Updated February 23, 2022

Effective October 2, 2020, the Small Business Administration (“SBA”) issued an SBA Procedural Notice: Paycheck Protection Program Loans and Changes of Ownership; and on October 26, 2021, the SBA issued SBA Procedural Notice 5000-821918: Extension of and Update to Guidance Related to Paycheck Protection Program Loans and Changes in Ownership (the “Notice”). The Notice is addressed to SBA employees and PPP lenders. Changes of ownership, asset transactions, and mergers were gray areas for PPP loan forgiveness purposes, and this guidance should help those PPP borrowers with pending transfers of ownership and other transactions.  The Notice did not answer all open questions in this arena. 

For PPP loan purposes, the Notice: (a) defines a “change of ownership”; (b) clarifies the responsibilities and continuing obligations of PPP borrowers; (c) describes when lender approval is required and related procedures depending on whether or not the PPP note will be fully satisfied; (d) sets forth when SBA approval is required and the procedures to be followed; (e) addresses situations and other requirements when the new owner or successor has a separate PPP loan; (f) clarifies that the guidance applies to entities that have received First and Second Draw PPP loans; and (g) provides guidance on changes of ownership when the individual borrower or an owner of the borrower is deceased.

In the event that a PPP borrower was the recipient of both a First Draw PPP loan and a Second Draw PPP loan and obtained the loans from different PPP Lenders, the seller is responsible for notifying and coordinating with both of the respective PPP Lenders, as well as SBA and the buyer, and could be required to set up separate escrow accounts, as prescribed and described below.

Definition of “Changes of Ownership”

According to the SBA, for purposes of the PPP, a “change of ownership” will be considered to have occurred when:

• 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 to an affiliate or an existing owner of the entity,
• A PPP borrower sells or otherwise transfers at least 50% 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.

In determining a change of ownership, 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.

Cautionary note: The Notice clarifies the thresholds that the SBA is concerned about and those that require SBA approval and provides guidance to PPP lenders. However, most of the PPP loan documents do not contain a threshold, and most contain a specific default provision concerning transactions where a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Although a lender could use its own form of note, most loan documents preclude a change in ownership, change of ownership, change in business structure, change of control, or change in control during the term of the PPP loan. For PPP borrowers contemplating any changes of ownership prior to forgiveness, please contact your lender to discuss how the lender is handling their loan documentation, this Notice, and other guidance. A PPP borrower should not assume that since the transaction is below the Notice thresholds that lender approval is not required. 

Aggregation note: The aggregation date starts on the “date of approval” of the PPP loan and not the date that the funds were received.  

Open area: The Notice does not clearly address the issuance of additional ownership interests in the PPP borrower or an indirect change of ownership. The wording in the Notice speaks in terms of “sold or otherwise transferred[.]” As such, it is not clear whether this Notice applies in these situations or whether the prior SBA Procedural Notice effective April 1, 2019 applies—that notice precludes lenders from unilaterally approving and requires SBA approval for “any adjustment to or change in the ownership of a Borrower, including a change in percentage of ownership…[.]” If the prior notice applies, SBA prior approval would be required for “any” change of ownership resulting from these situations.  

Change in control distinction: This Notice does not address “change in control,” which is a more typical default provision. This Notice is concerned with a “change of ownership” in a sale or transfer or merger situation.

Change of ownership calculation: The Notice does not explain how to calculate a change in ownership—whether it is to be calculated on a fully-diluted basis, including all options or warrants, or otherwise.

Borrower Responsibility

Regardless of any change of ownership, the PPP borrower remains responsible for (a) performance of all obligations under the PPP loan, (b) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (c) obtaining, preparing, and retaining all required PPP forms and supporting documentation, (d) providing all required PPP forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender”) or to the SBA upon request, and (e) complying with all other applicable PPP requirements.

The SBA reserves all rights and remedies available under the law in the event of fraud, false statements, and/or unauthorized uses of PPP loan proceeds. Furthermore, if the buyer or the seller (or both) has an outstanding PPP loan, and the change of ownership transaction is financed in whole or in part with a 7(a) loan, all SBA Loan Program Requirements, as defined in 13 CFR 120.10, must be met. In addition, if an escrow account is required under the procedures set forth in the Notice, the 7(a) loan that finances the change of ownership cannot be used to finance the escrow account. For documentation, see “Key Consideration for PPP Documentation,” and for the review process, see “A Guide to the SBA PPP Loan Forgiveness Review Process.”

Lender Notice/Approval and Requirements; SBA Approval Not Required

Prior to the closing of any change of ownership transaction, the PPP borrower must : (1) notify the PPP Lender in writing of the contemplated transaction;  and (2) provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

Open area: This Notice states that prior to the closing of such a transaction, the PPP borrower must “notify” the lender and provide further documentation. Later in the Notice, it states that, in certain circumstances, “the PPP lender may approve the change of ownership and SBA’s prior approval is not required” and “the PPP lender may not unilaterally approve the change of ownership[.]” It is unclear under the Notice when mere notice and providing documents would be sufficient. It is likely that lender approval is required in all of these situations.

There are different procedures depending on the circumstances of the change of ownership, as set forth below. (In all cases, the PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.)

