M&A Transactions Involving PPP Borrowers: Practical Experience Under the SBA’s “Change of Ownership” Guidelines

The Paycheck Protection Program (“PPP”) created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020, as a response to the COVID-19 pandemic. The PPP provided small businesses financial assistance in the form of a loan that could be forgiven if the PPP borrower utilizes the loan proceeds in accordance with the CARES Act and guidance issued by the Small Business Administration (the “SBA”). The SBA recently issued long-awaited guidance to address situations where a PPP borrower undergoes a “change of ownership.” The new guidance represents a welcome simplification and clarification of the SBA rules and procedures for PPP borrowers seeking to undertake such transactions, and, in many cases, eliminates the requirement of SBA approval. After several weeks of experience under the new guidance, however, it has become clear that some questions remain unanswered, both in the M&A context and with respect to internal reorganizations of PPP borrowers.       


PPP loans are considered part of the SBA’s existing “7(a)” loan program and are therefore subject to the same rules and guidelines that apply toward 7(a) loans generally. The SBA’s existing 7(a) guidelines require that a 7(a) borrower obtain SBA approval to undergo a “change in ownership” within 12 months of the final disbursement of such loan. When PPP borrowers began contemplating “change of ownership” transactions, the SBA recognized the need to issue formal guidance to address when, and if, SBA and/or lender approval is needed for a PPP borrower to undertake a “change of ownership” transaction.  

New SBA guidance on changes of ownership

On October 2, 2020, the SBA issued Procedural Notice 5000-20057 (the “Procedural Notice”), which provided PPP borrowers with the guidance and procedures necessary to carry out “change of ownership” transactions.

Definition of “change of ownership”

 The Procedural Notice defines a “change of ownership” of a PPP borrower as any of the following events:

  • at least 20% of the common stock or other ownership interest (which, for brevity, we will refer to as “equity”) of the PPP borrower is sold or transferred, whether in one or more transactions, including to an affiliate or existing owner of the borrower;
  • the borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
  • the borrower is merged with, or into, another entity.

The “change of ownership” definition is quite broad in several respects:

All sales or transfers since the original loan disbursement will be aggregated for purposes of deciding whether the 20% or 50% thresholds have been met. 

  • (Special rules apply, however, in the case of a publicly-traded borrower.)
  • The term “transferred” is broad and presumably includes such non-sale transfers as exchanges and gifts.
  • At least with respect to sales or transfers of equity, the fact that the transferee is an affiliate or existing owner of the borrower is irrelevant. Transfers between existing owners, for example, are covered by the definition.
  • In the case of mergers, the definition applies to the merger of a borrower “with” another entity as well as “into” another entity. In other words, it applies even if the borrower is the surviving entity of the merger.

No requirements if PPP loan is fully satisfied

If the PPP loan has been fully satisfied, either through forgiveness, repayment, or a combination of the two, the requirements of the Procedural Notice do not apply.

Safe-harbor guidelines

The principal purpose of the Procedural Notice is to establish certain safe-harbor guidelines that permit a PPP borrower to engage in a “change of ownership” transaction without obtaining approval from the SBA for the transaction. 

This is important because, as discussed in the next section, SBA approval may take at least 60 days and potentially result in the imposition of onerous requirements or even disapproval.

 Under the Procedural Notice, SBA approval is not required where: 

  • less than 50% of the equity of the PPP borrower is being transferred; 
  • 50% or more of the equity of the PPP borrower is being transferred, and the PPP borrower takes the following actions: (a) it completes a forgiveness application and supporting documentation, reflecting its use of all the PPP loan proceeds, and submits it to the PPP lender; and (b) it establishes an interest-bearing escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan, providing for disbursement, after completion of the forgiveness process, first to repay any remaining PPP loan balance plus interest; or
  • 50% or more of the PPP borrower’s assets are being transferred, and the PPP borrower takes the two actions described in paragraph (2) above.  

SBA approval required if safe-harbor guidelines are not satisfied

If a “change of ownership” transaction does not satisfy one of the safe-harbor guidelines described above, prior SBA approval of the transaction is required, and the PPP lender may not unilaterally approve the transaction. To obtain SBA approval, the PPP lender must submit a request to the appropriate SBA Loan Servicing Center along with additional information and documentation as specified in the Procedural Notice. Once properly submitted, the SBA states that it will deliver its determination within 60 days. As a practical matter, however, it is possible the actual period may be longer. In addition, even if approval is given, the SBA reserves the right in the Procedural Notice to impose “additional risk mitigation measures” as a condition of its approval, in addition to ones specified in the Procedural Notice.  

General requirements 

Regardless of the type of “change of ownership” transaction, the PPP borrower will remain responsible for (i) the performance of all obligations under its PPP loan, (ii) the certifications made in connection with the PPP loan application (including the certification of economic necessity), and (iii) compliance with all other applicable PPP requirements.

Loan documents

PPP borrowers that are contemplating a “change of ownership” transaction should also consult their PPP loan documents for any additional requirements that must be satisfied.

Issues in implementation of the Procedural Notice

Now that the Procedural Notice has been in effect for well over a month, other M&A attorneys and we are beginning to see different approaches being taken by PPP lenders and their counsel in how the Procedural Notice should be implemented in practice. A few issues that we have personally encountered are highlighted below:

  • Whether interest must also be escrowed. As discussed above, an interest-bearing escrow account controlled by the PPP lender must be established with funds equal to the outstanding balance of the PPP loan. However, the Procedural Notice does not contain an express requirement that interest on the PPP loan amount be escrowed as well. (As a reminder, interest accrues on the PPP loan from the loan disbursement but is not payable for any amounts that are forgiven). We are aware of at least one lender that has required PPP borrowers to escrow the accrued interest on the PPP loan amount in addition to the PPP loan amount itself.
  • Whether PPP lender approval is required. The Procedural Notice does not expressly require that the PPP lender grant its approval in the event SBA approval is not required in connection with a “change of ownership” transaction. Working through these types of transactions, we have seen at least one lender resist granting a formal approval to a “change of ownership’ transaction, agreeing instead only to waive specific events of default under the PPP loan documents. We believe the better practice is for the PPP lender to expressly grant approval.
  • Internal reorganizations. As discussed above, the Procedural Notice applies to equity transfers to affiliates and existing owners of the borrower, and to any merger engaged in by a PPP borrower (even if it is the surviving entity). Many types of internal company reorganizations or restructurings may involve such transfers or mergers and therefore literally constitute a “change of ownership” under the Procedural Notice, even though no third party is involved. Therefore, contemplated internal reorganizations may need to be postponed by a company that is also a PPP borrower.  

If a company has a PPP loan and is considering a “change of ownership” transaction, the Cokinos | Young STRUCTURE, the transactional team of Cokinos | Young (principal office in Houston, Texas), under the leadership of Tiffany Melchers, will be happy to discuss the specific transaction in connection with the issues raised in this white paper. With first-hand experience representing PPP borrowers through various “change of ownership” transactions, we are well suited to continue representing PPP borrowers in transactions of this type.

Alec C. Herzog
Tiffany M. Melchers

This website uses cookies to improve your experience. By using our site, you provide your consent.

Read More