From implementing the finer points of M&A deal negotiations to final disbursement of payments and escrow, the post-closing road can be an arduous one to walk. The post-closing process is often complex and can take years to implement—requiring commitment and unique expertise.
Fearing the loss of control of their deal and the timing associated with it, buying and selling deal parties may hesitate to outsource shareholder representation services, or may be tempted to choose a low-cost provider of professional shareholder representation on behalf of the shareholders. This can be a risky approach, as deal parties can easily underestimate post-closing deal complexities.
A “DIY approach” to professional shareholder services (or the choice of a low-cost provider) can expose parties to complications and distractions with unintended consequences. These approaches often come at a burdensome, high price: post-closing litigation (which may be preventable if managed by experienced professionals) can introduce unanticipated expenses and a host of risks to the M&A deal at hand. The prospect of being directly named as a defendant in a post-closing case should give deal parties’ pause: it can not only cause financial harm but can also potentially damage future relationships and their or their firm’s reputation.
Engaging professional shareholder representative services can ease considerable stress on an M&A transaction. Working from years of experience in all kinds of complex deal arrangements, a reputable professional shareholder representative knows how to effectively navigate post-closing issues to successful conclusion. The right shareholder representative, or “rep”, can identify and address issues before they start and resolve a wide range of post-closing demands.
To help you know what to look for when engaging a professional shareholder representative, we will explore the role. The team at SRS Acquiom also offers tips on pitfalls and crafting language to support your professional shareholder rep relationship, honed from years of specialized experience in this area.
What is a Professional Shareholder Representative?
What should selling shareholders1 expect from the person or entity they elect to serve as their shareholder representative following the closing of a sale of a business? What functions should the representative perform on behalf of the group they are representing? Historically, the parties assumed the answer was “not much.” The representative typically assumed there was nothing to do unless the buyer made a claim, and the shareholders usually expected not to hear much until the final disbursement of any remaining escrow balances unless they asked a specific question (and maybe not even then).
Shareholders have now come to expect more from their shareholder representative. They want more than a process manager; they want help with solving problems before they begin. At a high level, shareholders want confidence that the representative (i) has the experience and expertise to protect their interests and (ii) is established and stable enough to be there until the multiyear process is completed. Anyone agreeing to serve as the representative should view this role as a serious responsibility.
The expectations of today’s shareholders should give deal parties pause as they consider the time and commitment required to fulfill these obligations well. A “DIY approach” can distract deal parties from their primary business responsibilities. A low-cost approach can also compromise shareholder outcomes with a lack of internal resources and depletion of any expense funds. Shareholders expect that such a representative will diligently look after their interests and keep them informed on the status of their remaining financial stake in the transaction. Specifically, the shareholders should ask the representative to perform the following tasks and should believe that the representative has the following traits:
- Commitment and Resources
The representative should be committed to actively navigating the post-closing process and providing a single, senior point of contact for shareholders. This includes making sure the person has enough time and the appropriate resources available to devote to any issue that may arise rather than giving it minimal attention. This also means feeling comfortable that the representative will be responsive to shareholder questions and requests. Shareholders need information following closing for reporting, audit responses or other similar matters. They need to know their representative is not going to ignore their requests for information.
When hiring a professional shareholder rep, make sure that the organization engaged has sufficient in-house subject matter expertise and depth as well as experience managing similar transactions to be knowledgeable about the types of issues that may arise. This includes substantial experience managing complex indemnification claims, earnout disputes and working-capital adjustments. Ideally, outsourcing would be minimized, and the representative would have experience with both legal and accounting issues since these matters arise most frequently.
Ensure that the professional you hire has a deep history and proven track record of successfully resolving issues for shareholders. Professional shareholder reps are often tasked with maintaining files related to the transaction. The shareholders need to know that their representative is well established, organized, is not likely to change jobs, or otherwise quit or leave in the middle of the post-closing process. If the representative changes jobs (or the point person for an institutional representative leaves), they are unlikely to remain focused or committed to the remaining tasks of being a shareholder rep.
- Management of Disputes
This is one of the most important responsibilities of a shareholder representative. The representative should be experienced investigating, negotiating, resolving disputes, and have the resources available to thoroughly protect shareholders’ interests. This can require several unique areas of expertise, including various unrelated legal issues (such as employment, intellectual property, environmental and others), tax, and accounting. It is difficult for any individual or a small firm to be able to cover them all.
