Most seasoned fund managers know it’s only a matter of time before they get dragged into litigation relating to the sale of a portfolio company. In most cases, the fund or one of its partners who is designated as the shareholder representative in the merger agreement is named a litigant because of an issue internal to the portfolio company that comes to light in the post-closing period rather than an allegation that a fund has engaged in wrongdoing itself. Even litigation where the fund manager did nothing wrong will result in considerable time and upfront expense that distracts from the fund manager’s primary goal: making and managing investments.
In the short term, getting sucked into litigation is tedious, stressful and a significant distraction from the core business. Long-term relationships with potential buyers in future deals can be permanently damaged if the investor is an adverse party in bitter or contentious litigation. Relationships with co-investor funds suffer if there is disagreement about how to conduct the dispute. And a lawsuit is the last thing any fund wants at the top of its Google results.
Fortunately there is no reason for a fund to be named in the vast majority of M&A post-closing lawsuits. Appointing an outside designated shareholder representative should prevent funds or other investors from being sued (absent specific facts directed at the investor). As discussed in this white paper, this can have significant benefits for fund managers or any other investor.