Does Your M&A Deal Need a Professional Shareholder Rep?

The team at SRS Acquiom has seen a trend toward larger cap tables and more complex M&A deals. Sellers may be tempted to serve as their own shareholder representative in an M&A transaction. But what does the role actually entail?  Is there a way to maintain control of the deal process without adding to your clients’ workload or exposing them to unnecessary risk? In the article below, learn about the role of a professional shareholder representative, and why many sellers and their counsel conclude that the benefits far outweigh any perceived cost savings. 

What is a professional shareholder rep?

After an M&A transaction closes, a professional shareholder rep performs many administrative deal tasks, including responding to seller inquiries, negotiating with the buyer or third parties if disputes arise, monitoring compliance with the deal agreement, and ensuring that earn-out and escrow payments are accurately made to shareholders. They represent all sellers and are a single point of contact with the buyer.  

Shareholder reps also help mitigate post-closing risks to individual shareholders whilst managing administrative headaches, i.e., updating all sellers on deal matters or sending monthly statements tracking escrow amounts. If one of the selling shareholders becomes a do-it-yourself shareholder rep, they may quickly find it becomes their day job.  

Why else does an M&A deal need a professional shareholder rep? 

Volunteering to undertake the responsibilities of the shareholder rep also exposes an individual shareholder to personal and professional risk – especially if the individual becomes a named defendant in post-closing litigation, which is typically the case when serving as the shareholder rep. Post-closing duties may be unpredictable and require expertise and substantial resources not readily available to a volunteer shareholder rep. Additionally, a volunteer shareholder rep who is an employee still working for the target company may face conflicts of interest trying to advocate for the former shareholders against a new employer. A professional shareholder rep assumes these risks and complex workload while ensuring that all payments and obligations are completed after closing – a process that can take several years. 

Pro Tip:  Before guiding your client to act as their own shareholder rep, think about this: “Do they have the time or resources to address the needs of the other selling shareholders? Do you want their time and attention distracted by complicated administrative tasks or litigation?”

Are there M&A transactions that do not need a professional shareholder rep? 

Absolutely. A professional shareholder rep is not required nor appropriate for all transactions. On small deals, the deal consideration may be insufficient to justify the expense of an outside shareholder rep.  Or if a selling company has only one shareholder who is comfortable performing tasks and communicating with the buyer directly on post-closing matters. Similarly, carve-out transactions, or sales of a division of a company rather than the whole company, often do not need an outside shareholder rep because the seller remains an operating company after closing and can typically handle post-closing matters. 

How do the selling shareholders maintain control if they hire a professional shareholder rep?

A professional shareholder rep acts on behalf of the selling shareholders and at their direction. In most engagements, an advisory committee is formed that will be informed of any post-closing issues and will have the opportunity to instruct the professional shareholder rep on how to proceed on matters that go beyond the day-to-day. The ideal advisory committee is an odd number of significant former shareholders with knowledge of the transaction that come together as an efficient working group to respond to shareholder rep requests; the odd number (3 or 5 in many deals) helps ensure a majority is met for any direction, also means there is limited delay in achieving a majority (which can take time where there are large numbers of members) and limits the time commitment required of other shareholders. A good professional shareholder rep will have substantial prior experience with similar matters to help guide the discussion, but the shareholders will have ultimate control over decision-making and can even specify the matter on which they most want to be closely engaged with the shareholder rep. 

What should you look for in a professional shareholder rep? 

Diverse and Extensive Experience

Effective protection of shareholder interests requires specialized experience with similar transactions and the knowledge needed to anticipate and plan for issues that may arise. This includes substantial experience managing working capital adjustments, indemnification claims, and earnout disputes. A professional shareholder representative with thousands of deals under its belt will have unprecedented insight into the intricacies of private sale transactions and the full spectrum of issues that may arise. Depth and breadth of exposure to post-closing matters enables the professional shareholder representative to identify transaction terms that can become problematic and, in many cases, offer a tried-and-true solution.

Pro Tip:  Ask potential shareholder reps how many transactions they have supported and where. The greater the number of transactions, the better.

Dispute Management Expertise

While the possibility of post-closing indemnification claims or litigation is always a reality, less apparent is the risk assumed by the shareholder rep and the costs that may arise if outside counsel is needed. The role of shareholder rep is unique because being the agent for all selling shareholders creates a material risk that the shareholder rep will be targeted in litigation despite having done nothing wrong.  

SRS Acquiom data shows that more than 60% of deals will have a claim against escrow funds. With deep insight gained from representing shareholders on thousands of deals involving global shareholders, we’ve learned that these issues can take years—and millions of dollars—to resolve. Disputes can arise about everything from adjustments to the purchase price or working capital to earnouts and milestone achievements. Individuals and small firms typically cannot manage protracted disputes such as these over a multi-year horizon, in addition to providing coverage for other shareholder issues than may arise (such as taxes or accounting).   

To adequately represent the interests of the selling shareholders, a professional shareholder rep should have an experienced in-house team with deep expertise in investigation, negotiation, and dispute resolution. Other expertise around unique issues that frequently arise, such as working capital calculations, accuracy of financial statements, litigation, intellectual property, tax, accounting, life sciences, and employment issues, may also be required. 

Pro Tip:  Ask potential shareholder reps about the depth and breadth of in-house resources. Make sure you understand what will be handled in-house vs. what may be outsourced. 

Outsourcing can be expensive, so make sure to clarify what services are included in upfront fees.  A professional shareholder rep should be able to handle the coordination and negotiation of many deal issues and administrative tasks in-house in the event of a typical post-closing claim. However, post-closing matters can require additional costs, such as engaging litigation counsel or other experts in the event of a formal dispute. Selling shareholders often set aside a pool of money for this purpose, known as an expense fund.  Beware of service provider cost structures that rely too heavily on expense funds to cover additional fees incurred by hiring consultants, third-party service providers, outside counsel, or other experts not on staff. 

Commitment and Resources

Key to effective shareholder representation is the administrative and technological capability to track each shareholder, keep them informed of the status of their financial interest, and maintain focus on long-term deadlines that may occur years in the future. These tasks become increasingly difficult if there are large numbers of shareholders or other stakeholders, particularly if the target company has a complex capitalization table, or if tax withholding is required. In addition to handling these obligations efficiently, a truly effective shareholder rep can take over the distribution, collection, and tabulation of the myriad documents required to close your deal.

Pro Tip:  Ask potential shareholder reps about the kind of support they provide both pre- and post-closing. How do they manage information received from selling shareholders and communicate with them in a timely manner?

Post-closing responsibilities are often time-consuming and complicated, but an effective professional shareholder rep can alleviate shareholder stress and uncertainty.  SRS Acquiom pioneered professional shareholder representation in the U.S. and now extends these capabilities to Europe. Our versatile and highly capable team, with on the ground resources in both Europe and the U.S., has the depth and breadth of experience across a wide variety of post-closing issues to solve just about any problem a deal will encounter. From the beginning of the transaction to the final payment, hiring a professional shareholder rep allows seller shareholders to shed the burdensome aspects of post-closing management.