PPP Loans and Business Transfers

Most Payroll Protection Program (“PPP”) loans required the consent of the PPP lender and/or the Small Business Administration (“SBA”) for any significant change in ownership of the borrower that takes place prior to the repayment or forgiveness of the PPP loan. While this requirement would appear to prohibit the borrower from being the subject of an acquisition of its stock or assets or of a merger transaction, the SBA has provide guidance on how such an acquisition or merger may still be consummated.

The SBA has issued Procedural Notice No. 5000-20057 addressing PPP Loans and Changes of Ownership. That Notice outlines the following conditions under which a PPP borrower may engage in certain transactions without obtaining the prior consent of the SBA.

Change of Ownership. For purposes of the PPP, a “change of ownership” is considered to have occurred when (1) at least 20 percent of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether in one or more transactions, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity. Prior to the closing of any such transaction, the borrower must notice the PPP lender of the contemplated transaction and provide the PPP lender with a copy of the proposed transaction documents.

Stock or Ownership Interest Sale or Merger. The borrower may proceed with the transfer of a stock or ownership interest sale or a merger, without the prior approval of the SBA, only if one of the following apply:

(a) the sale or other transfer is of 50 percent or less of the common stock or other ownership interest of the borrower; or

(b) the borrower completes and submits to the PPP lender a forgiveness application and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loans. After the forgiveness process is completed, the escrow funds must be disbursed first to repay any unforgiven balance of the PPP loan plus interest, and the remaining escrow funds would then remitted to the borrower or the transferring holders of the common stock or ownership interests of the borrower.

Sale of Assets. The borrower may proceed with a transfer of 50 percent or more of its assets, without the prior approval of the SBA, only if the borrower completes and submits to the PPP lender a forgiveness application and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loans. As with the above ownership sales or mergers, after the forgiveness process is completed, the escrow funds must be disbursed first to repay any unforgiven balance of the PPP loan plus interest, and the remaining escrow funds would then remitted to the borrower

In the case of any stock or ownership interest sale, merger, or sale of assets meeting the above conditions, this provides the opportunity for a portion of the sale proceeds to be used to fund the escrow account with the PPP lender. The acquiror is thus assured of the full repayment of the PPP loan, whether or not fully forgiven, and the borrower or its stock or ownership interest holders need merely to wait out the forgiveness process to obtain the escrowed funds (or the applicable portion thereof).

Non-Qualifying Transactions. In the event that the borrower is unable to meet the above conditions for its contemplated transaction, prior SBA approval is required and the PPP lender may not unilaterally approve the change of ownership. To obtain such an SBA approval, the PPP lender must submit a request to the SBA detailing the transaction and why the transaction could not satisfy the conditions set forth above. The SBA may require additional risk mitigation measures and other requirements as a condition of its approval of the transaction. The SBA is to provide a determination within 60 days of receipt of a complete request.

PPP loans have provided great benefits to employers coping with COVID impacts on their businesses. However, those benefits need not impair business owners from pursuing exits or other strategic planning for their businesses. Poole Shaffery & Koegle, LLP is The Law Firm For Your Business and would be pleased to assist you with your business transactional needs.