Sometimes, an unexpectedly difficult aspect of an M&A transaction is getting people paid. M&A advisors and their clients rely on the rapid disbursement of funds at closing, and shareholders do not fully exhale until the money is in their account.
After deals close, it is common for shareholders to receive additional funds from escrow or the buyer. This disbursement of funds usually happens once the purchase price adjustment1 (PPA) is agreed upon and at the end of the escrow period after any claims have been resolved. Understanding these lesser-known aspects of the deal-payments process can help M&A advisors create a less stressful experience for the clients, especially when professional shareholder representation is involved.
SRS Acquiom has been the shareholder representative on thousands of M&A deals. In our experience, merger agreements typically require that the amount owed to shareholders from this process is remitted promptly once the PPA is resolved, or the escrow process has completed. However, the payment to shareholders of PPA amounts, which frequently are relatively small, is often suboptimal. This article highlights strategies that improve the ability of M&A advisory clients to pay shareholders on time and efficiently.
Retain Cash in the Shareholder Expense Fund Rather than Paying Small Distributions
The team at SRS Acquiom has seen many inefficiencies in PPAs and subsequent payment distributions. For example, disbursement costs may materially erode or even eliminate a minority shareholder’s stake in the cash available for distribution, especially when the PPA is small.
Additionally, deal parties must also agree on complex waterfall distributions to allocate any funds to shareholders regardless of the distribution size. It is especially inefficient to agree on complex waterfall distributions on larger deals where tens or even hundreds of shareholders are entitled to only a few dollars of the disbursement.
For greater efficiency in disbursements, we suggest retaining cash in the expense fund held by the shareholder representative.
For greater efficiency in disbursements, the team at SRS Acquiom suggests retaining cash in the expense fund held by the shareholder representative. The parties can either agree to this regardless of the amount of the PPA or can limit it to PPAs that are below an agreed upon threshold rather than forcing a small distribution. This approach anticipates payment to all shareholders with a future distribution (e.g., from the often higher-value indemnification escrow). Holding this cash can reduce encroachment of disbursement expenses on funds due to shareholders and can also create greater efficiencies for M&A advisory clients.
Expressly Permit the Shareholder Representative to Contribute to the Expense Fund
While the temporary “parking” of funds does not harm the buyer, buyers may react differently to these recommendations, including immediate approval of the approach or refusal to deviate from deal terms that may require prompt distribution of these funds to sellers. The most common outcome requires a formal amendment or side letter to the merger agreement that requires additional legal time and costs from outside counsel, which can be a hassle.
This is a situation where the expertise of a partner with a broad perspective across the deal process can be invaluable to M&A advisors and their clients.
This is a situation where the expertise of an M&A partner with a broad perspective across the deal process—from the early stages of negotiations to shareholder representation after the close—can be invaluable to M&A advisors and their clients. As an alternative or augmentation to the suggestion above, instead of handling these issues after closing with a side letter, M&A advisors can advise their clients to protect their interests with preemptive merger agreement language granting the shareholder representative specified authority to manage agreed upon amounts of funds. Adding such language to the merger agreement would explicitly permit the shareholder representative, in consultation with the sellers, to contribute funds to the expense fund from consideration otherwise distributable to sellers. Waterfall payments (as mentioned above) can be managed by the shareholder representative, easing the administrative burden on M&A advisory clients.
While this may be covered by the shareholder representative’s broad power of attorney, making their authority explicit would avoid confusion, increase shareholder value, and reduce costs and time spent on post-closing legal and payment administration for M&A advisors, their clients, and legal representatives. Allowing the shareholder representative to have flexibility to avoid a forced distribution of post-closing consideration when that otherwise would not make sense helps ensure efficient management of post-closing expenses, distributions, and other non-routine matters.
Planning for M&A Deals Can Make a Difference
Understanding potential impacts of decisions made early in the deal process can make a big difference to advisory clients post-close. A wider view across the entire M&A deal process helps the team at SRS Acquiom offer solutions in tune with the needs of advisors and their clients. From housing documents and collaboration among deal parties at the outset of a deal to managing challenges that can arise post-closing, it is helpful to have an M&A partner with a comprehensive understanding of inflection points that can hinder the deal process and final disbursements.
1 A purchase price adjustment (PPA) is the typical adjustment to the merger consideration for changes in the financial condition of the target company from the pre-closing estimates of working capital, cash, etc., to the determination of actual balances 60-120 days post-closing.