13 CFR 107.1820 – Conditions affecting issuers of Preferred Securities and/or Participating Securities
(a) Applicability of this section. This section applies if you have Preferred Securities issued after April 25, 1994, or if you issue Participating Securities or have Earmarked Assets in your portfolio. Your Articles must include the provisions of this § 107.1820 as a condition to SBA’s purchase of Preferred Securities or guarantee of Participating Securities and for as long as you own Earmarked Assets. Preferred Securities issued before April 25, 1994 continue to be governed by the remedies in effect at the time of their issuance.
Terms Used In 13 CFR 107.1820
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Bankruptcy: Refers to statutes and judicial proceedings involving persons or businesses that cannot pay their debts and seek the assistance of the court in getting a fresh start. Under the protection of the bankruptcy court, debtors may discharge their debts, perhaps by paying a portion of each debt. Bankruptcy judges preside over these proceedings.
- Fiscal year: The fiscal year is the accounting period for the government. For the federal government, this begins on October 1 and ends on September 30. The fiscal year is designated by the calendar year in which it ends; for example, fiscal year 2006 begins on October 1, 2005 and ends on September 30, 2006.
- Guarantor: A party who agrees to be responsible for the payment of another party's debts should that party default. Source: OCC
- Obligation: An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period.
- Partnership: A voluntary contract between two or more persons to pool some or all of their assets into a business, with the agreement that there will be a proportional sharing of profits and losses.
- Trustee: A person or institution holding and administering property in trust.
- you: as used in this part 107 means a Licensee or license applicant, as appropriate, unless otherwise noted. See 13 CFR 107.40
(b) Removal Conditions. Upon the occurrence (as determined by SBA) of any of the following conditions (“Removal Conditions”), SBA may avail itself of one or more of the remedies in paragraph (d) of this section:
(1) Insolvency or extreme Capital Impairment. You become equitably or legally insolvent, or have a Capital Impairment Percentage of 100 percent or more (“extreme Capital Impairment”) and have not cured such Capital Impairment within the time limits set by SBA in writing. In this regard:
(i) You are not considered to have a condition of extreme Capital Impairment during the first eight years following your first issuance of Participating Securities.
(ii) This paragraph (b)(1) does not give you an additional opportunity to cure if you have already had an opportunity to cure your Capital Impairment under paragraph (e)(3) of this section.
(2) Voluntary assignment. You make a voluntary assignment for the benefit of creditors.
(3) Bankruptcy. You begin any bankruptcy or reorganization proceeding, receivership, dissolution or other similar creditors’ rights proceeding, or such action is initiated against you and is not dismissed within 60 days.
(4) Transfer of Control. You violate § 107.475 and/or willfully violate § 107.410, and such violation results in a transfer of Control.
(5) Fraud. You commit a fraudulent act which causes serious detriment to SBA’s position as a guarantor or investor.
(6) Fraudulent transfers. You make any transfer or incur any obligation that is fraudulent under the terms of 11 U.S.C. § 548.
(c) Contingent Removal Conditions. Upon the occurrence (as determined by SBA) of any of the following conditions (“Contingent Removal Conditions”), SBA may avail itself of one or more of the remedies in paragraph (d) of this section, but only if you fail to remove the person(s) SBA identifies as responsible for such occurrence and/or cure such occurrence to SBA’s satisfaction within a time period determined by SBA (but not less than 15 days):
(1) Willful conflicts of interest. You willfully violate § 107.730.
(2) Willful or repeated noncompliance. You willfully or repeatedly violate one or more of the substantive provisions of the Act, specifically including but not limited to the provisions summarized in section 310(c) of the Act, or any substantive regulation promulgated under the Act.
(3) Failure to comply with restrictions under paragraph (f) of this section. You fail to comply with the restrictions imposed by SBA under paragraph (f) of this section.
