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Focus on Private Equity: PPP Loans and Changes of Ownership

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Prior to October 2, 2020, it was presumed that any entity contemplating a change in control that had received Paycheck Protection Program (PPP) funds would be required to obtain approval for the transaction from the SBA prior to sale.
October 9, 2020

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Background:

Prior to October 2, 2020, it was presumed that any entity contemplating a change in control that had received Paycheck Protection Program (PPP) funds would be required to obtain approval for the transaction from the SBA prior to sale. This process added unwelcome time and risk to the closing of a transaction.

On October 2, 2020 the SBA issued a Procedural Notice entitled “Paycheck Protection Program Loans and Changes of Ownership” (hereafter “Procedural Notice”) which provides guidance on sale transactions and clarifies the role of the SBA Lender and/ or the SBA as described below.

The Procedural Notice establishes when:

a.    Approval (SBA or SBA lender) is not required;
b.    Only SBA lender approval is required;
c.    SBA approval is required;

For prospective sellers (and buyers), it is important to understand the impact a PPP loan may have on their contemplated transaction to ensure a successful and timely transaction.

RubinBrown has prepared a Q&A below, which summarizes key aspects of the Procedural Notice. The full text of the Procedural Notice can be found here.

Please contact us to discuss your specific circumstances.

Q&A:

Question 1: What is a “change in ownership” as defined by the SBA for the purposes of PPP?

Answer: Change in ownership meets one of the following criteria:

  • A change in control of at least 20% of voting stock is sold or transferred (including to an affiliate), whether in one or more transactions, as measured from the PPP loan approval date;
  • The PPP borrower sells or transfers 50% of its assets (measured at fair value), whether in one or more transactions, as measured from the PPP loan approval date;
  • The PPP borrower is merged with another entity;

If your contemplated transaction does not meet one of the above criteria, your transaction may not require approval from either the SBA Lender or the SBA. If your contemplated transaction does meet the criteria above, the Procedural Notice provides additional guidance, see additional Q&A, below.

Question 2: Who is responsible for the PPP loan if a change in ownership occurs?

Answer: The original PPP borrower remains responsible for the performance of all obligations under the PPP loan, certifications of need and compliance with loan requirements, and fulfillment of all required reporting until the PPP loan is either paid in full or forgiven and closed by the SBA.

As further described in Question 4 below, in a change in ownership, the PPP borrower will be required to escrow a portion of the transaction price equal to the outstanding PPP loan until such time the loan is forgiven by the SBA.

We recommend transacting parties remain aware of this obligation and should make necessary considerations in their transaction planning.

Question 3: I am planning a change in ownership. When should I contact my SBA Lender (aka bank)?

Answer: The PPP borrower should notify the PPP Lender in writing, prior to the closing of any change in ownership transaction, and that the PPP Lender should receive a copy of the draft transaction documents for review.

We recommend sellers discuss any contemplated plans with their SBA Lender, and their sale team (accountants, attorneys and investment bank) early in the process, as they plan their transaction.

Question 4: I am planning a change in ownership. Who needs to approve my transaction?


Answer: There are different requirements depending on the status of the PPP loan:

1. If the PPP Note is fully satisfied, either through repayment or has been 100% forgiven (as defined) prior to the closing, there are no restrictions on a change in ownership and your transaction does not require approval from the SBA Lender or the SBA.

2. If the PPP Note is not fully satisfied, i.e. the loan is not paid off and/or has not been 100% forgiven prior to the closing, the loan will likely need approval by either your PPP lender or your PPP lender and the SBA.
  • Situations that would require approval but only your PPP lender and not also the SBA include:
      • The transfer of stock (including to an affiliate) or sale of assets (measured at fair value) is 50% or less of the outstanding total;
Or;
      • The transfer of stock (including to an affiliate) or sale of assets (measured at fair value) is greater than 50%, AND the PPP Borrower completes and submits a forgiveness application for approval by the SBA (but which has not received final approval from the SBA) and the PPP Borrower remits an amount equal to the outstanding PPP loan for deposit to an escrow account controlled by the PPP Lender. The escrow account will be settled upon final forgiveness of the PPP Loan;
  • Ultimately if the conditions described in 2(a) are not met, the change of ownership will require SBA approval, and the Procedural Notice provides the procedures and steps to be followed (contact us for further details or to discuss your specific situation);

In Closing:

Sellers should note that for any sale or transfer of ownership interest, whether SBA approval is required or not, the original PPP Borrower remains subject to all obligations under the PPP Loan. Sellers should also note all of the above guidance, in particular the impact an escrow may have on their closing-day proceeds.

Buyers should remain aware of the above guidance; in particular, remain vigilant that the SBA will have recourse against new owner(s) in case of use of funds subsequent to the transaction for unauthorized purposes.

If you are contemplating a buy or sell transaction, please reach out to a member of the RubinBrown Mergers and Acquisitions team to talk through your specific situation.

We will continue to monitor this topic, and as new information becomes available and clarifications are made, we will update you.

 

Readers should not act upon information presented without individual professional consultation.

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

 

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