The shareholder representative should not be an employee of the acquiring company or a law firm, nor have another job or have team members with other jobs. If they do, they will have conflicts and competing demands on their time.
- Term Tracking
The shareholder rep needs to understand and record the important terms of the transaction for ready availability should an issue arise, or shareholders have questions. The representative also needs to know what rights were negotiated on behalf of the sellers to ensure no such rights are inadvertently forfeited or forgotten.
- Disbursement of Proceeds
The shareholder representative needs to have the ability to track each shareholder’s interest in escrows or earnouts to ensure funds are promptly and correctly distributed at the appropriate time. This can be difficult if there are large numbers of shareholders or optionholders or if the target company had a complicated capitalization table, so the representative must have the appropriate administrative capabilities. The task is even more complicated if withholding is required.
- Shareholder Reporting and Responsiveness
The shareholders should expect the shareholder representative to keep them reasonably informed should any issues arise that could impact the timing or amount of any applicable payments. Periodic reporting should be requested so the shareholders understand whether there have been any changes to their economic interests.
Merger agreements may require the shareholder representative to perform tax reviews or prepare and file certain tax returns. The shareholders should feel comfortable the shareholder representative has the skills and resources necessary to complete such tasks.
- Date Tracking
The shareholder rep should have processes and systems in place to track important dates related to the transaction to ensure no such dates are missed. These dates can occur years into the future, so it is critical that the representative’s systems are sophisticated and will be maintained for long periods. It is not enough to just enter a few dates onto a laptop.
- Account Reconciliation
The shareholder representative typically will get monthly bank statements from the escrow bank. The shareholders need to know such statements will be carefully reviewed to ensure they are accurate and that no unauthorized charges have been made.
The role of a professional shareholder representative is complex and comprehensive. When considering who should serve as shareholder rep, and in selecting a professional shareholder representative, parties should have a conversation regarding the expectations for the terms of the relationship. Significant dollars are involved, and frustrations or problems can arise when the representative has a different vision of the job from that held by the shareholders. Ensure that your shareholder representative has the depth and breadth of expertise to solve issues that may arise whether they are related to earnouts, purchase price adjustments, indemnification claims or other disputes, or post-Closing releases to the shareholders.
M&A deal parties may believe their deal is too small or that they will lose control over the decision making if a professional shareholder is engaged. Or they may believe their deal is “clean” and that claims will not become an issue. This isn’t necessarily the case. Smaller deals are often the most at risk, and even what should be a small claim can lock up funds available for disbursement for an extended period. The vast majority of M&A deals (92%) have some form of purchase price adjustment or issues post-closing, which triggers the need for ongoing support and management for years to come. Hiring a professional shareholder representative allows the shareholders to offload day-to-day management of the process while allowing them to remain as involved as they want to be in the key decisions that need to be made. A seasoned professional shareholder representative, who has experience solving a wide variety of post-closing issues, can be useful in nearly every size and type of private target acquisition where there are post-closing obligations.
M&A Deal Language: Establishing the Shareholder Representative’s Role
When engaging professional shareholder representative services, M&A deal parties can find that crafting language regarding the appointment of this important role is a nuanced art. The merger agreement needs to successfully appoint the shareholder representative and outline the scope of the shareholder representative’s rights and obligations. A strategic view of shareholder representation language can help ensure the parties are protected for the life of the contract.
Scope of Power of the Shareholder Representative
Some shareholders, especially large corporate shareholders, express concern over the ability of the shareholder representative to change the terms of the merger agreement after closing. Large organizations want to control the terms of any agreements under which they have obligations or liabilities. This is certainly understandable. As extreme examples, some shareholders have wondered whether the broad powers typically granted to a representative would give them the ability to enter into a settlement agreement that would restrict the ability of the selling shareholders to take some action, such as executing a non-competition agreement. While that would be tough to enforce, the question about where the line should be drawn on the limits of the representative’s authority is a good one.
This potential desire of these shareholders to define and curtail the powers of the representative conflicts with the typical desire of the buyer for these powers to be as broad as possible. The buyer wants to know that any action that may need to be taken after closing can be taken by the buyer and the representative acting alone. Buyers do not want additional approvals to be needed for some actions, but not for others.
As a legal matter, SRS Acquiom questions whether any amendment that fundamentally changes the terms of the deal that were approved by the board and shareholders would be enforceable. However, it is difficult to define what would constitute such a fundamental change.
