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New Guidance on Change of Ownership Issues for PPP Loans

Under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, small businesses around the nation have received Paycheck Protection Program (“PPP”) loans to stay afloat during the pandemic, but the rules regarding these disbursements haven’t always been so clear. On October 2, 2020, the Small Business Administration (“SBA”) issued guidance to all SBA employees and PPP lenders to clarify the requirements around the ownership of businesses receiving PPP loans.

Initially, the definition of “change of ownership” for PPP loans was murky; the SBA had not clarified what constitutes “ownership” in terms of assets or control. Also unclear was the preferred procedure for a Merger & Acquisition (“M&A”) transaction in which both the acquirer and the business obtained had outstanding PPP loans. The new notice provides further guidance on these procedures.

“Change of ownership” is defined as any event in which 20 percent or more of the common stock or other ownership interest of a PPP recipient is transferred or sold, or 50 percent or more of the assets of the PPP recipient are sold. This includes publicly traded entities and can include transference over multiple transactions, including to an existing owner or affiliate of the business. Change of ownership can also occur when the PPP recipient is merged with another business.

Hands signing a contract

The PPP lender must be alerted, in writing, of the ownership changes. In some situations, ownership changes require the PPP recipient to obtain approval from the SBA. These exclude instances where the PPP loan has been paid back in full, or loan forgiveness has been granted before the M&A occurs. Additionally, any transfer of less than 50 percent of the PPP borrower’s common stock or ownership interest since receiving PPP does not require approval by the SBA, nor does a change in ownership when the entity has used all of its PPP funds before the change, submitted a forgiveness application, and the PPP lender has set up an escrow account with interest that holds funds equivalent to the uncollected remainder of the PPP loan to pay off any unforgiven PPP loan amount.

If the PPP recipient does not fall into one of the above categories, however, SBA approval must be granted before an ownership transfer can occur. The request, which will be approved or denied within 60 days of completion, must include information on why the business cannot pay back the existing PPP loan, ownership change transaction details, a list of all owners of 20 percent or more of the purchaser’s business, information on whether or not the purchaser has a PPP loan itself, a copy of the PPP note, and a letter of intent about the purchase agreement and the respective responsibilities of the PPP borrower, seller, and entity purchaser. The SBA may or may not approve the transaction and may require additional mitigation measures.

If the purchasing entity and the entity being purchased both have outstanding PPP loans, they must be kept separate and continued to be used for their approved and intended purpose. The PPP borrower retains responsibility for the loan, certifications, and compliance with PPP requirements.

This new guidance provides much-needed clarification on change of ownership requirements for business with PPP loans.  Call your McBrayer attorney today if you have received a PPP loan and intend to buy, sell, or merge a business.

Anne-Tyler MorganAnne-Tyler Morgan is a Member of McBrayer law.  Her law practice primarily focuses on politics, elections, and campaign finance, nonprofit institutions and associations, foster care and adoption, administrative law, healthcare law, pharmacy law and transactional healthcare and transactional agreements. Ms. Morgan can be reached at atmorgan@mcbrayerfirm.com or (859) 231-8780, ext. 1207. 

Services may be performed by others.

This article does not constitute legal advice.

Lexington, KYLouisville, KYFrankfort, KYFrankfort, KY: MML&K Government Solutions