The provisions of the new Notice are summarized below:
1. Will Not Apply After a PPP Note is “Fully Satisfied”
A PPP note is considered to be “fully satisfied” only once one of the following has occurred:
- The borrower has repaid the PPP note in full;
- The SBA has remitted funds to the bank lender in full satisfaction of the PPP note; or
- The borrower has repaid any remaining balance on the note and has completed the loan forgiveness process in accordance with the PPP rules.
2. Need Not Count Under 20% Ownership Transfer or Under 50% Value of Asset Transfer
The Notice considers a “change of ownership” to have occurred if any of the following has taken place:
- 20% or more of the ownership in the borrower is sold or transferred;
- the PPP loan borrower sells or transfers 50% or more of its assets based on their fair market value; or
- a PPP loan borrower merges with or into another entity.
3. A Sale or Transfer of up to 50% by Percentage of Ownership Requires Lender Acknowledgement without SBA Approval
A sale or transfer of up to 50% in common stock or other ownership interests does not require SBA approval. When calculating this 50% threshold, all sales or transfers that have occurred since the date of the borrower’s approval for a PPP loan must be aggregated.
A lender is required to report such a sale or transfer to the SBA as described in section 7 below.
4. Over 50% Transfer of Assets or Ownership
Borrowers that transfer more than 50% of the fair market value of the borrower’s assets or have more than a 50% change in ownership are therefore subject to the rules because the above exceptions will not apply.
5. Need for SBA Approval Eliminated by Escrow Deposit and Forgiveness Application
Even when a borrower would otherwise need SBA approval by reason of making a transfer of more than 50% in the value of assets or having a transfer of more than 50% of ownership, such approval will not need to be received as long as the borrower completes the following:
- The borrower must complete a loan forgiveness application that reflects its use of the loan proceeds; and
- The borrower must establish an interest-bearing escrow account with funds equal to the outstanding PPP loan balance.
6. What to do if SBA Approval is required
If the borrower does not satisfy the escrow and forgiveness application requirements above and SBA approval is therefore required (for a transfer of more than 50% of assets or ownership) then the Notice provides that the lender must submit a written request to the applicable SBA Loan Servicing Center which must include the following:
- The reason(s) why the borrower cannot satisfy the PPP loan obligations or the escrow requirements described above;
- The details of the transaction;
- A copy of the executed PPP Note;
- Any letter of intent and the purchase/sale agreement that sets forth the borrower’s responsibilities as well as the responsibilities of the buyer and seller (if the seller is different from the borrower);
- Disclosure of any existing PPP loan of the buyer (and the applicable SBA loan number); and
- A list of all owners of the purchasing entity that have a 20% or greater ownership interest.
7. PPP Borrower Remains Liable
For all sales or transfers of common stock or other ownership interest and for all mergers, regardless of whether SBA approval is required, the Notice confirms that the PPP loan borrower remains subject to all obligations under the loan, even after the transfer occurs.
Following either a merger or a sale or transfer of ownership of the borrower entity, the PPP Lender must notify the applicable SBA Loan Servicing Center within 5 business days after the transaction has been completed. This notification must include the following:
- The identity of the new owner(s) of the ownership interest (common stock or otherwise);
- The ownership percentages for the new owner(s);
- The Tax Identification Number for any owner(s) holding more than 20% interest in the entity; and
- The location of, and amount of funds in, the escrow account, if one is required.
8. PPP Loans Pledged in PPP Liquidity Facility
The PPP Liquidity Facility (“PPPLF”) extends credit to qualifying financial institutions that originate PPP loans by “taking the loans as collateral at face value.”
PPP lenders who have pledged notes to secure a loan under the Federal Reserve’s PPPLF Program must further comply with notification and other requirements of such program.
9. What is a Transfer of Assets from an Entity?
In many situations borrowers have had to close down, and have not been able to attract new capital because of obligations such as leases and bank loans that the entity cannot repay.
Many of these entities are now in bankruptcy, or will file bankruptcy in order to properly administer whatever assets remain, and to possibly sell any goodwill or going concern value and operational assets to a related or unrelated entity with the blessing of the bankruptcy court in what is known as a “Section 363 Sale.”
Bankruptcy Code Section 363 permits such sales with the approval of the bankruptcy court in order to maximize whatever amounts can be received for the assets in order to pay for the administrative expenses of the bankruptcy process, attorney and other expert fees, and creditors.
Time will tell how these rules may impact borrowers in bankruptcy, and whether the SBA will promulgate rules to facilitate helping failed borrowers get a fresh start.