Since the Paycheck Protection Program commenced earlier this year, the Treasury Department, IRS and Small Business Administration have been reasonably diligent in posting public guidance on PPP loans. The first Interim Final Rule from the SBA was posted on the Treasury website on April 2 and the first SBA FAQs were posted on the Treasury website on April 3. Thereafter, Interim Final Rules were posted with some frequency (7 in April, 8 in May, 7 in June) before tapering off. Likewise, the FAQs were frequently updated in April and May (48 of 53 FAQs). Treasury and SBA are to be commended for the speed in providing guidance in a difficult time, sometimes posting after office hours or on weekends. This was the period during which the PPP loans were being applied for, and that loan forgiveness applications and instructions were posted (for those borrowers with an 8-week covered period) but also the period that Treasury created significant chaos by revisiting the certification of necessity.
Since that period, however, publicly available guidance has been sparse, and no substantive guidance on the SBA’s review of large PPP loans has been provided. The SBA, however, has not ceased making rules, but has been doing it more quietly. One example is the PPP loan necessity questionnaires, which were released in draft form without fanfare in late October, but were only placed on the SBA’s document website (not the more public Treasury website) on December 9, on which date a FAQ was added explaining the rationale for them. This although lenders had already been sending these questionnaires to borrowers. Additionally, the SBA through non-publicized Procedural Notices to lenders have issued rules that affect PPP loan borrowers, even though borrowers have no substantial notice of these changes.
One in particular affects companies doing mergers and acquisitions while their PPP loans are outstanding. The published guidance of Interim Final Rules only address the ability to obtain a PPP loan if there is a change of ownership after February 15, 2020 (SBA FAQ 38). Neither the Interim Final Rules nor FAQs address any issues regarding changes of ownership or asset sales after a PPP loan is made. A borrower normally would merely review the loan documents to see if lender consent is required for the proposed transaction, and if so, request lender consent. For SBA guaranteed loans such as PPP loans, however, SBA consent may be required.
The base documents for the SBA’s “7(a)” loan program (which includes PPP loans) generally gives lenders unilateral authority to make decisions about such loans, with certain limited exceptions that do not include changes of ownership of the borrower. In April 2019, the SBA modified this through a Procedural Notice that prohibited lenders from approving changes of borrower ownership for 12 months after disbursement of the loan without the SBA’s consent. In October 2020, through another Procedural Notice to lenders, the SBA modified this restriction with respect to PPP loans, which helps some borrowers and hurts other.
This notice defines a “change of ownership” to be a transfer of at least 20% of equity (not even a majority), a transfer of at least 50% of assets, or a merger. Transactions beneath these thresholds will not require SBA consent even if within 12 months of loan disbursement, but a lender may not consent to a transaction constituting a change of ownership (which now includes a sale of a material amount of assets even if not intended as a change of ownership of a business) without first going to the SBA for consent, who has 60 days to respond to the lender’s request.
It is worth noting that these notices apply to lenders, not borrowers, but a failure by a borrower to obtain a lender consent required by the loan documents usually will result in a default and potential demand for repayment. Lenders will not want to be penalized by the SBA, who provides guarantees of these loans, but this SBA consent requirement could substantially delay the closing of applicable transactions. The larger lesson is that in the latter half of 2020, the SBA is being substantially less public about the rules it is making that affect PPP loan borrowers.
Procedural Notice: https://www.sba.gov/sites/default/files/2020-10/5000-20057-508.pdf