SBA Clarifies Ownership Change Obligations For PPP Loans

By Al Barbarino
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Law360 (October 5, 2020, 10:31 PM EDT) -- The U.S. Small Business Administration has issued new guidance detailing when small businesses receiving Paycheck Protection Program loans must obtain approval for changes of ownership, clarifying what law firms called a previously gray area.

SBA approval is not required if the PPP loan has been either fully repaid or forgiven, nor in some cases when the ownership change is structured as a sale, a transfer of common stock or other ownership interests, as a merger, or as an asset sale, according to Friday's guidance.

"Regardless of any change of ownership, the PPP borrower remains responsible for ... performance of all obligations under the PPP loan," according to the guidance, which adds that the borrower will be held to the certifications made in PPP loan applications.

"Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation" and providing it to the PPP lender, it states.

The PPP program is part of the Coronavirus Aid, Relief, and Economy Security, or CARES, Act signed into law in March. It set aside hundreds of billions of dollars in two-year forgivable loans up to $10 million to help businesses struggling with the impacts of COVID-19 pay for everything from payroll expenses to rent.

In the case of structured sales, transfers of common stock or other ownership interests, and mergers, the borrower does not need approval if the change constitutes a 50% or less ownership interest of the borrower and it completes a forgiveness application with the PPP lender, the guidance states.

In addition, approval isn't required if the ownership change is structured as an asset sale, even if the sale accounts for more than 50% of its assets, as long as a forgiveness application is submitted to the lender.

However, if these conditions aren't met, the borrower must seek approval from the SBA Loan Servicing Center by providing details including the reason why the PPP borrower cannot fully satisfy the loan, a list of all owners of 20% or more of the purchasing entity, and details regarding the ownership change.

"If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction," the guidance notes.

The guidance also addresses instances where the succeeding entity has a separate PPP loan, noting that compliance with the PPP requirements of each loan will need to be demonstrated.

"If the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the owner(s) for the unauthorized use," according to the guidance.

Law firms including Locke Lord LLP and Vedder Price PC welcomed the guidance in separate commentaries published Monday following ongoing criticism surrounding the program as being unnecessarily burdensome for small businesses.

"The new guidance ... more clearly defines changes of ownership and allows PPP lenders to unilaterally approve a change of ownership of a PPP borrower under certain prescribed conditions," a Locke Lord team wrote.

The guidance clears up "uncertainty and confusion" that had "created transactional delays and, in some cases, caused borrowers to repay their PPP loans rather than risk the possibility of violating law," the firm added. 

The Vedder Price commentary noted that the guidance "provides much needed guidance, particularly in light of months of delays in the PPP Loan forgiveness process."

On Sept. 29, a number of banking industry trade groups asked Congress to authorize more PPP lending and urged an easier forgiveness process.

"We strongly urge members of the Senate and House to continue these bipartisan efforts by quickly supporting an extension of PPP funding and a simpler forgiveness process that will make converting loans into grants easier and less technical for millions of small-business borrowers that have PPP loans," they wrote. 

On Thursday, the House passed a new $2.2 trillion economic relief package, which House Speaker Nancy Pelosi, D-Calif., suggested would provide more flexibility to the PPP program. 

--Additional reporting by Jon Hill and Stephen Cooper. Editing by Bruce Goldman.

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