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A common indemnification claim that SRS Acquiom sees relates to sales tax exposure of the target company. These claims tend to be complicated because they often involve an assessment of the target company’s interactions with customers in multiple states and the application of these states’ tax laws.
Earnouts are sometimes technically missed for reasons that are caused by changes in business strategy, while the buyer may still be getting the value sought from the company purchased.
Sellers must successfully navigate the internal relationships, politics, and various strategic motivations of their large company partner to get their product approved and to market.
The role of the purchaser representative is to ensure that non-accredited investors evaluate the merits and risks of the prospective investment in the acquirer’s stock.
It typically takes longer for a shareholder representative to review working capital calculations when material adjustments might be made, because both the number of issues and the complexity of such issues tend to increase as the amount of the adjustment increases.
When considering who should serve as your shareholder representative, you should have a conversation regarding the expectation of the relationship.
Most merger agreements improperly draft the language appointing the stockholder representative.
The representative should either be able to communicate with the shareholders or should be able to communicate with a subset of shareholders who are also bound by confidentiality obligations.
The parties on many deals decline to purchase representation and warranty insurance because they perceive the cost to be too great for the risk that is being mitigated.
In private equity transactions the lead investor frequently elects to assume the role of shareholder representative. However, there are significant risks and costs associated with the role.
SRS Acquiom has seen a trend toward having a separate firm that represents the interests of a stockholder or group of stockholders.
Even with good exits, a shareholder can always try to argue that the company could have done better.
Recently, SRS Acquiom has seen more transactions in which the acquiring company requires the selling shareholders to enter into side agreements to ensure that certain terms of the merger agreement are enforceable against them.
Tying up as much money as possible for as long as possible is, all else being equal, a good thing for buyers and a bad thing for sellers.
If the expense fund account is held by the shareholder representative, the arrangement is typically simpler.
It is important to ensure that the representative knows how to properly hold funds to ensure the assets are safely held and invested in order to minimize potential exposure to claims from creditors.
For decades, M&A deal closings have been completed by mailing piles of paper back and forth between the merger parties, the stockholders and a paying agent.
Inclusion of conflict waivers has nearly doubled from 2012 to 2014.
The threshold should be met only after the buyer has suffered actual damages in excess of the basket amount.
Though it may seem simple, it is impractical for the shareholder representative to prepare the tax return.
The escrow bank typically does not have any obligation to verify that the representative actually received notice. This presents two related but meaningful risks.
14% of all claims relate to the buyer looking to recover fees and expenses incurred in connection with the issue rather than losses related to the issue itself.
Many merger agreements do not make clear which option is the intended treatment.
SRS Acquiom believes that working capital is based on the company’s final closing balance sheet, and not the buyer’s opening balance sheet.
Best practice is to ensure that cash is included in the definition of net working capital so that the benefit of a true-up can flow to either party.
SRS Acquiom has seen large purchase price adjustments for reasons that will never affect the combined company’s actual cash position or value.
Contingent, unknown and unquantifiable liabilities are problematic in the post-closing purchase price adjustment process.
Buyer will use reasonable efforts to provide access to the books and records of the Company electronically.
If the buyer fails to deliver the notice of adjustments within the required time frame... has it forfeited its right to do so?
Merger consideration should be defined as the amount paid at closing plus whatever balance remains at the end point of the escrow process.
Parties should define in the merger agreement how such damages are to be calculated.
Parties should clarify whether indemnification caps are intended to be inclusive or exclusive of each other.
If the party that controls the defense is not the party responsible for any related payments, there can be a moral hazard problem.
A stated escrow period may not be respected.
Retention of a professional shareholder representative is increasingly important for a number of strategic reasons.
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