Mark Pestronk
Mark Pestronk

Editors' note: This column was updated on April 11.

Q: I am contemplating selling my agency to some people who I don't know very well. They are in the travel business, but they don't own an ARC-appointed agency, so they are looking to use my agency to issue tickets for their other business. I understand that ARC has to approve the change of ownership of my agency. How long does ARC take? If ARC takes a long time, what are the real risks if we close the deal before ARC approval? How can I lessen those risks?

A: If your buyer does not currently own an ARC-appointed agency, the ARC application process will take three to six months or even longer, depending on the buyer's background and extent of cooperation with ARC's requests for information and interviews. Furthermore, ARC approval is by no means guaranteed, even after a long wait.

ARC typically disapproves a change-of-ownership application if the buyer makes a "material misrepresentation" about the background of any of the buyer's owners, officers, directors, or managers. The quoted term means a fact which, if it had been properly disclosed, might have influenced ARC's decision to approve or disapprove the change of ownership.

As you probably know, most buyers and sellers jump the gun; they close before ARC approval or even before the parties file the ARC application. The parties just do not want to wait the months required.

So here is the biggest risk: ARC will try to hold you personally liable for any default after closing but before ARC approval, even if the fault lies only with the buyer. By "default" I mean not only a dishonored draft but also unreported sales and a pattern of credit card chargebacks that result in debit memos.

By "personally liable" I mean that ARC will sue you personally if the default is large enough, even if you have a corporation or limited liability company.  In at least one reported precedent, ARC succeeded: in Airlines Reporting Corporation v. Inter Transit Travel, a federal court in New York held the selling owner personally liable for "conversion" (i.e., theft) for turning over control of blank ticket stock to the new owner without ARC approval, after the new owner ran up $202,000 in unpaid tickets.

While there is no more "blank ticket stock," the principles are the same. The ARC agreement provides that e-ticket numbers are "ARC Traffic Documents" that are to be "held in trust." Therefore, letting another party have the ticket numbers without ARC approval of the ownership change is still "conversion," according to ARC.

The second risk is that, if ARC disapproves the application because of a misrepresentation or other grounds for disapproval, your buyer may not be able to continue running the business at all. If you agreed to accept installment payments, the buyer may then be unable to continue paying you.

If you are going to jump the gun, here are two ways to lessen your risk:

First, if you don't trust the buyer with your money and reputation, stay in sole control of ticket issuance and ARC reporting after the sale. If you have any net payments due to ARC, then stay in sole control of ARC remittance as well. If you are not a hands-on owner, delegate this job to someone who remains on your payroll or whom you trust.

Second, if you think you trust the buyer but aren't 100% sure, just retain the right to step in and take over ticket issuance, reporting and remitting if you suspect financial weakness or ticketing fraud.

In either case, retain the right to terminate your ARC appointment if ARC has not approved for six months or so after closing.

Update, April 11: Since this column was published, ARC has provided statistics that indicate that they have made significant strides in shortening the application process. The average approval time in 2017 for an Ownership Type 2 sale, which matches the example in the column, was 2.5 months. Another common type of agency sale involving an agreement transfer to a new entity (Ownership Type 5) in 2017 took an average of 3.1 months. In January 2018, approval of an Ownership Type 2 sale took about 1.5 months, while an approval of an Ownership Type 5 sale took less than one month. That's the average, so others took longer. My own experience is that it takes ARC at least 90 days in every such case, but perhaps I am consulted on cases that take a long time because of the issues involved. As a general observation, I would point out that ARC has made great strides not only in application processing, but in all areas of its treatment of agencies.

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