Legal Overview of Transition Matters in a Hotel Management Company M&A Transaction
By Patricia Mahlstedt Co-Chair Hospitality & Gaming Practice, Eckert Seamans | December 24, 2017
Given the number of hotel management companies in the United States, it’s no surprise these companies are as active in the merger and acquisition arena as any other industry. For hotel operators who don’t own the businesses they operate, their contracts with hotel owners are the “assets” to be combined in such a transaction. When hotel operators combine (through merger or asset acquisition), it’s easy to focus on obtaining required owner consents.
In addition, however, the parties must address operational transition matters long before the deal closes – they should be considerations even while the transaction agreement is being drafted.
A hotel operator's management contracts with the hotel owners are the main assets of the operator's business. Any business combination of two hotel operators needs to keep those assets intact to accomplish a successful combination. Thus, if the contracts require the consent of one or more hotel owners in order to consummate the proposed combination, from both a legal and financial perspective it is imperative to obtain those consents. Attorneys for both parties should review all the management contracts during legal due diligence review, and will draft the necessary documents for obtaining the consents. However, this process isn't just a review and documentation exercise for the lawyers. The results of the contract review can help the parties strategize on the structure of the transaction, as well as focus resources for the consent-seeking process.
Further, the executives and upper-level operational personnel of both operators play a key role in obtaining the necessary consents - they will need to satisfy those hotel owners that the combination will not negatively impact their hotels. Even if a contract does not require a hotel owner's consent for the particular transaction, keeping hotel owners satisfied is a core requirement for any hotel operator (particularly for contracts without long, non-cancellable terms). Therefore, whether or not a consent is required, it is also important for the hotel operators to demonstrate that the new, combined company will also have a positive impact on hotel operations.
We can't talk about obtaining owner consents, without also discussing consents from franchisors and lenders. The acquiring hotel operator needs to become (or remain) an operator approved by the owners' franchisors and lenders. Even if a management contract doesn't expressly require the owner's consent to the transaction, most likely the hotel operator is required to remain an approved operator, or at the very least is prohibited from taking any action which could cause a default under the owner's franchise agreement or loan agreement. While the hotel operators may have existing relationships with the franchisors and lenders, with respect to the specific hotels it is the hotel owners who have the direct contractual relationships with those parties. Therefore, the hotel operators need to have the hotel owners on board (or at least in the loop) before contacting the franchisors and lenders for any required consents. The goal is the same as with the owners - satisfy them that the combination of the hotel operators will not hurt hotel operations, and will likely positively impact the hotels. In addition, the hotel owners will not be expecting to bear any cost of obtaining and documenting these consents - the hotel operators need to be prepared to cover approval fees, as well as legal fees, of the franchisors and lenders.
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