A PPP lender may consent to any change of ownership that qualifies as (i) an Asset Deal or (ii) a Stock Deal or a Merger without obtaining SBA approval if 50% or less of the ownership interest of the PPP borrower is changing hands, or the PPP borrower:

  • Completes a loan forgiveness application reflecting full use of the PPP proceeds and submits it to the PPP lender; and
  • Escrows funds with the PPP lender equal to the outstanding balance of the PPP loan. Once the forgiveness period expires, the escrowed funds must be used first to repay any PPP loan balances (plus interest) before being distributed to the PPP borrower.

For any change of ownership transactions that qualify as a Stock Deal or a Merger, the PPP borrower will remain subject to all PPP loan obligations and the new owners will be liable to the SBA for any unauthorized use of proceeds.

If a transaction does not qualify for the safe harbors set out above, a PPP lender must submit the request for approval to the SBA with the following materials:

  • The reason why the PPP borrower cannot satisfy the safe harbors;
  • The details of the proposed transaction;
  • A copy of the executed PPP note;
  • Any transaction document setting out the responsibilities of the parties to the proposed transaction;
  • Disclosure of whether the buyer has a PPP loan outstanding, and if so, the loan number; and
  • A list of owners of the buyer who hold more than 20% of the outstanding ownership interests.

The SBA will review the approval request and make a determination within 60 days following the receipt of a completed request submission. The SBA may require additional measures to mitigate against risk associated with the proposed transaction.

For any Asset Deal that is submitted for SBA approval, the transaction documents must contain terms obligating the buyer to assume all of the PPP borrower/seller's obligations with respect to the PPP loan.

Within five business days after the completion of the transaction, the PPP lender must notify the SBA Loan Servicing Center for its region of:

  • The identity of the new owners of the PPP borrower and their percentage interests;
  • The tax identification numbers of any owners holding more than 20% of the ownership interests of the PPP borrower; and
  • The amount of the escrowed funds and the location of such funds in the escrow account maintained by the PPP lender, if applicable.

A copy of the SBA's Procedural Notice is available for download here.

For more information
Bowles Rice continues to closely monitor federal, state and local developments related to the novel coronavirus pandemic. Be sure to visit the CARES Act / COVID-19 Response Team page on our website for a comprehensive listing of available services.

Sandy Murphy
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Ben Thomas
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Amy Tawney
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Elizabeth Frame
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