In a merger and/or acquisition transaction, there are many public records that must be reviewed and consulted. In Part 1 and Part 2 of this series, we looked at the value of a closing checklist to organize the process. One item to be included on the checklist, especially if the acquisition is a regulated industry, is the status of the target’s business licenses. This is especially important if the acquiring party is planning to continue the business carried on by the seller. Insurance agencies and brokers, collection agencies, mail order pharmacies, architect and engineering firms and appraisal companies are all examples of regulated industries with a lot of state licensing requirements.
Severe Penalties for Inadequate Licensing in Regulated Industries
When considering the purchase of a company in a regulated industry, ensuring that the company is properly licensed to carry on its activities is an important step that should not be overlooked. Met-Life discovered this the hard way. In 2014, the company paid a 60 million dollar fine to the state of New York for the activities of two subsidiaries it acquired from AIG. New York determined that these subsidiaries were not properly licensed to carry on the work they were doing -- selling and renewing insurance policies to international companies. The fine covered activities undertaken by the companies from 2007 to 2012. While this is, perhaps, an extreme example, any acquirer may end up on the hook for fines and penalties if the company it acquires is not in compliance with licensing requirements.
It is actually fairly easy for a company to fall out of compliance. The requirements, renewal periods and due dates for licenses can vary greatly from state to state, so it is not uncommon for a company to mistakenly allow a license to lapse. In other cases, the company may be unaware that a license is required for the activities it is conducting. Each state, county and municipality has different rules and regulations for license requirements and it can often be quite difficult to know what applies to a particular business activity.
Allow Enough Time to Transfer or Obtain New Licenses
Even if the company is up to date with all of its licensing requirements, if the acquiring company is planning on carrying on the same business and was not previously licensed in these jurisdictions, it will want to ensure it has time to either transfer the existing licenses or file for a new license. Not all licenses can be easily transferred in the case of an acquisition and sometimes several weeks’ notice is required for a transfer to be accepted by a licensing authority. For example, a Connecticut collection agency license can be transferred in the case of an acquisition, but only if the authority is provided at least six weeks’ notice. In other cases, there are time limits, such as 30 or 60 days after the completion of the merger in which the authority must be notified. If you know in advance what must be done, you can make the whole process smoother, which is especially important during a time where the company is undergoing a lot of changes.
When a transfer is not allowed, often the process for becoming licensed in a new jurisdiction can take several weeks or even months, with requirements for bonding, fingerprints, exams, or quarterly board approval meetings causing significant delays. If the acquirer is looking to begin business in a new location directly following the merger, it is a good idea to begin the research and process of transferring and acquiring licenses well before the planned closing date.
Researching Licensing Requirements in Advance is Key to Success
In conclusion, unexpected penalties and delays to the acquirer’s ability to carry on business can be avoided by researching the jurisdictions where the company to be acquired is operating. From this, it can be determined whether the target company is in compliance with all licensing requirements, while providing the opportunity to determine in advance the best process for ensuring licensing compliance after the acquisition.
In Part 4, we discuss why you need a post-closing checklist to ensure your maintain compliance.
 See http://dealbook.nytimes.com/2014/03/31/metlife-reaches-60-million-settlement-with-n-y-authorities/?_r=0
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.