(d) SBA remedies for Removal Conditions and Contingent Removal Conditions. Upon the occurrence (as determined by SBA) of any Removal Condition, or any Contingent Removal Condition accompanied by your failure to act as set forth in paragraph (c) of this section, SBA has the following rights, and you consent to SBA’s exercise of any or all of such rights:
(1) With respect to a Corporate Licensee, upon written notice, to require you to replace, with individuals approved by SBA, one or more of your officers and/or such number of directors as is sufficient to constitute a majority of your board of directors; or
(2) With respect to a Partnership Licensee, upon written notice, to require you to remove the person(s) responsible for such occurrence and/or to remove your general partner, who shall then be replaced in accordance with your Articles by a new general partner approved by SBA; and/or
(3) With respect to either a Corporate or Partnership Licensee, to the appointment of SBA or its designee as your receiver under section 311(c) of the Act for the purpose of continuing your operations. The appointment of a receiver to liquidate a Licensee is not within such consent, but is governed instead by the relevant provisions of the Act.
(e) Restricted Operations Conditions. Upon the occurrence (as determined by SBA) of any of the following conditions (“Restricted Operations Conditions”), SBA may avail itself of any of the remedies in paragraph (f) of this section.
(1) Removal Conditions or Contingent Removal Conditions. Any condition occurs which is listed in paragraphs (b) or (c) of this section.
(2) Failure to maintain Regulatory Capital. You fail to maintain the minimum Regulatory Capital required by this part.
(3) Capital or Liquidity Impairment. You have a condition of Capital Impairment as determined under § 107.1830 or, if applicable, a condition of Liquidity Impairment as determined under § 107.1505, and you fail to cure the impairment within time limits set by SBA in writing.
(4) Improper Distributions. You make any Distribution to your shareholders or partners other than those permitted by §§ 107.585 and 107.1560 through 107.1580.
(5) Excessive Management Expenses. Without the prior written consent of SBA, you incur Management Expenses in excess of those permitted under § 107.520.
(6) Failure to make payment. You fail to pay any amounts due under Preferred Securities or required by §§ 107.1500 through 107.1590, unless otherwise permitted by SBA.
(7) Noncompliance. Except as otherwise provided for in paragraphs (c)(1) and (c)(2) of this section, SBA determines that you have failed to comply with one or more of the substantive provisions of the Act, specifically including but not limited to the provisions summarized in section 310(c) of the Act, or any substantive regulation promulgated under the Act.
(8) Failure to maintain diversity. You fail to maintain diversity between management and ownership as required by § 107.150, if applicable to you.
(9) Failure to meet investment requirements. You fail to make the amount of Equity Capital Investments required for Participating Securities (§ 107.1500(b)(4)), if applicable to you; or you fail to maintain as of the end of each fiscal year the investment ratios or amounts required for Leverage in excess of 300 percent of Leverageable Capital (§ 107.1160(c)) or Preferred Securities in excess of 100 percent of Leverageable Capital (§ 107.1160(d)), if applicable to you. In determining whether you have met the maintenance requirements in § 107.1160(c) or (d), SBA will disregard any prepayment, sale, or disposition of Venture Capital Financings, any increase in Leverageable Capital, and any receipt of additional Leverage, within 120 days prior to the end of your fiscal year.
(10) Nonperformance. You violate or fail to perform one or more of the terms and conditions of any Participating Security or Preferred Security or of any agreement with or condition imposed by SBA in its administration of the Act and the regulations promulgated thereunder.
(11) Noncooperation under paragraph (g) of this section. You fail to take appropriate steps, satisfactory to SBA, to accomplish such action as SBA may have required under paragraph (g) of this section.
(f) SBA remedies for Restricted Operations Conditions. Upon the occurrence of any Restricted Operations Condition, and until such condition(s) are cured to SBA’s satisfaction within a time period determined by SBA (but not less than 15 days), upon written notice SBA shall have the following rights, and you consent to SBA’s exercise of any or all of such rights:
(1) To prohibit you from making any additional investments except for investments under legally binding commitments you entered into before such notice and, subject to SBA’s prior written approval, investments that are necessary to protect your investments;
(2) Until all Leverage is redeemed and amounts due are paid, to prohibit Distributions by you to any party other than SBA, its agent or Trustee;
(3) To require all your commitments from investors to be funded at the earliest time(s) permitted in accordance with your Articles; and
(4) To review and re-determine your approved Management Expenses.
(g) Repeated non-substantive violations. If you repeatedly fail to comply with one or more of the non-substantive provisions of the Act or any non-substantive regulation promulgated thereunder, SBA, after written notification to you and until such condition is cured to SBA’s satisfaction, will deny you additional Leverage and/or require you to take such actions as SBA may determine to be appropriate under the circumstances.