Recently, SRS Acquiom has seen more transactions in which the acquiring company requires the selling shareholders to enter into side agreements to ensure that certain terms of the merger agreement are enforceable against them. Since selling shareholders generally do not sign merger agreements, there have been questions as to whether some agreement terms can be fully enforced. For example, in Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., the Court of Chancery of Delaware invalidated several obligations that shareholders were told they were required to sign in order to receive their merger consideration.1 To mitigate any risks associated with this potential ambiguity about enforceability, the parties may resort to one of several solutions.
To add a higher level of protection, the parties can use joinder or contribution agreements. Joinder agreements are generally those in which individual shareholders specifically agree that they will be subject to all or certain terms of the merger agreement. These agreements may contain additional obligations that the buyer requires of major shareholders, such as voting agreements.
Contribution agreements are generally those in which the shareholders agree that if any shareholder pays more than his pro rata share of any post-closing liability, the other shareholders will reimburse the paying shareholder as necessary so as to bring into balance everyone’s pro rata portion. This tends to be important if the shareholders are jointly and severally liable for any obligation.
The primary downside to either of these agreements is that it takes added time and cost to get them signed individually by shareholders prior to closing. This is especially true if there are any shareholders who push back or want to make comments to the documents. If any shareholders are receiving little or no consideration in the transaction, they may not be inclined to be terribly cooperative in reviewing and signing any additional agreements.
Whether side agreements are necessary or advisable is a difficult analysis that must be done on a deal-by-deal basis.
1 107 A.3d 1082, 1091 (Del. Ch. 2014).