SBA, Affiliation Rules for Paycheck Protection Program

Summary

To count a Paycheck Protection Program applicant's employees, the applicant is considered together with its affiliates, according to this SBA summary of the affiliation rules dated April 3, 2020. Four control tests apply. Under the ownership test, a concern is an affiliate of anyone who owns or has the power to control more than 50 percent of its voting equity. Stock options, convertible securities and agreements to merge are treated as though exercised; affiliation also arises from shared management and from an identity of interest between close relatives. The rules are waived for businesses with not more than 500 employees assigned a North American Industry Classification System code beginning with 72, for franchises with an SBA franchise identifier code, and for businesses financed by a licensed small business investment company.

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Full text

April 3, 2020


AFFILIATION RULES APPLICABLE TO U.S. SMALL BUSINESS ADMINISTRATION
                 PAYCHECK PROTECTION PROGRAM

Four tests for affiliation based on control apply to participants in the Paycheck Protection
Program.1 For purposes of the determining the number of employees of an applicant to the
Paycheck Protection Program, the applicant is considered together with its affiliates.
Following is a summary of the applicable affiliation tests.

Concerns and entities are affiliates of each other when one controls or has the power to control
the other, or a third party or parties controls or has the power to control both. It does not matter
whether control is exercised, so long as the power to control exists. Affiliation under any of the
circumstances described below is sufficient to establish affiliation for applicants for the
Paycheck Protection Program.

(1) Affiliation based on ownership. For determining affiliation based on equity ownership, a
concern is an affiliate of an individual, concern, or entity that owns or has the power to control
more than 50 percent of the concern's voting equity. If no individual, concern, or entity is found
to control, SBA will deem the Board of Directors or President or Chief Executive Officer (CEO)
(or other officers, managing members, or partners who control the management of the concern)
to be in control of the concern. SBA will deem a minority shareholder to be in control, if that
individual or entity has the ability, under the concern's charter, by-laws, or shareholder's
agreement, to prevent a quorum or otherwise block action by the board of directors or
shareholders.

(2) Affiliation arising under stock options, convertible securities, and agreements to merge.

      (a) In determining size, SBA considers stock options, convertible securities, and agreements
          to merge (including agreements in principle) to have a present effect on the power to
          control a concern. SBA treats such options, convertible securities, and agreements as
          though the rights granted have been exercised.

      (b) Agreements to open or continue negotiations towards the possibility of a merger or a sale
          of stock at some later date are not considered “agreements in principle” and are thus not
          given present effect.

      (c) Options, convertible securities, and agreements that are subject to conditions precedent
          which are incapable of fulfillment, speculative, conjectural, or unenforceable under state
          or Federal law, or where the probability of the transaction (or exercise of the rights)
          occurring is shown to be extremely remote, are not given present effect.

      (d) An individual, concern or other entity that controls one or more other concerns cannot
          use options, convertible securities, or agreements to appear to terminate such control
          before actually doing so. SBA will not give present effect to individuals’, concerns’, or
          other entities’ ability to divest all or part of their ownership interest in order to avoid a
          finding of affiliation.
1
    13 CFR 121.301(f).

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April 3, 2020



(3) Affiliation based on management. Affiliation arises where the CEO or President of the
applicant concern (or other officers, managing members, or partners who control the
management of the concern) also controls the management of one or more other concerns.
Affiliation also arises where a single individual, concern, or entity that controls the Board of
Directors or management of one concern also controls the Board of Directors or management of
one of more other concerns. Affiliation also arises where a single individual, concern or entity
controls the management of the applicant concern through a management agreement.

(4) Affiliation based on identity of interest. Affiliation arises when there is an identity of
interest between close relatives, as defined in 13 CFR 120.10, with identical or substantially,
identical business or economic interests (such as where the close relatives operate concerns in the
same or similar industry in the same geographic area). Where SBA determines that interests
should be aggregated, an individual or firm may rebut that determination with evidence showing
that the interests deemed to be one are in fact separate.

Religious Exemption. The relationship of a faith-based organization to another organization is
not considered an affiliation with the other organization if the relationship is based on a religious
teaching or belief or otherwise constitutes a part of the exercise of religion.

Waiver. The affiliation rules described above are waived for (1) any business concern with not
more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North
American Industry Classification System code beginning with 72; (2) any business concern
operating as a franchise that is assigned a franchise identifier code by the SBA; and (3) any
business concern that receives financial assistance from a company licensed under section 301 of
the Small Business Investment Act of 1958 (15 U.S.C. 681).




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