On April 3, 2020, the Small Business Administration (SBA) and the US Treasury issued guidance on Affiliation rules applicable to the Paycheck Protection Program (PPP).
The guidance outlines four major tests that can establish affiliation for the PPP:
Test 1 – Affiliation based upon ownership
- For equity ownership – entity owning or has the power to control more than 50 percent of the voting equity.
- If no entity or individual is found to control based upon ownership (none over 50%), SBA will deem the Board, President of CEO, managing member, partner who controls the management of the entity to be in control.
- But, a minority shareholder will be deemed to control if, under the governance documents, it has the ability to prevent a quorum or otherwise block action by the board or shareholders.
Test 2 – Affiliation rising under stock options, convertible securities and agreements to merge
- When determining size and power to control the SBA requires options, convertible securities and agreements to merge (including those in principle) to be treated as if those rights have been exercised.
- Agreements that provide a possibility of a merger or sale at a later date should NOT be considered.
- Options, convertible securities and agreements to merge incapable of fulfillment, unenforceable or probability deemed extremely remote are NOT considered.
- SBA will NOT take into considerations “agreements” that appear to terminate control before actually doing so or recognize the “ability” to divest all or part of their ownership interest to avoid affiliation.
Test 3 – Affiliation based upon management
- If CEO/President/Partner/Managing Member of a company also controls the management of another company.
- If individual or company controls the Board or management of their company and Board or management of another Company
- If individual or company controls management of another company through a management agreement.
Test 4 – Affiliation based on identity of interest
- Interest between close relatives (defined in 13 CFR 120.10) with identical or substantially similar business or economic interest.
The affiliation rules above are WAIVED for a business under 500 employees with a 1) NAICS code beginning with 72, 2) recognized as a franchise by SBA and 3) any business receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act (SBIA).