The National List of Attorneys has partnered with Cornerstone Support to do a blog series on licensing. This is the second blog in that series. Cornerstone Support is a licensing service provider to the collection industry. They offer an array of services and products that can support the licensing, compliance, and insurance needs of any organization. We encourage you to read the important information and follow the advice that they are very qualified to provide for NL members and clients.
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. This results 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 relicensing is almost always required. The following will address the specific action necessary for the most common types of transactions:
While in most situations a buyer would prefer an asset transaction, with respect to the individual state licensing requirements there are benefits to a stock transaction. Most notably, 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 percent, then in almost all instances the license is immediately invalid. 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:
- 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.
- 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, that action may cause you to lose 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 their respective jurisdictions immediately following the closing.
- If possible, do not announce the transaction 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 percent, the number of jurisdictions where a full relicensing effort is required declines significantly.
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 percent 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 percent by the holding company) and there would be no need in most instances to relicense.
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:
- 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.
- 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 a 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 papers 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 during which the new corporate entity is not appropriately licensed.
- As the name becomes available in the various jurisdictions, submit the requests to change the name of the new corporate entity to the ultimate name in which the buyer intends to do business.
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 888-445-8660 or visit us at www.cornerstonesupport.com to discuss the details of your business and see how Cornerstone can support your overall compliance strategy.