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In brief

On October 2, 2020, the Small Business Administration (SBA) published a long-awaited procedural notice that provides further clarity on procedures for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds. The procedural notice (i) identifies when a change of ownership will be deemed to have occurred, (ii) specifies the reporting obligations of PPP borrowers in connection with such change of ownership, and (iii) provides guidance as to whether the SBA’s prior approval is required. Notably, the procedural notice does not provide any relief to PPP borrowers with change of ownership transactions that were closed prior to October 2, 2020.


The procedural notice sets forth the steps that must be followed by PPP borrowers in two sets of circumstances: first, when the PPP note has been repaid in full prior to the closing of the change of ownership transaction; and second, when the PPP note has not been fully satisfied prior to the closing of the change of ownership transaction.

Critically, only a borrower (i) whose PPP loans have been repaid in full or (ii) who submitted a forgiveness application to its lender before closing and established an interest-bearing escrow account holding funds equal to the outstanding balance of the PPP loan may avoid the SBA prior approval requirement (although not notice requirements).

Key Takeaways

  • A change of ownership will be deemed to have occurred upon any of the following: (i) an acquisition of 20% or more of the equity of a PPP borrower, (ii) an acquisition of 50% or more of the assets of a PPP borrower, and (iii) a merger.
    • A change of ownership will be deemed to have occurred even if the equity or assets are transferred to an existing affiliate of the PPP borrower.
    • All sales and other transfers occurring since the date of the 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.

One issue that was not addressed, however, is whether an indirect change of ownership of a PPP borrower triggers reporting and other obligations. The reference in the procedural notice to “other ownership interests of a PPP borrower” in defining a change of ownership could be interpreted to capture changes in indirect ownership interests. Notwithstanding this ambiguity, some participants have taken the view that only changes in direct ownership interests result in deemed changes of ownership.

  • Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.
  • The SBA’s prior written consent to any change of ownership transaction will be required unless one of the following situations applies:
    • the change of ownership transaction is an equity sale of 50% or less of the interests of the PPP borrower;
    • the PPP loan has been repaid in full prior to the closing of the change of ownership transaction; or
    • the PPP borrower submitted a forgiveness application to its lender prior to the closing and established an interest-bearing escrow account holding funds equal to the outstanding balance of the PPP loan.

The SBA will have 60 calendar days to review and provide its approval.

  • Regardless of a change of ownership, the PPP borrower remains responsible for (i) performance of all obligations under the PPP loan, (ii) certifications made in connection with the PPP loan application, and (iii) compliance with all other PPP requirements.
  • In the case of sales or transfers of common stock or other ownership interests or mergers where a PPP loan is not fully satisfied prior to the closing of the sale, transfer or merger, the new owner or successor will be liable for its use of PPP funds for unauthorized purposes. Further, if the new owner or successor has a separate PPP loan, then it must segregate and delineate all PPP funds and expenses and provide documentation to demonstrate compliance with PPP requirements with respect to both PPP borrowers or both PPP loans, as applicable.
  • In all cases where the PPP loan has not been repaid in full prior to the closing of the change of ownership transaction, PPP lenders must notify the appropriate SBA Loan Servicing Center of the completion of the transaction within five business days. The contents of the notice will vary depending on the transaction structure.
  • PPP borrowers should still examine the terms of their PPP promissory notes to determine whether lender consent is separately required.

In More Detail

When the Paycheck Protection Program was established, the SBA did not promulgate a required form of PPP loan or note. Rather, the SBA authorized each PPP lender to develop and implement its own form in compliance with available PPP guidance. Many PPP lenders used the existing SBA form of note intended for use in the existing SBA 7(a) small business loan program or used that SBA form of promissory note as a basis for developing their own PPP promissory notes. Questions subsequently arose concerning the application of these SBA approval guidelines under the existing SBA 7(a) small business loan program to PPP loans in the context of M&A and investment transactions in light of the unique features of the PPP loans—namely, the ability for the loans to be forgiven and their unsecured nature.

Changes of Ownership Defined

The requirements under the SBA’s new procedural notice only apply to transactions in which there is a “change of ownership.” A change of ownership will be considered to occur under the procedural notice in the following situations:

  • Equity Acquisitions. When a least 20% of the common stock or other ownership interests 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 PPP borrower.
  • Asset Sales. When the PPP borrower sells or otherwise transfers at least 50% of its assets (as measured by fair market value), whether in one or more transactions.
  • Mergers. When the PPP borrower merges with or into another entity.

Importantly, a change of ownership is measured from the date of the approval of the PPP loan. Thus the SBA will aggregate all sales and other transfers occurring since the date of the approval of the PPP loan to determine if one of the criteria set forth above is met. For publicly traded PPP 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 interests of the borrower must be aggregated.

Any transaction that does not meet one of the criteria above is not considered a change of ownership by the SBA and does not trigger the requirements or procedures set forth in the procedural notice.

Obligations and Responsibilities of PPP Borrowers

Prior to closing any transaction that will result in a change of ownership, the PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

Regardless of the change of ownership, the PPP borrower will remain responsible for:

  • performance of all obligations under the PPP loan;
  • certifications made in connection with the PPP loan application, including the certification of economic necessity;
  • compliance with all other applicable PPP requirements; and
  • obtaining, preparing and retaining all required PPP forms and supporting documentation and providing such forms and supporting documentation to the PPP lender or the SBA upon request.

