On October 2, 2020, the Small Business Administration (the “SBA”) issued a long-awaited procedural notice (the “SBA Notice”) regarding change of ownership for borrowers that participated in the Paycheck Protection Program (“PPP”) loan process. According to the SBA, the purpose of the notice is to provide information concerning the required procedures for changes of ownership of an entity that has received PPP funds (a “PPP borrower”). Thus, for those clients that are planning on selling or buying a business, through assets or equity, and have participated in the PPP, this client alert is for you.
Background Information on PPP
On March 13, 2020, President Trump declared the ongoing Coronavirus Disease 2019 (“COVID-19”) pandemic of sufficient severity and magnitude to warrant an emergency declaration for all states, territories, and the District of Columbia. With the COVID-19 emergency, many small businesses nationwide were experiencing economic hardship as a direct result of the federal, state, tribal, and local public health measures that were being taken to minimize the public’s exposure to the virus. These measures, some of which were government-mandated, have been implemented nationwide and include the closures of restaurants, bars, and gyms. In addition, based on the advice of public health officials, other measures, such as keeping a safe distance from others or even stay-at-home orders, were implemented, resulting in a dramatic decrease in economic activity as the public avoided malls, retail stores, and other businesses.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (Pub. L. 116-136) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The SBA received funding and authority through the CARES Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency.
Section 1102 of the CARES Act temporarily permitted the SBA to guarantee 100 percent of 7(a) loans under a new program titled the “Paycheck Protection Program.” Section 1106 of the CARES Act provided for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.
On April 24, 2020, the President signed the Paycheck Protection Program and Health Care Enhancement Act (Pub. L. 116-139), which provided additional funding and authority for the PPP. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) (Pub. L. 116-142), which changed provisions of the PPP relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. On July 4, 2020, the President signed into law S. 4116, which reauthorized lending under the PPP through August 8, 2020 (Pub. L. 116-147).
Since July 4, 2020, all interested parties have been seeking guidance from the SBA. This sought out guidance includes questions related to the buy and sell of businesses that availed themselves and participated in the PPP loan process. There are certainly still additional questions about how to comply and how the change of ownership impacts the requirements, when it comes to the buying and selling of businesses. But, with the October 2, 2020 SBA Notice, at least we are beginning to receive some direction on the change of ownership.
Change of Ownership Requirements
For 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.
Regardless of any change of ownership, the PPP borrower remains responsible for: (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation, and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender”) in the SBA Notice or to the SBA upon request.
Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. The SBA Notice lays out different procedures depending on the circumstances of the change of ownership. We have included a link to the SBA Notice for careful review and consideration here.
In sum, the PPP process continues to be a fluid situation, ever-changing, and guidance continues to come out. We are working diligently to stay on top of these changes, and will follow-up on any additional guidance. We would encourage you to visit the SBA website for prior guidance on the PPP, by clicking here.
Kari Heinze is an associate in Walter | Haverfield’s Columbus office. She focuses her practice on business services within the healthcare and dental practice arena. Kari can be reached at firstname.lastname@example.org or at 614-246-2266.
Vince Nardone is Partner-in-Charge of Walter | Haverfield’s Columbus office. He serves as a business advisor to owners and executives of closely-held businesses, counseling them on business planning, tax planning and controversy, cash-flow analysis, succession planning, and legal issues that may arise in business operations. Vince can be reached at 614-246-2264 or email@example.com.