This is a difficult problem to navigate. If it becomes an issue on a transaction, the team at SRS Acquiom suggests adding language, such as:3
“The Securityholders hereby constitute and appoint the representative as attorney-in-fact for the Securityholders with [broad powers to take any actions necessary under the merger agreement following closing]; provided, however, that the shareholder representative shall not have the power or authority to execute an amendment, waiver, document or other instrument that, notwithstanding any other provision to the contrary, increases in any material respect the obligations or liabilities, or decreases the benefits, of any Securityholder without the prior written consent of that Securityholder.”
This leaves some ambiguity regarding materiality. However, it seems to be a possible compromise between the desires of some shareholders to know that the deal cannot be materially changed without consent, and the buyer’s desire that the representative is given the power to take most actions that may arise after closing.
Extension of Shareholder Representative Authority to All Payees
In many transactions, there are parties other than shareholders who are receiving merger consideration and may have interests in escrows, earnouts, or the like. Often in these agreements, the shareholder representative has the authority to make decisions that could impact deal economics, such as whether an escrow is depleted or whether it is agreed that an earnout will not be achieved. Since these decisions impact parties other than shareholders, it is generally advisable to have the shareholder rep’s authority cover the full set of payees who are receiving consideration, not just the shareholders (i.e., don’t overlook optionholders, warrantholders or others receiving proceeds).
Information Sharing: Ensure the Right Level of Latitude to Support Communications
A standard provision in merger agreements says the parties to the agreement shall not communicate any of the terms therein or any matters related thereto to any third party, subject to some standard exceptions. While this sounds reasonable enough, it fails to take into account that a shareholder representative will often need to communicate certain information to the former shareholders, who are not parties to the merger agreement. For instance, if a claim arises, the representative will often need or want to tell all or certain of the former shareholders about the claim and get their feedback on how they think the representative should proceed. Additionally, the representative will often need to communicate something to the former shareholders related to the claim once it is resolved, if there was a related payout, to let shareholders know why their escrow interest has been reduced.
On the other hand, since many claims relate to sensitive subjects, the buyer will likely want protection that information will not be broadly distributed, especially when there are hundreds of former shareholders.
To resolve this, SRS Acquiom suggests that the representative should either be able to communicate with the shareholders or should be able to communicate with a subset of shareholders who are bound by confidentiality obligations. Language such as the following can be added to the end of the confidentiality section of merger agreements:
“The shareholder representative may disclose information as required by law or to employees, advisors, or consultants of the shareholder representative and the Shareholders, in each case who have a need to know such information, provided that such persons either (A) agree to observe the terms of this Section __or (B) are bound by obligations of confidentiality to the shareholder representative of at least as high a standard as those imposed on the shareholder representative under this Section __.”
With respect to communications among shareholders or between shareholders and the shareholder representative, the parties should ensure such communications remain privileged, especially when the buyer has made an indemnification claim or the shareholders believe that buyer has breached one of its obligations under the merger agreement. When the shareholders elect to have conferences and/or phone calls to discuss matters that are either in arbitration or litigation or likely to result in a dispute, shareholders are advised to have the shareholder representative and counsel for the indemnifying shareholders included in all such calls and conferences. Including counsel should maintain privilege as to discussions for which privilege is available. Including the shareholder representative helps to protect the shareholders from unnecessary risk.
Indemnification of the Shareholder Representative’s Advisory Committee
If you have an advisory committee to the shareholder representative, consider including them in the indemnification terms that apply to the shareholder representative. This committee is often a subset of the selling shareholders and may give direction to the representative related to post-closing matters. It should be clear they are not incurring any liability in doing so. Suggested sample language:
“Neither the Shareholder Representative nor any member of the Advisory Committee established under the Shareholder Representative’s engagement letter (collectively, the “Representative Group”) shall incur any liability of any kind . . . and the Shareholders shall indemnify the Representative Group from and against any and all losses . . .”
Resignation or Removal of the Shareholder Representative
Merger agreements should make clear the shareholder representative can resign or be removed by the selling shareholders at any time. The representative represents a shareholder group, and that group should be able to designate a substitute whenever they wish. While this may seem obvious, SRS Acquiom has seen situations in which the agreement contains language that could limit that ability. There is an easy fix to avoid this problem.
