In most mergers, the buyer and seller are each represented by legal counsel. Many shareholders of the selling company assume that the law firm that “sat on their side of the table” in the negotiation phase of the transaction will continue to represent their interests after closing. After all, the selling shareholders were the owners of the selling company, and thus were the ones whose economic interests the selling company’s lawyers were seeking to protect in negotiating the deal. Many shareholders also assume that any communications with their counsel will remain confidential and cannot later be accessed by the buyer. Both of these issues have received substantially more attention in light of applicable case law and increased focus on their importance to the post-closing process. See M&A Privilege: What to Make of the Great Hill Case, Who Owns the Attorney-Client Privilege After Closing and How Can It Really Be Addressed? for a discussion of the privileged communications issue.
Regarding the conflicts waiver issue, whether the seller’s law firm can continue after closing to represent the selling shareholders or the shareholder representative is not always clear. The law firm’s client is usually the selling company, not its shareholders. At closing, the company that was acquired becomes a part of the buyer, and therefore, the attorney-client relationship arguably flows to the buyer. This means that the selling company’s counsel may be conflicted out of taking a position that is contrary to the interests of the combined company, as this combined company now includes its current or former client.
To address this conflicts issue, the selling company can consider adding language to the merger agreement that specifically says that the selling company and the buyer waive this possible conflict of interest, and agree that the seller’s law firm can represent the selling shareholders and their representative after closing.
Possible language to address this could be:
Each of the parties hereto acknowledges and agrees, on its own behalf and on behalf of its directors, members, partners, officers, employees, and Affiliates that the Company is the client of [Law Firm] (“Firm”), and not any of its individual Equityholders. After the Closing, it is possible that Firm will represent the Equityholders, the shareholder representative and their respective Affiliates (individually and collectively, the “Seller Group”) in connection with the transactions contemplated herein or in the Escrow Agreement, the Escrow Fund and any claims made thereunder pursuant to this Agreement or the Escrow Agreement. Parent and the Company hereby agree that Firm (or any successor) may represent the Seller Group in the future in connection with issues that may arise under this Agreement or the Escrow Agreement, the administration of the Escrow Fund and any claims that may be made thereunder pursuant to this Agreement or the Escrow Agreement. Firm (or any successor) may serve as counsel to all or a portion of the Seller Group or any director, member, partner, officer, employee, representative, or Affiliate of the Seller Group, in connection with any litigation, claim or obligation arising out of or relating to this Agreement, the Escrow Agreement, or the transactions contemplated by this Agreement or the Escrow Agreement. Each of the parties hereto consents thereto, and waives any conflict of interest arising therefrom, and each such party shall cause any Affiliate thereof to consent to waive any conflict of interest arising from such representation. Each of the parties hereto acknowledges that such consent and waiver is voluntary, that it has been carefully considered, and that the parties have consulted with counsel or have been advised they should do so in connection with this waiver.
Inclusion of such a provision is now prevalent in merger agreements. The 2018 SRS Acquiom M&A Deal Terms Study reveals that 77% of merger agreements include conflict waivers; this has more than doubled since 2013.
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Paul is the chief executive officer and co-founder of SRS Acquiom.
Before co-founding SRS Acquiom, Paul was one of the founding partners of Koenig & Oelsner, a Denver-based corporate and business law firm with a strong practice in mergers and acquisitions, securities, and financing transactions. Prior to that, he was an attorney in the Chicago office of Latham & Watkins, and in the Colorado office of Cooley LLP.
Paul has authored numerous articles and is a frequent speaker at industry events. He received his BBA in finance from the University of Iowa and graduated from Northwestern University School of Law.