Part 135 commercial aircraft operators are an essential and growing service in the aviation industry. A Part 135 Certificate is how aviation charter operators are generally certified. The significantly growing demand for Part 135 charter flights makes the purchase of a Part 135 Certificate-holding entity an attractive and reliable venture. In preparation for purchasing a Part 135 Certificate, buyers should know the type, kind, and scope of the operations they wish to use the certificate for, and also understand the requirements for such operations, including the equipment, facilities, personnel, manuals, and programs. This article lays out several tips for purchasing an existing Part 135 Certificate.
Purchase an Existing Part 135 Certificate Instead of Applying for a New One
The decision to apply for a new Part 135 Certificate or to purchase an existing certificate is one you must make before beginning business. At Bizjet Law, we recommend the latter of the two options – i.e., purchasing an existing Part 135 Certificate. There are a variety of different reasons underlying our recommendation, but it comes down to a matter of efficiency. If you opt to apply for a brand new Part 135 Certificate, do not expect the process to be timely. You are likely to face numerous delays before you are approved to start operations, and it is typical for a client to wait up to two or three years, if not longer, before they can begin operations.
Conversely, if you pursue the purchase of an already existing Part 135 Certificate, the process is much quicker and more cost-effective. The long process of getting everything approved has already been handled by purchasing an already existing certificate. Essential items such as the operational specifications (“OpSpecs”) are in order at the time of the purchase, as well as the manuals for safety, training, pilots, and the approved jurisdictions that aircraft on the Part 135 Certificate can fly.
Structure the Transaction as a Stock (or Membership Interest) Purchase
There are typically two ways to structure the purchase of a company: (1) an asset purchase or (2) a stock purchase. The FAA is clear that a Part 135 Certificate is not transferable. In other words, an FAA certificate is not an asset of the company that can be sold individually. Therefore, to purchase an existing Part 135 Certificate, the buyer must acquire the entire certificate-holding company.
Notify the FAA Early in the Process and Determine Their Level of Involvement
The FAA must be notified when a buyer acquires a Part 135 Certificate. Once the buyer submits the notice to the FAA, the amount of FAA involvement depends on the type of acquisition and the amount of changes made to the certificate, including the following types of changes:
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- Changes in management
- Turnover in personnel and reduction of workforce
- Labor disputes
- Rapid expansion
- Changes in fleet types
- Changes in outsourcing
- Changes in operational control systems and philosophy
- Changes in OpSpecs
- Changes to approved programs that are part of the operational control system
- Revisions to manuals containing procedures for conducting various operations, maintenance, and inspection programs
- Revisions to training curricula and/or changes in employee qualification criteria for persons who will be conducting merged or new operations and/or programs
Buyers can expect that the greater amount of changes to these items, the higher the level of involvement from the FAA. In addition, the process may look different depending on who is involved and how the deal is structured. For example, whether both the buyer and seller are certificate holders, and whether the deal is structured as a stock purchase, asset purchase, or merger, matters.
Mergers and acquisitions where there are a significant amount of the changes referenced above generally require significant FAA involvement and the development of a transition plan, though the determination of involvement will be ultimately made on a case-by-case basis by the Safety Assurance (SA) office. On the flip side, acquisitions by holding companies (noncertificate holders), when the certificate holder continues to exist as an independent entity (subsidiary), is a type of acquisition that requires little, if any, FAA action. Usually, few operational changes are made and the development of a transition plan is not necessary.
Structure the Purchase to Limit Liability Exposure
Buyer’s counsel should ensure that the Purchase Agreement is structured appropriately to address concerns or potential liabilities discovered during the due diligence process. Typically, this is handled through the representations and warranties section of the Purchase Agreement. The purpose of reps and warranties is to provide statements of facts and promises about what is being purchased, acting as a form of assurance that the transaction is what the parties believe it to be and providing legal recourse if it is not. Specific representations and warranties are essential to purchasing an existing Part 135 Certificate, including representations and warranties relating to financial statements, compliance with the law, environmental compliance, real property, the condition of the assets, and contracts. Regarding contracts, it is essential to pay close attention to the contracts with existing Director of Maintenance (“DOM”), Director of Operations (“DOO”), and Chief Pilot (“CP”) positions and the lease or purchase agreements for any aircraft on the certificate.
In the Purchase Agreement, buyers and sellers normally negotiate a survival period for the reps and warranties, providing the buyer with recourse and indemnity for a breach of a rep and warranty that occurs after closing within a specific period of months or years thereafter. A standard survival period is normally around 2 to 3 years, with a higher number of years for certain fundamental reps such as compliance with laws or taxes.
Assemble Your Acquisition Team
When purchasing an existing Part 135 Certificate, it is essential to have a team that understands the desired objective. The right acquisition team will help you properly value the acquisition, overcome financial and regulatory hurdles, and close the deal while efficiently streamlining the entire process.
At a bare minimum, the team should include:
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- An aviation lawyer who specializes in mergers and acquisitions (“M&A”) and aviation regulatory law,
- A business broker who understands the aviation industry, and preferably the specific type, kind, and scope of the operations certificate you are looking to acquire, and
- A technical specialist, whether an individual or an entire team, to assist with specific areas of due diligence and regulatory and technical compliance.
Purchasing an existing Part 135 Certificate can be a very complicated transaction; it is extremely important to have representation that understands the regulatory nuances of structuring such a deal and is aware of the required due diligence. If you would like experienced legal counsel, please call us at the number below or email us at Counsel@BizjetLaw.com.