by Benton B. Bodamer, Attorney, Goodwin Procter LLP
An M&A closing is often a mad dash to the finish line. Signature pages and final drafts of legal documentation fly back and forth. Various drafts of the “flow of funds” are continually updated for final numbers. Then, almost magically (or through mutual exhaustion), the final pieces fit together, the parties get into a room or, most frequently these days, on the phone, release signature pages, and authorize wires to transmit funds to the correct accounts.
After weeks or months of negotiations spent solving key business points, a deal lawyer’s worst nightmare (other than a deal blowing up) is the dreaded “last minute” legal or logistical issue that could have been dealt with weeks earlier, but now threatens to delay or interrupt the closing process.
For example, a company’s largest shareholder signed his documentation personally, but you learned 30 minutes before the closing that he actually owns his shares through a series of trusts, for which there are not yet any signature pages; or, the discovery that a handful of key letters of transmittal are missing or defective; or the realization that a target company’s CFO did not fully appreciate the fact that she is responsible for sending out 35 wires by 3 p.m. on the closing date and lacks the payment systems to do so.
The kind of issues described above, and many similar distractions, can often be preempted or eliminated entirely by engaging a paying agent, or better yet, a full-service payments administrator. Beyond just handling a significant portion of the wires on the funds flow, a payments administrator can add enormous value behind the scenes. Some of the hidden logistical conveniences include:
- Distribution and collection of investment materials, joinder agreements, and all tax forms;
- Systems checks on recipient tax and account information;
- Liaising with an affiliated financial institution serving as escrow agent;
- Double- or triple-checks on the proper completion of letters of transmittal or other legal documentation; and
- Tax withholding for certain payments.
Many M&A professionals, including counsel, may be unaware that a sophisticated payments administrator can handle all aspects of tax reporting and withholding for closing payments, even withholding and reporting for employee payments that would otherwise run through payroll.
Beyond the logistical conveniences, payments administrators provide peace of mind. Take, for example, a majority selling stockholder such as a private equity fund that self-elects to receive all sales proceeds and direct payments for its minority holders, which could involve both the receipt of personal information for individual holders, as well as incremental risk as a fiduciary of the payment recipients. These are the kinds of risks some deal professionals and their legal counsel would prefer to avoid.
Given the potential for so many things to go wrong with an M&A closing, it is always a relief when things go very smoothly. Engaging a payments administrator that provides a wide range of services can provide that relief and be a breath of fresh air in an otherwise hectic closing.