There has been widespread discussion concerning the effects of the Bush tax cuts expiring at the end of this year, with the realistic possibility that capital gains and dividend tax rates will rise in 2013 (the so-called “fiscal cliff’). Accordingly, there will likely be a significant spike in year-end closings for mergers and acquisitions transactions as business owners/sellers look to maximize the profitability of the sales of their businesses. With a lot of money potentially at stake, dealmakers will want to take every precaution to ensure that their transactions close in 2012. The following are some ways that a good corporate services company can help enable this.
Don’t Let Good Standing Issues Derail Your Deal
During the due diligence phase of merger and acquisition transactions, the verification of the legal existence and good standing of all entities in the transaction is a common requirement found on the “due diligence checklist.” If any of the constituent entities have good standing issues – or will encounter good standing issues prior to the closing date – these must be competently resolved or the desired closing date may not be met. This often becomes surprisingly complicated because jurisdictions vary concerning how, why and when entities can lose their good standing and how long it could take to resolve any problems. But a good corporate services company will help its customers avoid the “11th Hour Fire Drill” that so often accompanies large transactions.
For domestic U.S. transactions, verifying good standing status two weeks prior to closing typically allows for enough time to identify and correct any issues. The next (often overlooked) step is to identify what annual or periodic reports and taxes may be coming due for each entity in each state where it conducts business. This will alert the entity to anything that needs to be filed or paid prior to closing to ensure that the entities involved will be in good standing on the intended date of closing.
A comprehensive "entity compliance audit", well in advance of the closing date, will identify all good standing issues that must be addressed immediately. This is the best way to ensure that there are no last minute surprises that can delay the effectiveness of the transaction. Such an audit includes: verification of the exact legal name, date of filing and organization ID number on record in the constituent entities’ states of formation, current status of all entities plus any fees or franchise taxes owed, identification of the next annual report due dates to avoid missed deadlines that may be coming due prior to the intended closing date, identification of principal business address on record for each entity so that old addresses can be updated, identification of current registered agent of all constituent entities so that one registered agent can be designated for the surviving/remaining entities where desired and, finally, a verbal “bringdown” to confirm with each domestic and foreign state that the entities are in good standing as of the date of closing.
Extra Steps You Can Take to Ensure Timely Filings
In addition to ensuring due diligence is addressed in a timely manner, be sure the filing of your documents is completed in a time frame that meets your objectives. Keep in mind the following:
- Some states will be closed on New Year’s Eve. (See COGENCY GLOBAL INC.'s state holiday closing list)
- Last-minute filings are not possible in every jurisdiction and, in some, expedite fees imposed by states can dramatically increase the cost associated with the filing process. For example, Delaware’s fees to expedite filings are: $1,500 for 30-minute service, $1,000 for one-hour service and $500 for two-hour service.
- Find out if the states involved, such as California and Delaware, allow for future filing/effective dates and, if so, file early specifying the filing/effective date you desire.
- If the state you are filing in offers filing preclearance services, as Delaware does, take advantage of it well before year-end so you will have enough time to correct any issues and get your filing on record before the new year.
So, for merger and acquisition transactions during this year’s particularly critical end-of-year crunch, keep in mind that states and filing offices will be stretched thin. Act soon and take the extra steps needed to ensure your deal is not delayed and subject to the potential negative consequences associated with the fiscal cliff.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.