As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice. 

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice. 

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

3. Silence as to Already Completed Changes of Ownership. 

The SBA Procedural Notice does not provide any guidance for what should be done about changes in ownership that closed prior to the publication of the Notice. The significance of this silence is then either amplified or minimized, depending on one’s view of the next area of silence.

4. Silence as to Non-compliance with Procedural Notice. 

The SBA Procedural Notice does not provide any guidance as to the remedies or possible sanctions available to a PPP lender or the SBA in the event a PPP borrower consummates its change of ownership transaction without first obtaining SBA approval, if required by the Notice.  It makes little sense to think the SBA would punish the PPP lender by denying the SBA guarantee for actions of the borrower. While denial of loan forgiveness would appear to at least arguably be commensurate with the actions taken, nothing in the existing guidance on PPP loan forgiveness addresses compliance with the SBA Procedural Notice (or terms of the PPP note more broadly).