Learn essential drafting tips to avoid post-closing issues. Topics covered include expense funds, confidentiality, resignation/removal/replacement provisions, scope of agency, working capital and issues related to overlap in definitions.

Tip #1: Release of Expense Funds

Avoid hard-coding the release date of the expense fund (such as at the end of the escrow period). Instead, leave to the discretion of the Shareholder Representative (as directed by the Advisory Committee), since issues could remain after the escrow is released.

  • Bad Language: At the end of the Escrow Period, the remaining balance of the Escrow Amount (less any outstanding Claims) and the Expense Fund shall be released to the Shareholders.
  • Good Language: As soon as practicable following the completion of the Representative’s responsibilities, the Representative will deliver any remaining balance of the Expense Fund to the Paying Agent for further distribution to the Shareholders.

Tips #2: Confidentiality

Ensure that any confidentiality provisions that the Shareholder Representative subjected to are flexible enough to permit the Shareholder Representative to communicate with, at a minimum, the Advisory Committee. Without this, it can be very difficult to address claims.

  • Sample Language: Following Closing, the Representative shall be permitted to disclose information as required by law or to employees, advisors, agents or consultants of the Representative and to the Shareholders, in each case that have a need to know such information and that are subject to confidentiality obligations with respect thereto.

Tip #3: Resignation/Removal/Replacement Provision

Make sure to cover what happens if there is no Shareholder Representative at any point.

  • Sample Language: The Representative may resign or be removed at any time by the Required Majority. If at any time there is no Representative, the Required Majority, acting via written consent, may exercise the powers and authority of the Representative hereunder.*

*Sellers may consider also requesting that time periods for responses be tolled if there is not a Representative, but the parties would need to define what occurs if the buyer is required to respond to a third-party claim during this period.

Tip #4: Exculpation/Indemnity

If you have an advisory committee to the Shareholder Representative, include them in the indemnification terms.

  • 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 . . .

Tip #5: Scope of Agency

Have Shareholder Representative’s authority cover the full set of payees that are receiving consideration, not just the stockholders (i.e., don’t overlook optionsholders, warrant holders or others receiving proceeds).

Tip #6: Avoid Express Restrictions

Generally avoid having express restrictions on the Shareholder Representative’s authority in the merger agreement – better for both parties; restrictions can be built into the engagement letter or side letter where they are governed by the Advisory Committee’s authority instead of being hard-coded in the merger agreement.

  • Buyers want to be able to rely on the Shareholder Representative’s actions without being responsible for determining if other conditions were met.
  • Sellers want to be able to change authorities without requiring an amendment to the merger agreement.

Tip #7: Holding the Expense Fund

It’s usually a best practice to have the Shareholder Representative hold the expense fund rather than the escrow agent, for a few reasons.

  1. To be able to act quickly. Having to send instruction letters to a bank can cause delays.
  2. To avoid the possibility of funds being locked up if there is a dispute over their distribution.
  3. To avoid additional fees.

Tip #8: Watch for Non-Accounting Issues in Working Capital Adjustments


  • Tax compliance
  • Reserves for litigation
  • Capitalization


  • These require legal analysis to resolve.
  • The accountants aren’t able to provide a legal analysis or opinion.
  • If it goes to accounting arbitration, the arbitrators only know how to address the accounting issue

Resolution Options

  • Keep these issues out of working capital. Limit them to indemnification remedies.
  • Consider alternatives to accounting arbitration for dispute resolution.

Tip #9: Watch for Overlap in Definitions

Best Practices

  • Go through a detailed General Ledger with the CFO with each of the accounting definitions.
  • There should be no overlap of Cash, Net Working Capital, Indebtedness, Unpaid Transaction Expenses, etc.

Simple Example

  • “Cash” is defined as cash plus cash equivalents, including accounts receivable.
  • “Net Working Capital” is defined as Current Assets minus Current Liabilities.
  • “Current Assets” is defined as Cash and other current assets in accordance with GAAP.
  • “Current Liabilities” is defined as current liabilities in accordance with GAAP.

The Problems

  • You might have just counted accounts receivable twice.
  • You might be including transaction expenses in Current Liabilities even if they already reduced the closing purchase price.

Better Definitions

  • “Current Assets” is defined as Cash and other current assets not already included in Cash in accordance with GAAP.
  • “Current Liabilities” is defined as currently liabilities in accordance with GAAP other than those already factored into the Closing Purchase Price.
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