34 CFR 600.31 – Change in ownership resulting in a change in control for private nonprofit, private for-profit and public institutions
(a)(1) Except as provided in paragraph (a)(2) of this section, a private nonprofit, private for-profit, or public institution that undergoes a change in ownership that results in a change in control ceases to qualify as an eligible institution upon the change in ownership and control. A change of ownership that results in a change in control includes any change by which a person who has or thereby acquires an ownership interest in the entity that owns the institution or the parent of that entity, acquires or loses the ability to control the institution.
(2) If a private nonprofit, private for-profit, or public institution has undergone a change in ownership that results in a change in control, the Secretary may, under the provisions of § 600.20(g) and (h), continue the institution’s participation in the title IV, HEA programs on a provisional basis, provided that the institution submits, under the provisions of § 600.20(g), a materially complete application—
(i) No later than 10 business days after the change occurs; or
(ii) For an institution owned by a publicly-traded corporation, no later than 10 business days after the institution knew, or should have known of the change based upon SEC filings, that the change occurred.
(3) In order to reestablish eligibility and to resume participation in the title IV, HEA programs, the institution must demonstrate to the Secretary that after the change in ownership and control—
(i) The institution satisfies all the applicable requirements contained in §§ 600.4, 600.5, and 600.6, except that if the institution is a proprietary institution of higher education or postsecondary vocational institution, it need not have been in existence for two years before seeking eligibility; and
(ii) The institution qualifies to be certified to participate under 34 CFR part 668, subpart B.
(b) Definitions. The following definitions apply to terms used in this section:
Closely-held corporation. Closely-held corporation (including the term “close corporation”) means—
(i) A corporation that qualifies under the law of the State of its incorporation or organization as a statutory close corporation; or
(ii) If the State of incorporation or organization has no statutory close corporation provision, a corporation the stock of which—
(A) Is held by no more than 30 persons; and
(B) Has not been and is not planned to be publicly offered.
Control. Control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
Ownership or ownership interest. (i) Ownership or ownership interest means a direct or indirect legal or beneficial interest in an institution or legal entity, which may include a voting interest or a right to share in profits.
(ii) For the purpose of determining whether a change in ownership has occurred, changes in the ownership of the following are not included:
(A) A mutual fund that is regularly and publicly traded.
(B) A U.S. institutional investor, as defined in 17 CFR 240.15a-6(b)(7).
(C) A profit-sharing plan of the institution or its corporate parent, provided that all full-time permanent employees of the institution or its corporate parent are included in the plan.
(D) An employee stock ownership plan (ESOP).
Parent. The legal entity that controls the institution or a legal entity directly or indirectly through one or more intermediate entities.
Person. Person includes a natural person or a legal entity, including a trust.
Wholly-owned subsidiary. A wholly-owned subsidiary is one substantially all of whose outstanding voting securities are owned by its parent together with the parent’s other wholly-owned subsidiaries.
(c) Standards for identifying changes of ownership and control—(1) Closely-held corporation. A change in ownership and control occurs when—
(i) A person acquires more than 50 percent of the total outstanding voting stock of the corporation;
(ii) A person who holds an ownership interest in the corporation acquires control of more than 50 percent of the outstanding voting stock of the corporation; or
(iii) A person who holds or controls 50 percent or more of the total outstanding stock of the corporation ceases to hold or control that proportion of the stock of the corporation.
(2) Publicly traded corporations required to be registered with the Securities and Exchange Commission (SEC). A change in ownership and control occurs when—
(i) A person acquires such ownership and control of the corporation so that the corporation is required to file a Form 8K with the SEC notifying that agency of the change in control; or
(ii) (A) A person who is a controlling shareholder of the corporation ceases to be a controlling shareholder. A controlling shareholder is a shareholder who holds or controls through agreement both 25 percent or more of the total outstanding voting stock of the corporation and more shares of voting stock than any other shareholder. A controlling shareholder for this purpose does not include a shareholder whose sole stock ownership is held as a U.S. institutional investor, as defined in 17 CFR 240.15a-6(b)(7), held in mutual funds, held through a profit-sharing plan, or held in an Employee Stock Ownership Plan (ESOP).
(B) When a change of ownership occurs as a result of paragraph (c)(2)(ii)(A) of this section, the institution may submit its most recent quarterly financial statement as filed with the SEC, along with copies of all other SEC filings made after the close of the fiscal year for which a compliance audit has been submitted to the Department of Education, instead of the “same day” balance sheet.
(C) If a publicly-traded institution is provisionally certified due to a change in ownership under paragraph (c)(2)(ii) of this section, and that institution experiences another change of ownership under paragraph (c)(2)(ii) of this section, an approval of the subsequent change in ownership does not extend the original expiration date for the provisional certification provided that any current controlling shareholder was listed on the change of ownership application for which the original provisional approval was granted.
(3) Other entities. (i) The term “other entities” means any entity that is not closely held nor required to be registered with the SEC, and includes limited liability companies, limited liability partnerships, limited partnerships, and similar types of legal entities.
(ii) The Secretary deems the following changes to constitute a change in ownership resulting in a change of control of such an entity:
(A) A person (or combination of persons) acquires at least 50 percent of the total outstanding voting interests in the entity, or otherwise acquires 50 percent control.
(B) A person (or combination of persons) who holds less than a 50 percent voting interest in an entity acquires at least 50 percent of the outstanding voting interests in the entity, or otherwise acquires 50 percent control.
(C) A person (or combination of persons) who holds at least 50 percent of the voting interests in the entity ceases to hold at least 50 percent voting interest in the entity, or otherwise ceases to hold 50 percent control.
