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BANKCARD LAW Who’s
on First? The
Curious Effects of Mergers and Acquisitions by Tony
Ogden For
those of us who are old enough to remember, you may recall the comedy team of
Abbott & Costello and their trademark play on words routine entitled,
“Who’s on First?” The premise is that Abbott & Costello are watching a
baseball game. Costello is trying to determine the names of the infield players.
So, they engage in a humorous exchange in which Costello asks Abbott, “Who’s
on first?” Unbeknownst to Costello,
“Who” is the actual name of the player on first base; “What” is the
actual name of the player on second base; and “I don’t know” is the actual
name of the player on third base. What follows is a laughable misunderstanding
in which Costello becomes frustrated as he repeatedly tries to discover the name
of the player on first base. All too often, players in the
bankcard acquiring industry feel like Costello in the “Who’s on First?”
routine. Frequent mergers and acquisitions (“M&A”) involving banks, ISOs,
processors/third party service providers, and merchant account portfolios keep
us begging the proverbial question. Put another way, we ask, “Who owns the
accounts? Where did the residuals go? Who’s in charge? Who’s responsible?”
Using Abbott & Costello’s baseball team as a construct, we can unwind the
essentials of M&As and achieve a basic understanding. I. Who’s on First: The
Original Players This is the easy part. When a
merchant account is formed, you generally have the original merchant, ISO,
acquiring bank and processor/third party service provider. You have a series of
agreements, which define the relationships between these players. The merchant
agreement specifies the terms by which the merchant will relate to the ISO,
acquiring bank, cardholders, and sometimes the third party service provider. Then there are the agreements
which govern the Bank-ISO relationship and the Bank-Processor relationship. At
this stage, the players know each other, know their positions and what roles
they play on the team. Life is good and the merchant account operates smoothly.
Then it happens–someone “lets the dogs out” and everything changes–a
merger or an acquisition occurs. II. What’s on Second:
The New Players To better discuss the new
players resulting from mergers and acquisitions, let us consider the definitions
of these terms. Black’s Law Dictionary defines a “merger” as “The
absorption of one company by another, [the] latter [company] retaining its own
name and identity and acquiring the assets, liabilities, franchises, and powers
of the former [company], and [the] absorbed company ceasing to exist as an
independent business entity.” Black’s Law Dictionary further defines
“acquisition” as “the act of becoming the owner of certain property.” So, what happens in the
bankcard industry when a merger or acquisition occurs? With a merger, one of the
original players is absorbed by another company (a new player). It can be any of
the following combinations, which join ranks to become one company (see chart
below): In an acquisition, one of the
original players themselves (either the acquiring bank, the ISO, or the third
party processor) is purchased by another company (a new player), or part of the
original player’s company or merchant account portfolio is purchased by
another company. To recap, we now know the
legal definitions of mergers and acquisitions. We also know that the original
players are either joined or replaced by new players in a merger or acquisition.
However, it is the resulting consequences of mergers and acquisitions, which can
be simultaneously intriguing and confounding. III. I Don’t Know is
on Third: The Consequences Now that the merger or
acquisition has taken place, the real fun begins. Either things operate
wonderfully well or border on absolute chaos. I certainly support the practice
of well executed M&As–those undertaken with good business judgment. Such
mergers and acquisitions allow for more efficient functioning of the bankcard
industry through realization of better economies of scale and other beneficial
mechanisms. However, based on the inquiries received by Bank Card Law, I know
that most everyone would like to discuss the chaotic consequences of M&As. Some of the most common bad
side effects of M&As are: • merchant accounts which
get somehow “lost in the shuffle” from one company to the next, • different or new
procedures employed by the new company cause transactional difficulties such as
increased chargebacks, • ISOs and agents stop
getting their originally agreed upon residuals, • valuable merchant
accounts are lost unnecessarily by the new acquirer, and • no one is sure who is
responsible for problem resolution and/or those responsible are overwhelmed or
incapable of problem resolution. For clarification, there are
some general legal principles that apply to M&As and form a good foundation
for understanding. First, the legal result of a merger in most jurisdictions, is
that the absorbing company (the new player) stands in the shoes of the company
it absorbed. This means that whatever rights and responsibilities the original
company had (i.e., residuals payment, debts, receivables, fiduciary duties,
etc.), now become the rights and responsibilities of the absorbing company (new
player). Likewise, in an acquisition, the company (new player) who acquires
another company (original player) or some or all of its assets (i.e., merchant
portfolio), stands in the shoes of the company it acquired or from whom it made
an acquisition. Therefore, you should look to
the new player to contractually assume the role of the original player. But,
remember that the legal principles above are general in nature, and there may be
exceptions for a variety of reasons. Because of the numerous exceptions, it is
strongly recommended that you consult a competent attorney to examine the
contractual relationships of the players. So, when faced with the post
M&A question, “Who’s on First?”, you can at least draw upon some basic
legal principles for understanding and hopefully fare better than the terribly
confused Costello. Who knows, in your quest to determine who’s on first, you
may even discover, “Who let the dogs out!” |
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© Copyright 2001 · The Green Sheet, Inc. |
