Export compliance is a subject frequently – and legitimately – discussed as part of mergers, acquisitions and divestitures (M-A-D). How about the import and customs compliance part? Is this something to be seriously considered in M-A-D activity?
The answer is yes, indeed! There are both compliance and operational issues that need to be considered – and managed – when you are going M-A-D. (Sorry!)
Let’s start by defining our terms. A merger is where one company combines with another company to form a new company, perhaps a joint venture. An acquisition is where a company purchases another business. For example, Company A buys Company B and makes it a business unit or subsidiary. A divestiture is where a company sells a business unit or subsidiary to another business.
No matter which of these is occurring, or which side you are on, you will have concerns to handle and work to be done.
Let’s concentrate on an acquisition. When acquiring another company, there are a few things that need to be addressed as soon as possible. Ideally, these are handled in the pre-acquisition stage. However, since import compliance people are not always involved at that point, these matters may have to wait until the acquisition is announced.
- Does the company to be acquired have any imports at all? If not, there may not be anything to be concerned about. Be careful, though, about accepting a statement of no imports at face value. Many companies treat imports from Canada or Mexico, those from related subsidiaries, or shipments through express couriers as non-imports, so you may have to dig deeper. In other instances, the people from the acquired company that you are dealing with are not involved with import activities, so they may not know the details. Getting an ITRAC report for the acquired company’s past imports would be ideal, but may have to wait until the acquisition is completed.
- If the company being acquired has imports, what is the nature and scope of those shipments? If reliable information indicates that the company has only a few low value imports, your concerns may be minimal. On the other hand, if the company has a large volume of imports, or has certain high-risk imports, such as merchandise subject to dumping duties or claimed under free trade agreements, your life is about to become more complicated.
- An obvious subject to inquire about is the previous compliance history of the company being acquired. This is best done at the pre-acquisition stage, but as mentioned above, import compliance people may not be involved at that stage. Successor liability is not as clear on the import and customs side as it is on exports – especially where the company being acquired will cease to exist as a legal entity as a result of the acquisition. Regardless of that, there may be systemic or continuing problems that can carry forward to the acquiring company. Here are some things you will need to find out about the company being acquired. (the sooner the better):
- Has the company experienced any major customs penalties in the last five years?
- Has the company received any significant liquidated damages claims? This could be the symptom of lack of control of TIBs or other internal control issues.
- Has the company received a large number of Customs and Border Protection (CBP) Form 28s or 29s? This could indicate there are some customs issues simmering under the surface.
- Has the company undergone a Customs Focused Assessment? If not, have they received indications that one may be on its way? If one is underway or scheduled, you may wind up inheriting it.
- How are their import records? Do they have all the required customs records? If so, where are they located and are the records maintained for at least five years?
- Does the company being acquired participate in any customs programs, such as the Customs-Trade Partnership Against Terrorism (C-TPAT) or importer self assessment? You may need to integrate them into your own programs.
- Has the acquired company been assigned an account manager by CBP? At a minimum, you will need to advise that individual of the acquisition.
There are more positive things that come from an acquisition. If the company being acquired has import compliance personnel, there may be an opportunity to expand your staff with some good people. The acquired company may have some best practices you will want to adopt. They may also have some compliance software or systems that can be utilized. If the acquired company has a drawback program, you may want to adopt it or combine it with your own. That may give you some additional leverage to negotiate a better fee with your drawback broker. What customs broker does the acquired company use? That is an essential piece of information to learn in all instances. You may actually like their broker better than the one you are using, or they may have a broker in a port where you lack coverage. The broker contracts and powers of attorney may need to be changed – more on that to follow.
In any acquisition situation, you will need to learn what form the acquired company will take. Will they become a subsidiary and retain their existing Internal Revenue Service number and name? In some cases their name will change but the IRS number remains the same. The acquired company may be integrated into your company and cease to exist as a separate legal entity. Yet another thing that could happen is that your company and the acquired company are combined to form a completely new company. You will need to find out which of these will be happening because that will dictate what operational changes you will need to do next.
We didn’t go into what needs to be done if you are part of the company being acquired. That's a separate subject, but to give you an idea, take the above and reverse the actions. Being part of the acquired company is no easy task either – but it may lead to new opportunities for you.
As you can see, M-A-D activity can be a challenge. We will try to put a positive spin on it to say that it can lead to new opportunities for personal and staff development. In our next article, we will discuss some of the many operational things that need to be done as a result an acquisition.