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Law360 (October 20, 2020, 5:49 PM EDT) --
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| Christine Price |
The notice provides, among other things, that:
[f]or purposes of the PPP, a "change of ownership" will be considered to have occurred when (1) at least 20 percent of the common stock or other ownership interest 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 entity, (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.
Furthermore:
[f]or purposes of determining a change of ownership, all sales and other transfers occurring since the date of 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.
While the notice goes on to set forth the steps that a PPP borrower must take in the event that a change of ownership will occur, it does not address what impact, if any, this new guidance will have on already completed transactions or those transactions that were already in progress prior to the notice's Oct. 2 effective date. It also fails to set forth the consequences of failure to comply with the requirements of the notice.
This new guidance highlights an ongoing issue that has plagued the PPP since its inception in March: The rules are being made up or changed on the fly, which leaves PPP borrowers confused and potentially economically vulnerable.
For example, prior to the notice, a PPP borrower that was contemplating a change of ownership would have been advised to comply with the terms of the documents evidencing the PPP loan, which typically is just the promissory note. Many lenders have utilized SBA Form 147 Version 4.1[2] as the form of note pursuant to April 7 guidance from the SBA and the U.S. Department of the Treasury, or lenders have created their own form based upon same.
SBA Form 147 provides that it is an event of default if the PPP borrower "[r]eorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender's prior written consent."[3]
If a PPP borrower sold or entered into another transfer of common stock or other ownership interest or merger with its lender's written consent prior to the effective date, is that PPP borrower — and in the case of a merger, the successor in interest to the PPP borrower — subject to all obligations of the PPP borrower under the PPP loan?[4]
Is all liability now extended to all new owners of the PPP borrower in the event that they utilize any PPP loan proceeds for unauthorized purposes?[5]
Must all new owners and successors in interest to a PPP borrower adhere to additional requirements regarding the segregation of PPP funds and compliance with PPP loan documentation requirements?[6]
The intuitive answer is that you cannot retroactively subject these borrowers to these new requirements; however, at this time no one knows what the SBA and the Treasury will do. Again, PPP borrowers must await further guidance.
Further concerning PPP borrowers is that the potential assumption of liability, segregation of funds and documentation requirements placed upon the new owners of a PPP borrower likely were not terms contemplated during the structuring of the transaction given that many PPP borrowers have assumed that their PPP loan would be forgiven.
The question has become: Does this notice affect a borrower's ability to achieve loan forgiveness if they completed a change of ownership prior to the effective date and therefore did not comply with the terms of the notice? Yet again, we do not know what this means for these previously closed transactions, and we must await further guidance.
However, for those transactions that are in in progress right now, to the extent that it is possible, it is advisable to amend the transaction documents in order to adhere to these new requirements and guidance less you run afoul of the PPP and potentially jeopardize the ability to achieve loan forgiveness or possibly subject yourself to a claim for damages.
In addition to the foregoing, all prospective successors in interest or purchasers of a PPP borrower should be mindful of the possible consequences that the transaction could have on them. This includes, without limitation, whether or not the combined amount of any PPP borrower's loan plus the prospective successor in interest or purchaser's PPP loan could push them into a higher review category, such as PPP loans of $2 million or more being subjected to an automatic audit.
In addition, prospective successors-in-interest and purchasers should be aware of the potential impact that a PPP borrower's loan could have on said successor or purchaser who did not receive a PPP loan but received other benefits under the Coronavirus Aid, Relief and Economy Security, or CARES, Act, such and the employee retention credit[7].
It is important to note that definitive guidance from the SBA is not yet available regarding the foregoing concerns, even though these are hot topic issues in current transactions. Parties considering a change of control transaction should be mindful that there are extensive delays in the SBA confirming forgiveness and similar delays can also be expected with regard to any consent to a change of control.
New Forgiveness Application for PPP Loans of $50,000 or Less and Interim Final Rule
On Oct. 8, the SBA in consultation with the Treasury released a third form of the PPP loan forgiveness application that joins previously released SBA Forms 3508 and 3508EZ. This new form is only for those PPP borrowers that received a loan in the principal amount of $50,000 or less, except for those PPP borrowers that, together with their affiliates, received PPP loans totaling in the aggregate $2 million or greater[8].
It is worth noting that this change makes it easier for approximately 68% of PPP borrowers to file for and obtain loan forgiveness.[9]
On the same date, the SBA and the Treasury issued new Interim Final Rule RIN 3254-AH59,[10] which provides additional guidance in conjunction with Form 3508S. The rule provides, among other things, that PPP borrowers that are able to utilize Form 3508S, or a lender's equivalent form, are:
exempt from any reductions in the borrower's loan forgiveness amount based on reductions in full-time equivalent (FTE) employees (section 1106(d)(2) of the CARES Act) or reductions in employee salary or wages (section 1106(d)(3) of the CARES Act) that would otherwise apply.[11]
The rule also confirms that those PPP borrowers submitting Form 3508S do not have to provide their calculations for the requested forgiveness amount and that lenders may rely upon the representations of the PPP borrowers contained in Form 3508S provided that the PPP borrower submits the applicable supporting documentation with the application.[12]
This new streamlined and simplified two-page forgiveness application is designed to make obtaining loan forgiveness even simpler and less costly for the smallest of small businesses, a purpose that is recognized in the rule. This is surely welcome news for many PPP borrowers.
However, it is important to note that this new form contains an expiration date of Oct. 31, and that any PPP borrower intending to use this form, should do so quickly in case the expiration date is not extended. It also begs the question, why is the expiration date so soon?
Perhaps this signals that another new forgiveness application with a higher amount is forthcoming? Again, we must wait and see.
Furthermore, we have not yet received guidance on how similarly situated PPP borrowers that already submitted their forgiveness applications will be impacted by this new forgiveness application and guidance. This is concerning since the Treasury announced that on Oct. 2, the SBA finally began remitting payments to PPP lenders for amounts forgiven pursuant to filed forgiveness applications and the resulting decisions of PPP lenders.
The SBA and the Treasury need to address the issue that this new application has created for those smallest borrowers that could have utilized Form 3508S but have already submitted their forgiveness application, and the potential impact it can have on obtaining loan forgiveness.
Christine H. Price is an associate at Moritt Hock & Hamroff LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.sba.gov/sites/default/files/2020-10/5000-20057-508.pdf (Accessed Oct. 14, 2020).
[2] https://www.sba.gov/document/sba-form-sba-standard-loan-note-form-147 (Accessed Oct. 14, 2020).
[3] See SBA Form 147 Section 4, L.
[4] See Procedural Notice, Section 2c.
[5] Id.
[6] Id.
[7] Pursuant to the CARES Act, an entity cannot receive both a PPP loan and the Employee Retention Credit.
[8] https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-3508S.pdf (Accessed Oct. 14, 2020).
[9] Paycheck Protection Program (PPP) Report, Approvals through 08/08/2020", U.S. Small Business Administration (Accessed Oct. 14, 2020). This figure is based upon the number of PPP loan applications and not the aggregate amount advanced pursuant to the program.
[10] RIN 3245-AH59, Business Loan Program Temporary Changes; Paycheck Protection Program — Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, Small Business Administration, Oct. 8, 2020.
[11] RIN 3245-AH59 at page 6.
[12] RIN 3245-AH59 at page 9.
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