Navigating the Transportation Transaction Minefield

Now more than ever, to execute a transition in the transportation industry correctly, all players must consider a complex web of factors. Non-compliance may lead to delays, risks, and costs that could hamper a deal’s success or even prevent its closing. Scopelitis Law Firm’s experience in every aspect of transportation law has helped us successfully move thousands of transportation deals from start to finish. Here is a set of transaction basics that help our clients succeed.

Distinction Between Asset and Equity Transactions

A deal’s structure dictates each step of the transaction. Equity sales tend to be more straightforward, especially as relates to operating authority and equipment plating, registration, and titling considerations. However, the downside is that the buyer inherits all historical risk.

Conversely, an asset sale typically offers greater liability insulation from historical losses but requires more advanced planning and can result in increased costs. For instance, typically owned equipment must be re-titled and re-plated.

Material Transaction Issues

Thorough due diligence is critical regardless of whether an asset or equity sale is at issue. The following are a few areas of particular consideration.

1. Licensure and Change-in-Control Requirements. In an equity sale, operating authorities issued by the Federal Motor Carrier Safety Administration do not require regulatory consent where a change in control is at issue. However, many other transportation licensures do. For instance, permits and authorities issued by the Transportation Security Administration, Customs and Border Protection, and the Federal Maritime Commission trigger various regulatory filings in the event of a change in control.
2. Assignability and Licensures. In an asset sale, the buyer will need to determine all authorities necessary to operate acquired assets following closing. While some transportation-related accounts can be effectively transferred, many cannot—including a seller’s USDOT number.
3. F-Reorganization. Common in an equity sale is a pre-close F-reorganization, which can result in a change in entity form (typically a conversion from a corporation to an LLC for tax purposes). These transactions often result in a change of company name that must be reflected in any transportation-related accounts, licenses, permits, or certifications. However, some state regulatory agencies, for instance, do not recognize these name changes (e.g., California), which results in the target needing to obtain a new permit.
4. USDOT Safety. Where an asset sale is at issue, the buyer will need to consider how it intends to qualify drivers operating commercial motor vehicles subject to the Federal Motor Carrier Safety Regulations. Commercial drivers will either need to be re-qualified, which requires careful planning, or the buyer can adopt the seller’s driver qualification files, which is not without risk—all DQ file defects become the buyer’s.
5. Independent Contractor Relationships. Regarding diligence and subject negotiation in a purchase agreement, companies must beware of the risk of independent contractor misclassification. Among other considerations, a buyer should evaluate pending litigation and the written agreement in place with the target’s contractors.
6. Motor Carrier Tax and Vehicle Accounts. The target company’s compliance with the International Fuel Tax Agreement (IFTA) and any state-specific Highway Use Tax (HUT) requirements can create many challenges. While electronic logging devices have made IFTA tax reporting easier than in the past, companies are subject to audits for reports submitted over the past four years. A review of the target company’s past reports can alleviate audit concerns. With respect to HUT, only five states currently require payment of a HUT: Connecticut, Kentucky, New Mexico, New York, and Oregon. Still, it is crucial to ensure the target is maintaining proper accounts. Similarly, since HUT is limited to vehicles exceeding a certain weight, a review of the target’s operations in this regard is highly recommended.
7. Motor Carrier Vehicle Credentialing. International Registration Plan Licensing (IRP) must also be part of the review. IRP-apportioned license plates are generally obtained for cross-border interstate power units weighing over 26,000 pounds. Participating jurisdictions have varying plate renewal dates, and registrants must report their fleet’s miles on an annual renewal application.

The long list of areas to review before finalizing a transaction can seem daunting, especially since skipping a vital step can shift the entire transaction timeline. But for attorneys experienced in mergers and acquisitions, the process is not only doable but can be done in a way that protects business interests and sets companies up for future success. For more information or assistance with a contemplated transaction, please contact Katie Feary-Gardner or J.D. Robinson.

About Scopelitis

Scopelitis, Garvin, Light, Hanson & Feary serves the legal needs of more than 5,000 transportation-related companies including 90 of the top 100 motor carriers in the nation.

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