Resources
M&A and the Law
For Buyer or Seller...What You Should Know.
By Thomas Crowe, Esq. (Originally published in Intele-Card News, April 2007)
Mergers and acquisitions are sweeping across the telecommunications industry at an increasing pace. Prepaid calling card providers and MVNOs are no exception - many are merging with financially stronger partners or are acquiring additional telecommunications assets to strengthen their strategic positions. Regrettably, many prepaid service providers fail to exercise adequate care in structuring and consummating these transactions so that they comply with diverse federal and state legal requirements.
The unfortunate consequence of a merger or asset acquisition which, for example, closes without requisite federal or state regulatory approval, can be costly and can result in protracted hearings in multiple jurisdictions, fines and penalties, or worse yet, disapproval of the proposed transaction. Such an outcome has the potential to undermine the strategic objectives that the transaction was designed to realize in the first place.
In other instances, acquiring a telecommunications business or assets without requisite regulatory authorizations can result in liability under the Telecommunications Act of 1996 for unlawful switching of 1+ customers without their consent (generally known as "slamming"). Prepaid service providers seeking to merge with other companies, acquire the assets of other telecommunications businesses or sell their assets to third parties need to carefully plan ahead to ensure compliance with all federal and state regulatory requirements.
While many considerations must be addressed to effectuate a merger or asset acquisition involving one or more telecommunications service providers, these general steps must occur. First, a stock/share or asset purchase agreement or merger agreement typically needs to be negotiated, prepared and executed by the parties to the transaction. A careful investigation of the assets and telecommunications licenses of the company being acquired or merged with must be completed (generally referred to as "due diligence"). And finally - the step often overlooked by many prepaid providers - approvals for the transaction must be obtained from the Federal Communications Commission (FCC) and separately from appropriate state public utility commissions (state PUCs). These steps, which will largely occur simultaneously, are described in further detail below.
An Agreement Is Needed
Mergers or acquisitions generally require the negotiation and preparation of an agreement which (a) effectuates the goals of the parties; (b) accurately reflects the price and terms of the transaction; and (c) identifies the applicable closing date.
Agreements typically take the form of stock or share purchase agreements, merger agreements or asset purchase agreements. An important consideration in preparing the agreement is ensuring that all needed assets to be acquired or sold are specifically identified in the agreement.
For example, in the case of a telecommunications asset sale/purchase, the agreement should specifically encompass needed federal and state telecommunications licenses and tariffs, network codes (e.g., CIC codes, etc.) and related authorizations to the extent transferable.
Due Diligence is Required
The specific assets of a business to be acquired must be carefully reviewed before a prospective buyer will be willing to agree to purchase that business or its assets. In order to accomplish this, a complete inventory of the target company's assets, authorizations and liabilities must be prepared as part of the due diligence process.
The due diligence process is both time-consuming and tedious, and often entails a painstaking examination of a business' files. However, careful due diligence is absolutely vital to ensure that the assets or business being purchased is fully known to the buyer.
The regulatory component of due diligence ensures that: (a) all required federal and state licenses have been obtained and are effective; (b) all necessary tariffs have been filed and kept updated; (c) all federal and state filing requirements have been complied with; (d) all regulatory fees, contribution requirements and assessments have been paid; and (e) no investigation or enforcement proceedings by federal or state regulatory agencies have been initiated. If a company is not compliant with all regulatory requirements, it is possible that the FCC or state PUCs could commence enforcement actions against the company even after the transaction has closed.
Prior FCC Approval(s) Must Be Obtained
If the company to be acquired or merged with has Section 214 authorizations, cable landing licenses or other FCC licenses (such as CMRS or paging licenses), prior FCC approval of the acquisition or merger is generally required. The application for approval should include specific information regarding the proposed transaction and demonstrate that grant of the application is in the public interest. Typically, within weeks of filing, applications are placed on public notice by the FCC and usually granted in a month or less.
Prior State Approval(s) Must Be Obtained
On the state side, the approval process can be much more complicated. Prepaid providers generally are required to obtain authorizations from state PUCs if they are (1) operating in that particular state; and/or (2) have certification to operate in that state. On average, it takes approximately two to six months for the state approval process to be completed. Because at least two states do not allow post-consummation approvals to be granted, careful advance planning concerning the state approval aspect of the transaction is necessary.
If a provider has authorization to provide intrastate telecommunications service in all states, the laws of each state need to be reviewed in order to determine if prior state approval is required. Depending on the particular circumstances of the transaction, some states will not require any filings at all. Others require prior notification, some post-notification, and some require prior approval of the transaction before the deal can close.
Federal/State Enforcement
If prepaid providers or MVNOs fail to obtain required regulatory approvals, the FCC and/or state PUCs can undertake a number of enforcement actions. Further, because a number of states do not allow post-consummation approval of transactions, if prior approvals in those states are not obtained, state law may render the transaction null and void in those jurisdictions.
In addition, it is not uncommon for state PUCs or the FCC to initiate investigations regarding the companies' noncompliance with federal or state law, which can result in stiff penalties or, even if such penalties are avoided, costly legal bills. Worse, the FCC or state PUCs can revoke the companies' authorizations to provide telecommunications service within their respective jurisdictions.
A merger or asset acquisition is clearly an important step that many prepaid providers and MVNOs are likely to face as they mature. Because of the complexity and importance of the legal issues involved, it is imperative that counsel experienced in both transactional matters and prepaid telecommunications regulatory issues be involved from the outset in such transactions.
Conclusion
Careful legal/regulatory planning is vital in the case of any prepaid service provider seeking to merge with other companies, acquire the assets of other telecommunications businesses or sell their assets to third parties. While the legal hurdles that must be cleared (as briefly outlined above) can be time-consuming, the potential landmines (in the form of fines and penalties, lack of proper licensing and liability under the 1996 Act) are substantial.
This article is intended for informational purposes only and is not intended to serve as legal advice.