After an M&A deal closes, it is common for shareholders to receive additional funds either from escrow or from the buyer. Most immediately, this usually happens once the purchase price adjustment (PPA) is agreed upon.1 Merger agreements usually require that the amount owed to shareholders from this process is remitted promptly to shareholders once the PPA is resolved.
However, the payment to shareholders of purchase price adjustments is often suboptimal. This article highlights how the funds in your next M&A deal can be more efficiently managed and disbursed.
Retain Cash in the Shareholder Expense Fund in a M&A Closing
As shareholder representative on thousands of private M&A deals, the team at SRS Acquiom sees a significant proportion of PPAs that are immaterial in the context of the deal and potentially inefficient for individual shareholders to receive in the timeframe contemplated in the merger agreement. For example, disbursement costs may materially erode or even eliminate a minority shareholder’s stake in the cash available for distribution. Additionally, M&A deal parties must also agree on complex waterfall distributions to allocate any funds to shareholders regardless of the size of the distribution. This is especially inefficient on larger deals where tens or even hundreds of shareholders are entitled to only a few dollars of the disbursement.
In these situations, our team may recommend that the cash is temporarily retained in the expense fund held by the shareholder representative for anticipated payment to all shareholders with a future distribution (e.g., from the often higher-value indemnification escrow) for greater efficiency in disbursements.
Expressly Permit the Shareholder Representative to Contribute to the Expense Fund
While temporarily “parking” funds in no way harms the buyer, buyers react differently to these recommendations, ranging from immediate acquiescence to refusal to deviate from deal terms that may require immediate distribution of these funds to sellers. The most common outcome requires a formal amendment or side letter to the merger agreement, which necessitates additional legal time and costs from outside counsel and is a hassle to all involved.
Instead of handling these types of issues after the fact, deal parties should consider including simple boilerplate language in the shareholder representative’s appointment and authority section of the merger agreement that addresses this issue. This language would explicitly permit the shareholder representative, in consultation with the sellers, to elect to contribute funds to the expense fund from consideration otherwise distributable to sellers.
While this may be covered in any event by the shareholder representative’s broad power of attorney, making shareholder representative authority explicit in this fashion would avoid confusion and could ultimately be beneficial for both shareholders (by increasing value) as well as deal parties and their representatives (by reducing costs and time spent on post-closing legal and payment administration).
Additionally, and more broadly from the PPA, greater control over the distribution of post-closing consideration would assist with the efficient management of post-closing expenses, distributions, and other non-routine matters.
Planning Ahead for M&A Deals Can Make a Difference
Our unique vantage point at SRS Acquiom affords us the ability to see where many M&A deals can be more effectively managed to a better and swifter conclusion. We often see where “an ounce of prevention is worth a pound of cure.” Anticipation of shareholder disbursement needs can provide a more time- and cost-efficient means of managing M&A deal considerations.
1 A purchase price adjustment (PPA) is the typical adjustment to the merger consideration for changes in the financial condition of the target company from the pre-closing estimates of working capital, cash, etc., to the determination of actual balances 60-120 days post-closing.
Senior Finance Director, Shareholder Advisory 720.799.8604
Paul is a senior finance director in the Shareholder Advisory group at SRS Acquiom, specializing in finance and accounting. He manages post-closing matters and disputes related to purchase price adjustments, earn-outs, and indemnification claims.
Before joining SRS Acquiom, Paul worked at Alvarez & Marsal in Chicago and AlixPartners in London, advising multinationals and private companies on high-value purchase price disputes, commercial litigation, financial damages, and forensic accounting.
Paul holds an MA in Economic History from the University of Glasgow in the UK, and is a Fellow of the Institute of Chartered Accountants in England & Wales (ICAEW).