Paying Agent Agreement - Five Important Considerations When Negotiating

Paying Agent Agreements should be simple. Buyers and their counsel too often find themselves distracted by details like payment mechanics rather than getting the most out of the paying agent. An experienced paying agent should make the Buyer's and Buyer’s counsel’s jobs easier while ensuring a first-class experience for payees. Based on the over $220 billion in payments processed by SRS Acquiom to date, this article highlights five areas where time can be saved, and headaches avoided, when negotiating paying agent agreements.

1. Where to begin?

Compile a list of what you would like the paying agent to do to make the payments process, and the closing in general, more streamlined. Consider things like:

  • use of an online letter of transmittal (LOT) solicitation and submission platform,
  • whether or not to collect physical certificates,
  • how to process compensation payments (if any),
  • if any payees are not in the U.S., whether any special arrangements are needed (including payments in foreign currency),
  • evaluation of what tax reporting and withholding requirements are applicable,
  • determination of payment methods (ACH, wire transfer or check) and how those will be selected, and
  • appropriate customer service levels for responding to payee questions and requests

The paying agent should be able to provide a wide range of services to smooth the closing process and minimize the number of required vendors. Use your negotiation capital for things like service level enhancements or rush processing to meet tight timeframes.

Pro Tip: Choose the appropriate form of paying agent agreement

Start by requesting the paying agent’s current form of paying agent agreement. Paying agents frequently update their forms to better position themselves competitively and to account for regulatory changes, and it can be helpful to take advantage of those updates. The form that is selected should appropriately cover the topics listed above. Regardless, as Tim Martin, Senior Director and Relationship Manager at SRS Acquiom, advocates, “a sophisticated paying agent can accommodate the Buyer’s preferred form of paying agent agreement and work together with Buyer’s counsel to ensure it is suitable for the specific deal.”

2. What information will the Buyer need to provide? 

A good paying agent will communicate clearly and proactively about what information they need and when they need it. Depending on the deal, there are generally three categories:

  • account opening documents (including know-your-customer (KYC) requirements);
  • solicitation materials (LOT, information statement, joinder agreements, releases, lost or stolen certificate affidavits, etc.); and
  • payee information (most likely in a form similar to a closing spreadsheet).

A helpful paying agent should walk the Buyer and Buyer’s counsel through all of the requirements, either making it clear for Buyer’s counsel to convey back to the Buyer or working directly with the finance or accounting staff of the Buyer.

Pro Tip: Utilize the Paying Agent’s expertise to complete the KYC process

The paying agent will guide the Buyer through what information is required and how detailed to be when completing the documentation. For example, does the Buyer really need to provide projected revenue figures? Aaron Soper, Senior Director of Escrow and Payments Administration at SRS Acquiom, confirms that “revenue ranges may be sufficient.” As another example, if the responsible officer of the Buyer does not want to provide her social security number on a form or via email, Aaron suggests to “ask the paying agent if the officer can provide it over the phone directly to the paying agent’s compliance representative.”

3. How will the Paying Agent make the Buyer look good to VIP payees?

A paying agent should provide a straightforward platform that makes it easy for payees to get their money quickly. For example, they should ensure the paying agent will provide the very best customer service, use an easy-to-use method of soliciting and collecting LOTs, and commit to getting payments made quickly and accurately. The more efficient the process is for the payees, the better the Buyer will look to VIP payees like company executives, private equity funds, venture capital firms, institutional investors, family offices, and high net worth individuals.

Pro Tip: Take advantage of the paying agent’s expertise in soliciting LOT’s

The instructions included in the LOT are critical to the payee’s experience. Providing complete, useful, plain-language information and instructions will ensure expectations are appropriately set, LOTs are submitted correctly, and payees get paid sooner. Drew Wassing, Senior Director for SRS Acquiom’s global M&A Payments and Escrow Administration services, suggests to, “Ask what options the paying agent offers for soliciting and collecting LOTs and select the one that works best for your deal and is most convenient for the payees.”

4. How will the Paying Agent handle tax reporting and withholding?

The tax matters language in a paying agent’s form agreement is typically drafted by its tax counsel to deliberately include specific wording. This tax language is often designed to be as broadly applicable as possible, so that it can cover widely varying transactions with few or no changes. Even if some tax provisions are not applicable to your particular deal, the language is likely drafted so that any inapplicable provisions can be ignored. Changes to the form tax matters language can result in delays in negotiation of the agreement because the paying agent will often need to escalate tax language to its legal and/or tax personnel and, potentially, to outside tax counsel (at additional expense to the deal parties). To shortcut this process, request that your tax counsel only incorporate necessary changes to the agreement’s tax language, rather than making broader changes that fine tune and customize the tax section to your particular deal but may not necessarily be strictly required. Focus your negotiating efforts to address any truly deal-specific tax matters such as dividends, interest, sale of partnership interest, compensation payments, IRS Section 1446, and other “miscellaneous” categories. 

