Here is the scenario: You are the Import Manager for Smith Corporation, a fairly large company with significant import activity. Smith Corp. buys Jones Company, a small to medium size company with a lesser but still significant amount of imports. You were not involved in the acquisition team and had no knowledge about the acquisition until it happened (no surprise there). Does this concern you? Will you have things you have to do? The answers are yes and yes. Let’s go into it.
The first thing that will be significant is what will happen to Jones Company as a result of the acquisition. Most likely one of three things will occur:
- Jones Company will be absorbed into Smith Corp. and cease to exist as a separate corporation.
- Jones Company will become a subsidiary of Smith Corp. and will keep its name and operate as a separate corporation.
- Jones Company will be a subsidiary of Smith Corp. and remain a separate corporation but will be given a new name.
How you react to the acquisition will largely be dictated by which of these three things will occur.
Let’s start by talking about bonds and powers of attorney. We will assume that both Smith Corp. and Jones Company had their own continuous entry bonds. Smith Corp. has a power of attorney and contract with ABC Customs Brokers and Jones has a power of attorney with XYZ Customs Brokers.
If Jones Company is absorbed into Smith Corp. and ceases to exist, you will need to cancel the bond for Jones Company and receive a prorata refund of the premium. Don’t do this right away though as the bond may be needed for a while. How about the bond for Smith Corp? If the activities of the former Jones Company become a separate business unit with a unique 2-digit suffix to the Smith Corp. IRS number, you will need to file a bond rider to modify the Smith Corp. bond to add the business unit and suffix in Part III of the bond. If the imports and duty outlays of the former Jones Company are significant you should also review the bond coverage for Smith Corp. to ensure bond sufficiency. A new bond may be needed – increasing the limit of liability of a bond can’t be done by rider.
If Jones Company remains a separately incorporated subsidiary – either under its existing name or a new name – can it be added to the Smith Corp. bond, allowing the existing Jones Company bond to be canceled? Although in real life principals on Customs bonds have “got away” with adding separately incorporated subsidiaries in Part III of the CBP 301 bond form, Part 113.21 of the Customs Regulations provides that only unincorporated divisions can be added to that section of the bond. That means the answer is no. The only way that Jones Company (either under that name or a new name) could be legitimately added to the Smith Corp. bond is as a co-principal. That would require a new bond. Experience has shown that co-principals are often not a good idea because a significant change to either principal would necessitate the bond being canceled and replaced with a new bond.
Under the scenario of Jones Company continuing as a separate company under that name, maybe no new bond is needed. It may be wise, though, to review the Jones Company bond to ensure it is accurate and has an appropriate limit of liability. You may also want to add Jones Company and its bond to your ACE Portal account so you can track their bond sufficiency. How about powers of attorney? If Jones Company is absorbed into Smith Corp. and ceases to exist, its activities will be covered under the existing power of attorney Smith Corp. has with ABC Customs Brokers. The power of attorney with XYZ Customs Brokers will need to be revoked (after a transition period) and any contract Jones Company had with XYZ Customs Brokers will need to be terminated. However, what if the former Jones Company imported through ports where Smith Corp. has no activity and ABC Customs Brokers has no office or agent? In that case you may want to consider a new power of attorney granted by Smith Corp. to XYZ Customs Brokers so they can handle those imports. An alternative to this is if the existing power of attorney with ABC Customs Brokers authorizes them to appoint subagents, ABC Customs Brokers could appoint XYZ Customs Brokers as its subagent in that port. Our advice is to keep use of subagents to a minimum so the separate power of attorney is a better approach.
If Jones Company continues to exist as a separate company – either under that name or a new name – it complicates things further. Jones Company can retain its power of attorney with XYZ Customs Brokers and nothing changes. If Jones Company changes its name but wants to retain XYZ Customs Brokers, a new power of attorney under the new name will be needed.
Smith Corp. may want to revoke the power of attorney with XYZ Customs Brokers and add Jones Company (or the new subsidiary name) to its coverage and contract with ABC Customs Brokers. Changing customs brokers can be a touchy subject and you may encounter resistance from Jones Company in trying to impose a new broker on them. You may be faced with either carving out an exception or forcing the change. If the change is made to ABC Customs Brokers, that broker will need to learn about the new imports they will be handling. The increased volume and variances on the way business is done may also cause you to re-examine your contract and method of operations with ABC Customs Brokers.
Finally, can Jones Company (or its new name) be included on the power of attorney Smith Corp. has with ABC Customs Brokers? Technically, if Jones Company is a separate corporation the answer is no. Jones Company will need to issue a separate power of attorney to ABC Customs Brokers signed by an officer of Jones Company. An alternative is to amend the power of attorney between Smith Corp. and ABC Customs Brokers with a document separately executed by an officer of Jones Company with appropriate language and required information.
It is possible that Smith Corp. may actually like XYZ Customs Brokers better and wind up revoking its power of attorney and contract with ABC Customs Brokers and going with XYZ Customs Brokers instead.
A final consideration on this subject is that if Jones Company is absorbed into Smith Corp. or continues as a separate corporation but under a new name, you can expect that for a period of time shipments will continue to arrive in the US with documents addressed to Jones Company. New documentation and shipping instructions must be issued to the foreign suppliers and affiliates of Jones Company instructing them on the new name (and possibly new address) to be used. An approach that has been successfully used in the past is to issue a right to make entry document (signed by an appropriate person at Jones Company before it ceases to exist or changes its name), authorizing entry to be made in the name of Smith Company (or the new name of Jones Company) when shipments arrive addressed to Jones Company after the acquisition is complete.
Don’t forget that new letters of authority will be needed for carriers, freight forwarders and breakbulk agents advising them of how to handle import shipments when new importer names and possibly a new customs broker are involved. This can help minimize the chaos that can occur.
Now – wasn’t that easy?
We didn’t even touch in internal staffing and participation in Customs programs such as C-TPAT, ACE and Importer Self-Assessment. We will save these for the next time.