• The PPP note is fully satisfied: There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:
  • Repaid the PPP note in full; or
  • Completed the loan forgiveness process for the PPP loan in accordance with the PPP requirements and:
    • The SBA has remitted funds to the PPP Lender in full satisfaction of the PPP note; or
    • The PPP borrower has repaid any remaining balance on the PPP loan.
• The PPP note is not fully satisfied: If the PPP note is not fully satisfied prior to closing the sale or transfer, the following applies:
  • Cases in which SBA prior approval is not required: If the following conditions are met for (a) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger; or (b) a change of ownership structured as an asset sale, the PPP lender may approve the change of ownership and SBA’s prior approval is not required:
    • Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger: An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of SBA only if:
      • The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower (in determining whether a sale or other transfer exceeds the 50% threshold, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated); or
      • For each outstanding PPP loan (whether First Draw or Second Draw), the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender; and for each outstanding PPP loan (whether First Draw or Second Draw), 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 escrow funds must, first, be disbursed to repay any remaining PPP loan balance, including any accrued interest.
    • Change of ownership is structured as an asset sale: A PPP borrower may sell 50% or more of its assets (measured by fair market value) without the prior approval of the SBA only if:
      1. for each outstanding PPP loan (whether First Draw or Secord Draw), the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender; and
      2. for each outstanding PPP loan (whether First Draw or Second Draw), 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 escrow funds must first be disbursed to repay any remaining PPP loan balance, including any accrued interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 10 business days of completion of the transaction.

SBA Approval Required

Prior SBA approval is required if a change of ownership of a PPP borrower does not meet the conditions outlined above, and the PPP Lender may not unilaterally approve the change of ownership.

If a PPP borrower has a First and Second Draw Loan with different lenders, each lender must obtain SBA’s prior approval of requests for changes of ownership. The PPP Lender must submit the request to the appropriate SBA Loan Servicing Center.

To obtain SBA’s prior approval of requests for changes of ownership, the PPP Lender must submit the request to the appropriate SBA Loan Servicing Center and the request must include:

• The reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds;
• The details of the requested transaction;
• A copy of the executed PPP 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% or more of the purchasing entity.

If the request is deemed appropriate, the SBA may require additional risk mitigation measures as a condition of its approval of the transaction. SBA approval of any change of ownership involving the sale of 50% or more of the assets (measured by fair market value) of a PPP borrower will be conditioned on the purchasing entity 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 purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA. The SBA will review and provide a determination within 60 calendar days of receipt of a complete request.

Continuing Obligations Regardless of Lender or SBA Prior Approval

In the event of a sale or other transfer of common stock or other ownership interest in the PPP borrower, or a merger of the PPP borrower with or into another entity, the PPP borrower (and, in the event of a merger of the PPP borrower into another entity, the successor to the PPP borrower) will remain subject to all obligations under the PPP loan.

In addition, if the new owner(s) use PPP funds for unauthorized purposes, the SBA will have recourse against the owner(s) for the unauthorized use.

New Owner or Successor Has a Separate PPP Loan; Segregation and Delineation of Funds

If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction:

• In the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower, and
• 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.

The PPP lender must notify the appropriate SBA Loan Servicing Center, within 10 business days of completion of the transaction, of the:

• Identity of the new owner(s) of the common stock or other ownership interest;
• Ownership percentage(s) of the new owner(s);
• Tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and
• Location of, and the amount of funds in, the interest-bearing escrow account controlled by PPP Lender. 

Change of Ownership if a PPP Borrower or Owner of a PPP Borrower is Deceased

If an individual PPP borrower or an owner of a PPP borrower dies before the PPP loan is fully forgiven or fully repaid, the PPP Lender must notify the appropriate SBA Loan Servicing Center. The SBA Loan Servicing Center can provide the PPP Lender with the next steps to take.

In the event of a change of ownership due to the death of the owner, the SBA Loan Servicing Center may take into account the following factors, among others:

1. the probate/estate laws with authority over the deceased owner and the business of the PPP borrower;
2. the terms of and bequests made in the owner’s will and/or trust, should either exist (e.g., relatives named as survivors/executors of the estate and whether the estate includes the business of the PPP borrower);
3. the legal structure of the PPP borrower (e.g., sole proprietorship vs. a corporation with multiple owners); and
4. whether the business is still operating.

PPP Loans Pledged in Paycheck Protection Program Liquidity Facility (“PPPLF”)

If a PPP loan of a PPP borrower associated with a change of ownership transaction was pledged by the PPP Lender to secure a loan under the Federal Reserve’s PPPLF,  the PPP Lender is reminded to comply with any notifications or requirements of the PPPLF.

Suggested Next Steps

Because the Notice process outlined above sets out requirements for both borrowers and lenders, borrowers are encouraged to familiarize themselves with the requirements and work collaboratively with lenders to obtain approval.

As with previous client updates, borrowers are reminded to be aware of the different sources of statutory and regulatory guidance related to the PPP loan and forgiveness process. The statutory and regulatory landscape relating to the PPP is likely to continue to evolve. Because of the many variables that affect each borrower differently, a borrower should consider discussing any change of ownership with legal counsel before taking such action. Schwabe is closely monitoring developments related to the PPP and other implications that COVID-19 might have on legal issues our clients face. We encourage you to visit Schwabe’s COVID-19, CARES Act, and PPP Portal resource pages for up-to-date information as it becomes available.

This article summarizes aspects of the law relevant to the PPP program, it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.