On October 2, 2020, the SBA Office of Capital Access published Procedural Notice 5000-20057, which provides a framework to address whether SBA pre-approval is required for various changes of ownership under the Paycheck Protection Program, as well as the process for seeking that approval if needed. Any Paycheck Protection Program borrower looking at a potential change in control, whether via actions of the shareholders or direct action by the PPP borrower needs to be familiar with this guidance. In addition, anyone looking to acquire control of a PPP borrower should also review the guidance. While the guidance makes clear the possibility of preserving the potential for forgiveness of the PPP loan through a change of ownership, the Procedural Notice sets forth various approaches to obtain SBA pre-approval for the transaction (or to avoid the need for SBA pre-approval.)
Before outlining the key elements of the SBA guidance, we must note that this guidance is being published almost six months after the first PPP loans were issued, and two months after the SBA advised that guidance on changes of ownership would be issued “soon.” While one might hope that such delay at least allowed for clear and complete guidance to be published, I’m afraid the guidance may result in more questions than answers.
Without expressing a basis for such obligation, SBA Procedural Notice provides that 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.”
While only specifically requiring notification (as opposed to application or consent), this requirement would seem inconsistent with the SBA’s Frequently Asked Questions and Interim Final Rule permitting lenders to use their own promissory note and to include any terms not inconsistent with Sections 1102 and 1106 of the Cares Act, the PPP Interim Final Rules and Guidance, and SBA Form 2484. While the SBA general form of promissory note does require lender’s prior consent if a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure,” these terms were not defined and lender’s were expressly permitted to use other forms of note.
Changes of Ownership Defined
For purposes of the SBA Procedural Notice, “Changes of Ownership” are defined to consist of the following transactions:
- an aggregate change in 20% or more of the ownership interests in the Borrower since date of SBA approval of the SBA loan (but for public companies, only need to include sales or transfers resulting in one person owning at least 20%) (stock transfers);
- sale or transfers of 50% or more of the fair market value of the assets of the Borrower (asset sales); and
- mergers with or into another entity (mergers).