Typically, M&A deals are negotiated by two law firms—one for the buyer and one for the selling company. Recently, however, SRS Acquiom has seen a trend toward having a separate firm that represents the interests of a stockholder or group of stockholders.

The stockholders will do this for at least two reasons. The first is to ensure that their interests are fully protected with respect to issues such as how merger proceeds are distributed, whether third parties are receiving payments that could reduce the amount paid to stockholders, and what liabilities are being assumed by the stockholders or their representatives in connection with the transaction.

SRS Acquiom has seen a trend toward having a separate firm that represents the interests of a stockholder or group of stockholders.

The second reason for separate stockholder counsel is to ensure that at least one of the attorneys who represent the sell-side in connection with the deal will continue to be available to the shareholders after the closing of the transaction. The selling company’s attorneys may be conflicted from assisting the selling stockholders after closing. The company (rather than the stockholders) was that firm’s client, and when that client was merged into the buyer, the buyer owned that attorney-client relationship after closing. In contrast, a lawyer who represented the stockholders in the deal will not have any such conflict.

A related question is whether the party agreeing to serve as the shareholder representative should be separately represented. The person or entity that assumes that job is taking on significant responsibility and potential liability and should make sure they fully understand and agree to the terms applicable to them in the agreement. While seller’s counsel may consider it part of their job to negotiate for favorable terms applicable to the shareholder representative in some cases, the representative typically is not their client. In fact, the interests of the representative are to some degree in conflict with the interests of the stockholders on issues such as the level of indemnification the representative receives from the selling stockholders and the duties the representative owes to such shareholders. SRS Acquiom has seen several agreements in which the final document contained terms that representatives never should have agreed to and would not have had they been separately represented in the negotiating process.

SRS Acquiom’s suggestion is that anyone considering serving as the representative on a volunteer basis should tell the company that his or her willingness to take the job is dependent on being represented by separate counsel in connection with the negotiations, and that they expect the company to be responsible for payment of the related legal expenses regardless of whether they eventually accept the position. Even with separate representation, the person may elect not to accept the position, but the separate representation should be a condition before other factors will even be considered. This should be acceptable to the company because having a strong representative is in the best interests of its shareholders, and this is a necessary step in making that happen.

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