As any mergers and acquisitions (M&A) practitioner knows, one of the keys to a successful transaction is ensuring that all of the moving pieces come together smoothly at the appointed time for closing. Regulatory issues especially can impact considerably the time and expense associated with consummating a deal. Given their regulatory nature and the number of third parties generally involved in the deals, this is undoubtedly true when it comes to the acquisition and disposition of companies in the transportation and logistics fields. As a result, M&A professionals should ensure that they seek the counsel of attorneys experienced with the rules and regulations of the Federal Motor Carrier Safety Administration (FMCSA) and any other relevant federal or state agency. Since the nuances of the regulatory regime can greatly affect deal structure, regulatory attorneys should be consulted at the commencement of the transaction to avoid unexpected delays as the deal nears completion.
In traditional M&A, the choice of stock versus asset deal might be based upon taxes or the retention of liabilities. Although the traditional factors are no less important in transportation and logistics M&A, the required approvals and filings (including those with the FMCSA and other agencies) also play heavily into the calculus.
In a recent deal, a large, diversified transportation company with multiple subsidiaries was looking to divest a portion of its refrigerated trucking and brokering business. The entire business was held in a wholly owned subsidiary (Sub) of the parent company (Parent). In order to divest the business, Parent could have sold the stock of Sub to the buyer. However, after considering the tax consequences of purchasing the stock, the buyer decided to purchase the assets of Sub instead. Unfortunately, an asset sale was going to raise potential regulatory issues because among the assets that the buyer wanted to purchase was Sub’s operating authority under the FMCSA. This type of transfer requires increased scrutiny and approval by the FMCSA that would not normally be present in a mere change of control. This was not ideal, as buyers and sellers always try to reduce the uncertainties inherent in and time associated with third-party approvals, regulatory or otherwise. As a result, the parties were forced to devise a configuration that would preserve the asset sale structure while allowing the transfer of the operating authority with minimal approval by the FMCSA.
After consultation with regulatory counsel, and in order to avoid the time and expense required in connection with the transfer of an operating authority, the parties employed a two-step process with a signing and deferred closing. A reorganization effected in the interim period between signing and closing allowed the Sub to continue to operate until closing under its current authorities, while also permitting a transfer of the operating authorities with the other assets. At closing, the asset sale occurred as planned, with the interim reorganization preserving the name and operating authorities that the buyer was intent on purchasing, without the need for additional consents from the FMCSA.
In order to successfully implement this reorganization, the parties had to organize new entities, make regulatory filings, and execute additional agreements. Altogether the reorganization process took several weeks. As a result, it is imperative that, at the outset of a deal, each party clearly indicate both their preferred deal structure and their ultimate goals in preserving any regulatory status. As with a tax expert, the M&A practitioner should ensure regulatory counsel is involved as soon as possible in order to craft the most appropriate strategy to reach the parties’ objectives and to eliminate any wasted time and expense that could otherwise impede a successful deal.