SRS Acquiom occasionally sees merger agreements in which the acquirer or escrow bank is to pay some portion of merger consideration or the balance of the escrow fund to the shareholder representative, with the representative then being responsible for disbursing the money to the former shareholders. Unless the shareholder representative is set up to handle this job, it can create numerous regulatory and administrative challenges.
First, it may be difficult or impossible for a representative that is not experienced with payments administration to make any payments that are deemed compensation and are subject to withholding taxes. Generally, the representative is not the employer and does not have the authority to act in such capacity for withholding purposes without more complicated arrangements, such as grants of powers of attorney. SRS Acquiom is uniquely positioned to be able to handle compensation payments, but most any other shareholder representative, whether volunteer or hired, cannot and should not accept taking on this role.
Second, the representative needs to be able to structure this so that it does not take control of the funds. With SRS Acquiom, the money remains with a financial institution and we perform the service of payments administration. If this is not set up properly, the shareholder representative could risk violating regulatory rules and the money could become at risk of loss should the representative be insolvent or otherwise fails to complete the distribution as instructed. SRS Acquiom has facilitated billions of payments with no money being lost, but this should not be undertaken by a person or entity that lacks this experience to ensure it is done properly.
Third, the amount of time it takes to disburse funds is important. Many banks take weeks to get payments out. Volunteers or representatives that do not do this frequently may struggle for even longer to make such disbursements. This comes at a significant cost. Since most funds expect to earn a 20% to 30% internal rate of return, the cost of capital is high, and delays like this cost the holders significant value.
When funds do flow through the representative, such as is the case when the representative is holding expense funds, it is important to ensure that the representative knows how to properly hold funds to ensure the assets are safely held and invested in order to minimize potential exposure to claims from creditors. Payment processing is a complex business. The representative should know how to efficiently process wires, checks and ACH transactions for the best interest of the recipients or be instructed to hire a third-party paying agent who does.