Pro Tip: Determine tax characterizations early in the process

One avoidable snag at closing is last-minute efforts to determine tax characterizations and required withholding amounts. For example, certain withholding applicable to non-U.S. payment recipients is legally required to be performed at the time the payment is made. Also, if closing happens to be close to the tax reporting deadline, there may not be sufficient time to make these determinations after closing. Finally, after the closing of a transaction, the priorities of tax and accounting personnel at the Company will likely shift away from these tax matters to post-closing integration. Ali Arend, Relationship Manager for SRS Acquiom’s global M&A Payments and Escrow Administration services, suggests, “to minimize delays and last-minute fire drills, begin working on the closing payment spreadsheet with payee information, tax characterizations and withholding amounts as early in the transaction as possible.”

5. How can you avoid additional and unexpected fees?

First, ensure that the paying agent agreement covers all post-closing payment events, including any purchase price adjustments, escrow releases (including the potential for multiple releases from escrow if there are indemnity claims), earnout and milestone payments, contingent compensatory payments, tax refunds, distribution of any expense fund amounts, and any other possible future payments that might occur. Avoid additional setup fees (and negotiating a separate paying agent agreement or an amendment to the existing one) by planning ahead and setting reminders for the known dates of future payment events; payees and vendors will appreciate the ease and consistency and the Buyer will appreciate not getting stuck with the hassle of post-closing payments. Second, consider other services like tax reporting and withholding, locating payees with out-of-date contact information, following up with non-responsive payees, handling escheatment, and answering expected payee questions about amounts and timing of future payments. Paying agents can add substantial value to the process by providing these services, and the parties should confirm any requested services are covered specifically in either the paying agent agreement itself or the fee schedule that typically accompanies it.

Pro Tip: Find out what else the Paying Agent can do for the deal parties

Historically, deal parties would engage a traditional financial institution to act as a paying agent with a very limited scope of services. Now, there are new and innovative participants in the market (including payments administrators) and you have more choices with some providers offering a platform of additional services such as online solicitation, signatures and tabulation of stockholder documents, facilitation of tender offer processes, setting up one or more escrow accounts with online access to balances, representations and warranties insurance (RWI) brokerage, loan agency services, shareholder representative services and expense fund management, among others. Tim Martin, Senior Director of Escrow and Payments Administration, advises to “take advantage of using a single vendor for your M&A closing and post-closing administration to keep the process efficient and fees down.”

In short, leverage the expertise and experience of the paying agent for details like payments mechanics and focus your negotiations on obtaining the best, most comprehensive suite of services from your paying agent. The outcome will be seamless closing process that ensures fast, efficient payments, a smooth and successful transaction, and happy clients and VIP payees.


About the Author: 

Kip Wallen

Kip is an attorney with the SRS Acquiom M&A Transactional Group. He has broad experience in M&A and provides guidance on market standards pertaining to a wide variety of matters including earn-outs, holdbacks, escrows, expense funds, and purchase price adjustments.


About the Pros:

Tim Martin

Tim is a Senior Director of Escrow and Payments Administration at SRS Acquiom and develops referral opportunities, manages customer relationships, and administers M&A Escrow and Payments Administration accounts. He has worked in the M&A market for over 25 years.

Aaron Soper

Aaron is a Senior Director of Escrow and Payments Administration, principally focused on management and development of the SRS Acquiom M&A Escrow and Payments Administration business nationally. He has over 10 years of experience in M&A escrows and payments.

Andrew Wassing

As Senior Director for SRS Acquiom’s global M&A Payments and Escrow Administration services, Drew is responsible for developing and facilitating transactions for the SRS Acquiom M&A Escrow and Payments Administration service.

Ali Arend

As Relationship Manager for SRS Acquiom’s global M&A Payments and Escrow Administration services, Jennifer works to coordinate transaction details with customers and offers direct support to clients to ensure customer needs are met timely and accurately.

Kip Wallen

Senior Director, Thought Leadership tel:720-452-5364

Kip Wallen is a senior director leading the SRS Acquiom thought leadership practice. He leverages his extensive expertise and SRS Acquiom proprietary data to produce resourceful content regularly utilized by market practitioners. Kip has broad experience in M&A and provides guidance on market standards and trends.

Previously, Kip was a Director with the SRS Acquiom Transactional Group, where he collaborated with clients and counsel to negotiate M&A documents including purchase, escrow, payments, and other transactional agreements. Before joining SRS Acquiom, Kip was an attorney with a Denver-based boutique business law firm where he assisted clients with M&A transactions as well as general corporate governance and securities matters.

Kip is an avid supporter of the Colorado Symphony, serving on the Associate Board and Colorado Symphony Fund Board, and the Colorado Rockies. He is an active participant on the American Bar Association’s M&A Committee. In 2016, Kip completed Leadership 20 with the Denver chapter of the Association for Corporate Growth.

Kip received his J.D. from the Sturm College of Law at the University of Denver and an M.S. in Economics, B.S. in Economics and B.A. in International Relations from Lehigh University. He is a member of the Colorado bar.

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