(D) A partner in a general partnership acquires or ceases to own at least 50 percent of the voting interests in the general partnership, or otherwise acquires or ceases to hold 50 percent control.
(E) Any change of a general partner of a limited partnership (or similar entity) if that general partner also holds an equity interest.
(F) Any change in a managing member of a limited liability company (or similar entity) if that managing member also holds an equity interest.
(G) Notwithstanding its voting interests, a person becomes the sole member or shareholder of a limited liability company or other entity that has a 100 percent or equivalent direct or indirect interest in the institution.
(H) An entity that has a member or members ceases to have any members.
(I) An entity that has no members becomes an entity with a member or members.
(J) A person is replaced as the sole member or shareholder of a limited liability company or other entity that has a 100 percent or equivalent direct or indirect interest in the institution.
(K) The addition or removal of any entity that provides or will provide the audited financial statements to meet any of the requirements in § 600.20(g) or (h) or 34 CFR part 668, subpart L.
(L) Except as provided in paragraph (e) of this section, the transfer by an owner of 50 percent or more of the voting interests in the institution or an entity to an irrevocable trust.
(M) Except as provided in paragraph (e) of this section, upon the death of an owner who previously transferred 50 percent or more of the voting interests in an institution or an entity to a revocable trust.
(iii) The Secretary deems the following interests to satisfy the 50 percent thresholds described in paragraph (c)(3)(ii) of this section:
(A) A combination of persons, each of whom holds less than 50 percent ownership interest in an entity, holds a combined ownership interest of at least 50 percent as a result of proxy agreements, voting agreements, or other agreements (whether or not the agreement is set forth in a written document), or by operation of State law.
(B) A combination of persons, each of whom holds less than 50 percent ownership interest in an entity, holds a combined ownership interest of at least 50 percent as a result of common ownership, management, or control of that entity, either directly or indirectly.
(C) A combination of individuals who are family members as defined in § 600.21, each of whom holds less than 50 percent ownership interest in an entity, holds a combined ownership interest of at least 50 percent.
(iv) Notwithstanding paragraphs (c)(3)(ii) and (iii) of this section—
(A) If a person who alone or in combination with other persons holds less than a 50 percent ownership interest in an entity, the Secretary may determine that the person, either alone or in combination with other persons, has actual control over that entity and is subject to the requirements of this section; and
(B) Any person who alone or in combination with other persons has the right to appoint a majority of any class of board members of an entity or an institution is deemed to have control.
(4) Wholly owned subsidiary. An entity that is a wholly owned subsidiary changes ownership and control when its parent entity changes ownership and control as described in this section.
(5) Nonprofit institution. A nonprofit institution changes ownership and control when a change takes place that is described in paragraphs (c)(3) and (d) of this section.
(6) Public institution. The Secretary does not consider that a public institution undergoes a change in ownership that results in a change of control if there is a change in governance and the institution after the change remains a public institution, provided—
(i) The new governing authority is in the same State as included in the institution’s program participation agreement; and
(ii) The new governing authority has acknowledged the public institution’s continued responsibilities under its program participation agreement.
(d) Covered transactions. For the purposes of this section, a change in ownership of an institution that results in a change of control may include, but is not limited to—
(1) The sale of the institution;
(2) The transfer of the controlling interest of stock of the institution or its parent corporation;
(3) The merger of two or more eligible institutions;
(4) The division of one institution into two or more institutions;
(5) The transfer of the liabilities of an institution to its parent corporation;
(6) A transfer of assets that comprise a substantial portion of the educational business of the institution, except where the transfer consists exclusively in the granting of a security interest in those assets;
(7) A change whereby the institution’s ownership changes from an entity that is for-profit, nonprofit, or public to another one of those statuses. However, when an institution’s ownership changes from a for-profit entity to a nonprofit entity or becomes affiliated with a public system, the institution remains a proprietary institution until the Department approves the change of status for the institution; or
(8) The acquisition of an institution to become an additional location of another institution unless the acquired institution closed or ceased to provide educational instruction.
(e) Excluded transactions. A change in ownership and control timely reported under § 600.21 and otherwise subject to this section does not include a transfer of ownership and control of all or part of an owner’s equity or partnership interest in an institution, the institution’s parent corporation, or other legal entity that has signed the institution’s PPA—
(1) From an owner to a “family member” of that owner as defined in § 600.21(f);
(2) As a result of a transfer of an owner’s interest in the institution or an entity to an irrevocable trust, so long as the trustees only include the owner and/or a family member as defined in § 600.21(f). Upon the appointment of any non-family member as trustee for an irrevocable trust (or successor trust), the transaction is no longer excluded and is subject to the requirements of § 600.20(g) and (h);
(3) Upon the death of a former owner who previously transferred an interest in the institution or an entity to a revocable trust, so long as the trustees include only family members (as defined in § 600.21(f)) of that former owner. Upon the appointment of any non-family member as trustee for the trust (or a successor trust) following the death of the former owner, the transaction is no longer excluded and is subject to the requirements of § 600.20(g) and (h); or
(4) A transfer to an individual owner with a direct or indirect ownership interest in the institution who has been involved in the management of the institution for at least two years preceding the transfer and who has established and retained the ownership interest for at least two years prior to the transfer, either upon the death of another owner or by transfer from another individual owner who has been involved in the management of the institution for at least two years preceding the transfer and who has established and retained the ownership interest for at least two years prior to the transfer, upon the resignation of that owner from the management of the institution.