PPP Loans & Change in Ownership Transactions

Underneath new steerage from the Small Enterprise Administration (SBA) issued by a Procedural Discover (Discover) on Oct. 2, 2020, sure PPP debtors could also be required to hunt prior consent from the SBA for a change in possession of fairness or sale of belongings. Notably, the Discover addresses a change in possession curiosity of the PPP borrower itself, however doesn’t particularly handle adjustments in possession on the degree of the borrower’s associates. Absent extra steerage, presumably no SBA or lender approval can be required for a change in possession at a borrower’s affiliate if the transaction didn’t have a bearing on the PPP borrower, its direct belongings, or fairness pursuits. The Discover establishes completely different classes of transactions, a few of which can require prior approval of the SBA, and is efficient for all transactions that shut on or after Oct. 2, 2020.

Previous to the closing of any change of possession transaction, a PPP borrower should notify its PPP lender in writing of the contemplated transaction and supply the PPP lender a duplicate of the proposed agreements or different paperwork that will impact the proposed transaction. The unique mortgage documentation itself could include covenants triggering lender consent to the transaction as properly and must be reviewed accordingly, though compliance with the Discover necessities will nonetheless be required. The Discover states that, the place SBA approval is required, the SBA will assessment and supply its determination inside 60 days of receipt of a accomplished request. This up-to-60-day ready interval may end in a big delay of the closing of the transaction. Accordingly, a willpower of whether or not prior approval is required must be made early within the transaction course of.

Underneath the Discover, a “change of possession” might be thought-about to have occurred with respect to a PPP mortgage when:

no less than 20% — a comparatively low threshold — of the widespread inventory or different possession curiosity of a PPP borrower (together with a publicly traded entity) is bought or in any other case transferred, whether or not in a number of transactions, together with to an affiliate or an current proprietor of the entity;

a PPP borrower sells or in any other case transfers no less than 50% of its belongings (measured by truthful market worth), whether or not in a number of transactions; or

a PPP borrower is merged with or into one other entity.

With respect to asset gross sales, all gross sales and different transfers occurring for the reason that date of approval of the PPP mortgage have to be aggregated to find out whether or not the 50% threshold has been met. For publicly traded debtors, solely gross sales or different transfers that end in one individual or entity holding or proudly owning no less than 20% of the widespread inventory or different possession curiosity of the borrower have to be aggregated. Transactions that don’t fulfill one of many classes set out above mustn’t, absent different obligations of the borrower, represent a change in possession requiring pre-closing consent of the SBA.

No matter any change of possession, the unique PPP borrower stays chargeable for (1) efficiency of all obligations beneath the PPP mortgage, (2) the accuracy of the certifications made in reference to the PPP mortgage software, together with the certification of financial necessity, and (3) compliance with all different relevant PPP necessities. Moreover, the PPP borrower should get hold of, put together, and retain all required PPP varieties and supporting documentation and supply these varieties and supporting documentation to the PPP lender or lender servicing the PPP mortgage (known as the “PPP Lender” on this Discover) or to the SBA upon request. If the client or the vendor (or each) has an excellent PPP mortgage, and the change of possession transaction is financed in entire or partly with an SBA Part 7(a) mortgage, all SBA Mortgage Program Necessities, as outlined in 13 CFR 120.10, have to be met. Additional, if an escrow account is required beneath the Discover, the Part 7(a) mortgage can’t be used to finance the escrow account.

Change in possession transactions that won’t require SBA consent

As soon as a PPP borrower determines its proposed transaction constitutes a change in possession beneath the Discover, it should then decide whether or not that change in possession construction would require SBA consent. Underneath the phrases of the Discover, SBA consent just isn’t required within the following situations:

The mortgage is absolutely happy. There are not any restrictions on a change of possession if, previous to closing the sale or switch, the borrower has (a) repaid the mortgage in full; or (b) accomplished the mortgage forgiveness course of in accordance with PPP necessities. Completion of the mortgage forgiveness course of happens when both the SBA has remitted funds to the PPP Lender in full satisfaction of the mortgage, or the borrower has repaid any remaining stability on the mortgage.