Specifically, avoid language, such as:
“If any shareholder representative dies or becomes legally incapacitated or is otherwise similarly unable to carry out his duties hereunder, then the other Company Shareholders shall designate a single individual to replace any deceased or legally incapacitated or otherwise similarly unable shareholder representative as a successor shareholder representative hereunder.”
The above language could inadvertently imply that a representative is entitled to resign or be replaced only if he dies or becomes incapacitated. Instead, consider language such as:
“If any shareholder representative dies or becomes legally incapacitated or is otherwise similarly unable to carry out his duties hereunder or resigns or is otherwise removed by the Company Shareholders, then the other Company Shareholders shall designate a replacement shareholder representative as a successor shareholder representative hereunder.”
In addition, it may be advisable to add a sentence that the representative can resign any time, and to provide for a replacement representative if the shareholders do not otherwise designate a replacement. For instance, language such as the following may be advisable:
“If a shareholder representative resigns or is otherwise removed for any reason, the Company Shareholders shall designate a replacement shareholder representative within [ ] days. If no such replacement shareholder representative is so designated, the Company Shareholder with the then largest percentage interest in the Escrow Fund, or in any outstanding claim if the Escrow Fund has been fully depleted, shall be deemed to be the shareholder representative, and shall have all rights and obligations of a shareholder representative hereunder.”
Professional Shareholder Representation: Reduce Risk, Improve the M&A Deal Process
Protecting the economic interests of deal parties and shareholders requires a deep understanding of the M&A deal process. Everything from investigation, negotiation, and dispute resolution related to working capital calculations, earnouts, indemnification claims, intellectual property, tax, accounting, and employment issues can arise post-close. These issues can pose many headaches and distractions to deal parties hoping for the efficient and timely resolution of post-closing mechanics. Buying and selling deal parties can increase their odds of success by engaging a professional shareholder representative that has resident expertise and knowledge of the issues at-hand, gained through its track record of success on thousands of deals with proven case studies of issues solved for shareholders. Finding the right professional shareholder representative can ease the strain on M&A deal parties as well as shareholders. With the right team, M&A deal parties can holistically manage the process, solve problems before they start, and can rest assured that what can often be a multiyear process is fully sustained to its conclusion.
1 To provide context and to define “shareholder,” it is a term that the team at SRS Acquiom uses interchangeably with the terms “stockholder” and “securityholder”. The shareholder, who can be a person or an entity, maintains equity (or other securities) in a company of at least one share. The literal interpretation is that this person or entity “shares” in a company’s successes or failures in the form of dividends, profits, or increased valuation of their shares. When selling shareholders arrangements on their behalf since the target company, including the company’s engagements with advisors and counsel, belong to the buyer after Closing. Selling shareholders usually appoint a shareholder rep via the merger or purchase agreement and sometimes directly through a shareholder support agreement or other joinder instrument.
22021 M&A Deal Terms Study, SRS Acquiom
3 SRS Acquiom notes that it would be very difficult to enforce a settlement between the representative and the buyer that would require a payment from shareholders in excess of the escrow or that would require the shareholders to take, or refrain from taking, some action. As a result, most buyers will insist that the shareholders directly agree to such settlements. Nevertheless, some corporate shareholders will not be sufficiently comfortable with this and will request language included in this article.
Managing Director, Professional Services Group tel:415-363-6081
Casey is a managing director at SRS Acquiom and leads the Professional Services group. His team of lawyers, accountants, and other professionals is responsible for managing post-closing escrow claims, earnouts, working capital, tax, and other disputes on behalf of the company's clients, post-closing distribution of merger proceeds, and other activities related to serving as the shareholder representative. While at SRS Acquiom, Casey has represented shareholders’ interests on hundreds of deals, including defending claims up to $400 million and administering life sciences deals with as much as $1 billion in contingent consideration.
Before joining SRS Acquiom, Casey represented Fortune 50 clients as a litigation attorney nationally and internationally in a variety of fields. He acted as outside counsel on behalf of numerous parties, including SRS Acquiom and its clients, and took multiple cases to trial and appeal.
Casey frequently presents and writes on subjects of interest to those in the M&A field and is a core contributor to SRS Acquiom’s life sciences study. He is also an Eagle Scout and volunteers with San Francisco Bay Area youth sports. He holds a J.D. from the University of California, Berkeley (Boalt Hall) and a B.S. in economics from Arizona State University’s Barrett Honors College.