Be Prepared to See the Deal All the Way Through: Why a Properly Sized Expense Fund Can Be Good for Buyers and Sellers
First published in the ABA Preferred Returns newsletter – September 2018
“Nobody cares how good your case is if you don’t have the money to prove it.” As harsh as this sounds, it’s often true in post-closing M&A disputes. The selling shareholders may have a great claim against the buyer for an earnout payment (or a rock-solid defense to the buyer’s indemnification claims), but if the shareholders have not reserved enough in their post-closing expense fund, they may have brought a knife to a gunfight.
This shareholder expense fund plays a critical role in post-closing strategy and dispute management, and may even present some advantages for buyers. However, with legal billing rates increasing over the past several years, it is important that shareholder expense funds keep pace.
For those that cannot, the market has responded by providing an alternative to traditional expense accounts. A bourgeoning sector of litigation financiers has emerged to provide contingency-like funding that can allow sellers to pursue meritorious offensive litigation. While litigation finance creates new opportunities for some, its applications and benefits are limited. The best way to adequately protect merger parties’ rights post-closing is (still) to adjust the expense fund to the cost of anticipated issues.
Topics covered in this white paper include:
- Why it is Important to Establish and Expense Fund
- Why the Size of the Expense Fund Matters
- How Buyers and Sellers May Benefit
- The Rising Cost of Good Representation
- New Financing Options
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