The mortgage just isn’t absolutely happy. If the mortgage just isn’t absolutely happy previous to closing the sale or switch, however the next circumstances are met, then the PPP Lender could approve the change of possession with out prior approval from the SBA:

Change of possession is structured as a sale or different switch of widespread inventory or different possession curiosity or as a merger. A person or entity could promote or in any other case switch widespread inventory or different possession curiosity in a PPP borrower with out the prior approval of SBA provided that:

The sale or different switch is of 50% or much less of the widespread inventory or different possession curiosity of the borrower. Word that, in figuring out whether or not a sale or different switch exceeds this 50% threshold, all gross sales and different transfers occurring for the reason that date of approval of the PPP mortgage have to be aggregated; or

The borrower completes a forgiveness software reflecting its use of all the PPP mortgage proceeds and submits it, along with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account managed by the PPP Lender is established with funds equal to the excellent stability of the PPP mortgage. After the forgiveness course of (together with any attraction of SBA’s determination) is accomplished, the escrow funds have to be disbursed first to repay any remaining PPP mortgage stability plus curiosity.

Change of possession is structured as an asset sale. A borrower could promote 50% or extra of its belongings (measured by truthful market worth) with out the prior approval of SBA provided that the borrower completes a forgiveness software and follows the process outlined in clause (b) above. The PPP Lender should notify the suitable SBA Mortgage Servicing Middle of the situation of, and the quantity of funds in, the escrow account inside 5 enterprise days of completion of the transaction

If a change of possession of a PPP borrower doesn’t meet the circumstances set out above, prior SBA approval of the change of possession is required, and the PPP Lender could not unilaterally approve the change of possession. It’s the accountability of the PPP Lender, not the borrower, to submit a request for approval to the suitable SBA Mortgage Servicing Middle, which request should embrace:

the rationale that the PPP borrower can’t absolutely repay the mortgage or fulfill the relevant escrow necessities;

the small print of the proposed transaction;

a duplicate of the executed PPP mortgage;

any letter of intent and buy or sale settlement setting forth the tasks of the borrower, vendor (if completely different from the borrower), and purchaser;

disclosure of whether or not the client has an current PPP mortgage and, if that’s the case, the SBA mortgage quantity; and

an inventory of all homeowners of 20% or extra of the buying entity.

Further danger mitigation measures could also be imposed by the SBA as a situation of its approval of the transaction. Additional, SBA approval of a transaction involving the sale of 50% or extra of the belongings (measured by truthful market worth) of a PPP borrower might be conditioned on the client assuming all the PPP borrower’s obligations beneath the mortgage. The Discover states that in such circumstances, the acquisition or sale settlement should embrace applicable assumption language or a separate assumption settlement, which have to be submitted to the SBA. The SBA will make its willpower inside 60 days of submission by the PPP Lender of all required data and documentation.

No matter whether or not SBA approval is required, the PPP borrower (and, within the occasion of a merger, the successor to the PPP borrower) will stay topic to all obligations beneath the PPP mortgage. The SBA can have recourse in opposition to the client’s unauthorized use of the mortgage proceeds. If any of the consumers or successors have a separate PPP mortgage, then, following consummation of the transaction PPP funds and bills have to be segregated and delineated for every borrower, with applicable documentation accessible to reveal compliance with PPP necessities with respect to all PPP loans.

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Whereas this newest steerage from the SBA clarifies when a change within the borrower’s possession or belongings requires prior approval, the extra burden on small companies to adjust to each PPP Lender and SBA approval or consent necessities may be onerous and trigger vital delays within the potential of a borrower to consummate a transaction. If circumstances permit and the borrower has the flexibility to fulfill the mortgage in full or in any other case adjust to the escrow necessities, in every case previous to closing, then the SBA’s documentation and approval course of as set out within the Discover may be prevented. This will, nevertheless, power sure debtors to hunt bridge or purchaser financing, if accessible, to repay the mortgage upfront with the intention to consummate the transaction on a well timed foundation with out extra regulatory scrutiny or delay.

The foregoing evaluation and abstract displays steerage issued by the SBA by Oct. 9, 2020. Further steerage could also be issued that materially alters the data set out on this GT Alert.