by Matt Pridemore
Changes to the ownership structure of a licensed collection
agency occur for a variety of reasons and are a regular part of the corporate
life cycle. Unfortunately, the statutory
regulations for the majority of jurisdictions prohibit the transfer of debt collection
licenses. Furthermore, the inflexible
language of the provisions in almost all instances does not allow for an
interim or transitional license, resulting in a gap period during which the
ownership structure will have changed, but the new licenses will not have been
processed. While the significance of the
change and structure of the transaction are factors that help determine the
specific action necessary, some level of re-licensing is almost always
required. The following will address the
specific action necessary for the most common types of transactions:
Stock Transaction
While in most situations a buyer would prefer an asset
transaction, there are benefits to a stock transaction with respect to the
individual state licensing requirements. Most notable, corporate registrations required
as a prerequisite to obtaining state debt collection licenses are not affected
in the event of a stock transaction – they are transferred seamlessly to the
buyer, saving valuable time and money.
Unfortunately, the same is not true for state debt
collection licenses. Whether it is a
stock sale or recapitalization, if the equity positions on the balance sheet of
the entity holding the debt collection license change by more than 50% then the
license is immediately invalid in almost all instances. The entity must submit new license
applications to the various jurisdictions for subsequent review and approval. The answers to the following questions will
help in determining your re-licensing strategy:
1. What
is the quickest way to obtain the required state debt collection licenses lost
in the stock transaction?
Complete the required license applications prior to consummating the
transaction and submit them to their respective jurisdictions immediately
following the closing. This simple
action will significantly decrease the span of time in which you are without
the required state licenses. It will
also have a positive impact on the way state regulators view the new regime…the
longer the gap period between closing and submitting new license applications,
the harder the questions you may have to answer.
2. Will
you continue to collect from debtors in those states where the license is now
invalid and it is technically unlawful to continue operations until the new
license is approved?
While holding accounts in those states until the new license is
obtained is the only way to fully mitigate any risk associated with unlicensed
collection activity it may cost you clients and ultimately prove impractical. As such, the following are steps that one can
take to minimize those risks:
- As discussed above, complete the required license applications prior to consummating the transaction and submit them to there respective jurisdictions immediately following the closing.
- Do not announce the transaction if possible until the new licenses are approved. While there is generally a desire on the buyer’s part to immediately announce the transaction, keeping the deal quiet will minimize exposure to frivolous lawsuits from predatory attorneys aware of the inflexibility in the change of control provisions.
- Be conscious of the fact that you are operating without a license and impress upon your staff and collectors the importance of their good behavior. Please note that any instruction out of the ordinary could be used one day by a plaintiff’s attorney in a lawsuit as proof of willful or malicious wrongdoing. In that regard, it is important to provide instruction in such a manner that does not imply any past or future fault.
Please note that as the change in equity for a proposed
transaction dips below 50% the number of jurisdictions where a full
re-licensing effort is required declines significantly.
Key Point:
The state license applications ask
for varying degrees of information related to the ownership of the entity being
licensed. However, in almost every
instance the applications do not request information beyond the direct owners
of the entity being licensed (corporate or individual owners). If you are starting an agency and wish to
avoid the licensing issues related to selling the stock of your agency you
should consider setting up a holding company to own 100% of the stock of the
entity that you will be licensing.
Selling the stock (any percentage) of the holding company would not
change the equity position on the balance sheet of the licensed entity (owned
100% by the holding company) and there would be no need in most instances to
re-license.
Asset Transaction
In an asset transaction, the seller retains ownership of the
corporate entity and is generally responsible for unwinding it appropriately. The buyer must either create a new corporate
entity or use an existing corporate entity for the transaction. While there are a number of reasons why a
buyer would prefer an asset transaction, this deal structure creates a number
of transition issues with respect to licensing.
The following are a few such issues and recommendations for dealing with
them:
1. Both
the corporate registrations and debt collection licenses are tied to the corporate
entity and cannot be transferred to a new corporate entity set up by the
buyer. Unless the buyer has an existing
licensed collection agency in which to roll the purchased assets, new corporate
registrations and debt collection licenses would need to be obtained.
Recommendation:
Obtain the appropriate corporate registrations and debt collection
licenses prior to closing (it will take no less than six months to fully
license the new corporate entity). If this
is not possible then the recommendations for re-licensing and business conduct
during the “gap” period discussed for a stock transaction above would be
relevant to help minimize the exposure related to collecting without a
license. Please note that setting up the
holding company structure discussed above at this point would provide more
flexibility for any future divestiture.
2. The
desired corporate name of the post transaction agency can also create a
transition issue with respect to licensing.
There is oftentimes some tangible value associated with the corporate
name of the acquired business. As such,
it is not uncommon for the new corporate entity to do business under the same
name as the seller has historically used.
In fact, the rights to the name and any collateral material or other intellectual
property are generally included in the definitive asset purchase
agreement. Unfortunately, the states do
not generally allow multiple corporate entities to operate using the same or
similar names. As such, the new
corporate entity cannot register to do business and then obtain the necessary
debt collection licenses in the same or similar name to the name already taken
by the seller.
Recommendation:
Do not wait until the seller’s existing corporate entity has either
been dissolved or the name has been changed.
The goal should be to minimize the period of time in which you are not
appropriately licensed and the most laborious and time consuming step in the
process is obtaining the debt collection licenses for the new corporate entity.
- Proceed with obtaining the required corporate registrations and debt collection licenses under an available name prior to closing.
- Prepare the paperwork required to request the name change of the seller’s corporate entity so that they are ready to be submitted to the various jurisdictions at closing. It should be noted that some buyers and sellers choose to dissolve the seller’s corporate entity at this time instead of simply requesting a name change. While this strategy saves a step in the process it normally results in a much longer period in which the new corporate entity is not appropriately licensed.
- Submit the requests to change the name of the new corporate entity to the ultimate name in which the buyer intends to do business as the name becomes available in the various jurisdictions.
Summary:
Changes to the ownership structure of a licensed collection
agency occur for a variety of reasons and are a regular part of the corporate
life cycle. Dealing with the licensing
issues surrounding them should not be taken lightly. One should fully understand the impact that
the structure of a proposed transaction has on licensing and develop a strategy
to minimize any related exposure prior to closing a transaction. Cornerstone Support has established the
reputation as the premier licensing service provider to the collection
industry. We understand the particular
nuances of licensing all types of collection agencies and in all types of
situations. We are professionally
staffed and trained to help you navigate through the gauntlet of regulations
that is not only confusing, but can prove costly if misunderstood or neglected.
Call us at (770) 587-4595 or visit us at www.cornerstonesupport.com to
discuss the details of your business and see how Cornerstone can support your
overall compliance strategy.
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