Obligations and Responsibilities of New Owners

In the event that a change of ownership transaction is structured as an equity acquisition or merger, the PPP borrower (and, in the event of a merger, the successor to the PPP borrower) will remain subject to all obligations under the PPP loan. The SBA will also have recourse against the new owner(s) for such new owner(s)’ unauthorized use of PPP funds.

If any of the new owners or the successor arising from a change of ownership transaction has a separate PPP loan, then, following the consummation of the transaction: (i) in the case of an equity acquisition, 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 the PPP requirements for each PPP borrower; and (ii) in the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to deomonstrate compliance with the PPP requirements with respect to both PPP loans.

The obligations of the new owner(s) or successor of the PPP borrower does not depend on whether or not the SBA’s prior approval of the change of ownership transaction was required.

Restrictions on Change of Ownership Transactions and Prior SBA Approval

No Restrictions on Fully Satisfied PPP Loans

There are no restrictions on a change of ownership transaction if, prior to the closing of the sale or transfer, the PPP loan is fully satisfied. The PPP loan will be considered to be fully satisfied if:

  • the PPP borrower has repaid the PPP loan in full; or
  • the PPP borrower has completed the loan forgiveness process in accordance with the PPP requirements and (a) the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note; or (b) the PPP borrower has repaid the remaining balance on the PPP note.

Change of Ownership Transactions Where SBA Approval is Not Required

If the PPP note is not fully satisfied, the change of ownership does not require the SBA’s prior approval if the following conditions are met.

  • if the change of ownership transaction is structured as a sale or transfer of common stock or other ownership interest or merger:
    • the sale or transfer (or series of sales or transfers from the date of the approval of the PPP loan) is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
    • 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 an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.
  • if the change of ownership transaction is structured as an asset sale:
    • 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 an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

In each case, after the forgiveness process (including any appeal of the SBA’s decision) is completed, any escrow funds must be disbursed to repay the remaining PPP loan balance plus interest.

If none of the conditions set forth above apply to the change of ownership transactions, then the SBA’s prior approval of the change of ownership transaction must be obtained.

Obtaining SBA’s Prior Approval

If the SBA’s prior approval is required for the change of ownership transaction, a request must be submitted to the SBA through the PPP lender and contain the following:

  • the reason why the PPP borrower cannot satisfy the PPP loan in full or provide funds equal to the amount of the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender;
  • the details of the change of ownership 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 equity of the purchasing entity.

The SBA will provide a determination within 60 calendar days of receipt of the complete request.

In the event the change of ownership transaction is structured as an asset sale, the SBA’s approval will be conditioned upon 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.

If deemed appropriate, the SBA may require additional risk mitigation measures as a condition of its approval to the transaction.

The procedural notice does not state any consequences for failing to obtain the SBA’s prior approval of a change of ownership transaction when required.

Obligations of PPP Lenders Following a Change of Ownership Transaction

In all cases where the PPP loan has not been repaid in full prior to the closing of the change of ownership transaction, the PPP lender must notify the appropriate SBA Loan Servicing Center of the transaction within five business days of the closing.

  • If the change of ownership transaction was structured as an asset sale and did not require the SBA’s prior approval, the PPP lender must notify the SBA Loan Servicing Center of the location of, and the amount of funds, in the escrow account.
  • If the change of ownership is structured as a sale or transfer of common stock or other ownership interest or a merger, the PPP lender must notify the SBA Loan Servicing Center of (i) the identity of the new owner(s) of the common stock or other ownership interest of the PPP borrower; (ii) the new owner(s)’ ownership percentage; (iii) the tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and (iv) the location of, and the amount of funds, in the escrow account.

In all cases, the PPP lender is required to continue submitting monthly 1502 reports until the PPP loan is fully satisfied.

Author

Steven Canner is a member of the Firm’s Global Corporate and Securities Practice Group in New York. For over 25 years, he has been counseling clients with respect to cross-border and US domestic mergers, acquisitions, joint ventures, private equity and venture capital transactions, as well as corporate reorganizations. Mr. Canner also focuses his practice on public and private securities offerings and securities laws compliance matters. He acts as outside general counsel to a number of international companies, assisting them with their day to day legal concerns.

Author

Mark Mandel is a partner in the Corporate & Securities Practice Group based in New York and a member of the Firm's North American Private Equity Steering Committee.

Author

Nick Marchica is a partner in Baker McKenzie's New York office, where he is the Chair of the Transactional Practice Group. He mainly advises domestic and international companies, private equity firms and commercial banks across the United States, Asia Pacific and Europe on a range of market-shaping M&A transactions. Nick is a member of the Firm's North American Private Equity Steering Committee.

Author

Matthew Andonian is an associate in the New York office of Baker McKenzie and a member of the Corporate & Securities Practice Group.

Author

Michelle Heisner is a member of the Firm's Global Corporate and Securities Practice Group in New York. Michelle's industry experience includes clients in the energy, telecommunications, financial services, and technology sectors. Earlier in her career, Michelle worked as an M&A attorney at a leading global law firm at its offices in New York, Australia and Washington, DC.