THERE are now many niche players in the private-equity market who are interested in taking on the challenge of asset-based companies and owning the rolling stock. And as always, there are strategic buyers — those already in the industry looking to add on or merge.
This is the era of the transportation contract. The Interstate Commerce Commission (ICC) is gone, having been dissolved in 1995. The rules of the game have changed significantly, and some tank fleet executives may need to change their merger and acquisition strategies.
“There's less regulation, although some might say there's a new era of re-regulation,” said Eric Zalud, head of transportation logistics practice law at Benesch, Friedlander, Coplan & Aronoff LLP. “It's important when you're looking to kick the tires, to think of them as assets. They provide the certainty of assets. At the same time, it's important to understand the sort of contracts a carrier may have with its customers.”
In “Considerations in Buying or Selling a Tank Truck Carrier in 2012,” Zalud said there are indemnification clauses in virtually every contract in the transportation arena between shippers and carriers, and carriers and brokers. Zalud spoke during the National Tank Truck Carriers' 64th Annual Conference May 6-8 in San Francisco, California.
Other considerations:
- Equipment commitments/preferences for prices
“Sometimes it's tough to get equipment when needed.”
- No changes except by mutual agreement
“That prevents surprises both for you and for someone looking to buy your company or for a company you're looking at. Certainty is key.”
- Incorporate services/performance standards and require periodic checks
“That way you know what's going on with your contracting party so there are no surprises. It helps your operations.”
He said that if any contracts still contain a reference to ICC, they need to be updated.
Then there's the specter of the CSA (Compliance, Safety, Accountability) program.
“It's been beaten to death,” he said. “It's here. It's real. We're all living it. Many shippers and brokers have in their contracts CSA thresholds. That's an important negotiating point for motor carriers because you really don't want the shipper or broker drawing a line in the sand — picking some numbers and saying, ‘We're not going to retain any motor carrier that's above that number in any of the seven BASICs.’ That shackles them and is a problem for motor carriers.”
Other key elements:
- Leasing regulations
“There's concern with indemnity provisions. Some are very broad in both ways. It's important you're scrutinizing those indemnity provisions.”
- Change in leverage
“This business goes in cycles. For a few years, shippers had the upper hand — those who hire the motor carriers to transport freight. It's shifting right now — motor carriers have a lot more leverage. If you're on the upside, don't turn the screws too hard because that cycle is going to change. It's important to think of your contracting party as a partner.”
- Keep contractors “independent.”
”As most of you know, this is at the forefront of a lot of regulatory agencies — the whole independent contractor, owner-operator issues. Those contracts should be current. There can be a lot of contingent liabilities for your business.”
Keys for those branching into brokering:
• The carrier and employees are independent contractors and not employees of agents or broker.
• Disclaim responsibility for cargo, bodily injury, and all other claims.
• Specify that the broker has no control over the load in transit.
• Re-brokering is not allowed.
• The carrier must notify the broker if at any time the carrier does not hold a valid operating authority, satisfactory safety rating, or required liability insurance.
• Driver selection is completely at the discretion of the carrier.
“As we’ve all seen in the industry in the last decade, there has been a kind of metamorphosis,” he said. “A lot of carriers are taking on different roles. As your businesses grow, you want to serve your customers in new ways. They might ask, ‘Can you expand into a lane here? Can you broker a few loads? Can you set up a warehouse?’ That will cause you to get into different segments of business, and your goal is to provide that seamless transportation. However, you want to make sure one catastrophic loss in one segment of your business doesn’t bring down the whole empire. When private-equity funds are looking at companies, they’re looking at corporate structure. Is there a rational corporate structure?
“The key is to restructure the entity so that liability can be ‘contained’ to the greatest extent possible. Weigh operational considerations and legal considerations. What legal counsel may recommend as the ‘best protection’ for a company may not be operationally workable. Restructuring for risk management does not stop once papers have been signed, the organizational chart finalized, and legal counsel goes home.
“Legal and business practices must be implemented to ensure the restructured entity is not subject to attack by the argument that the restructuring was a sham and that the entity is a single entity responsible for all liabilities. Observe corporate formalities, document financial transactions among related entities, and operate related entities for economies and efficiencies but don’t merge independent identities. Review contracts to determine the effect of restructuring and whether consents to assignment are needed.”
He said there are lessons from case law: Francis v United Jersey Bank Held. The New Jersey Supreme Court affirmed judgment in favor of the plaintiff on a claim of negligence and affirmed an award of over $10 million.
“The corporate director is personally liable in negligence for failure to prevent misappropriation of funds by other directors who, in this case, were also officers and shareholders of the corporation,” he said. “There are lessons to take away from this. You’re growing and concentrating on getting bigger. It’s important to remain vigilant. Don’t tune out. Stay vigilant as to other directors with a careful selection process. Don’t let familial loyalty transcend corporate obligations. Retain outside directors. Board members can’t be figureheads only. Keep minutes and document attendance, review, and dissent.
He said transportation and logistics entities have set up parallel carrier or logistics operations, and it’s very important to maintain separateness of these entities, in terms of catastrophic loss, and, in a recent case, in terms of collection of freight charges.
In H&H Brokerage Inc v. JR Simplot Co (February 12, 2008), H&H Brokerage entered into a co-brokerage agreement with Simplot to arrange for the transportation of commodities. There was a dispute over the freight charge liability of $131,370.68.
“The court found the carrier and the broker to be indistinguishable,” he said. “They had employees in common, operated as one company, shared a mailing address, were listed in the telephone book with the same telephone number, and had the same fax number. The sign in front of one location read ‘H&H Transportation/Brokerage.’ Customers would often pay H&H Transportation for services provided by H&H Brokerage.”
