More and more, companies with smaller cap tables—such as family-owned businesses and PE-owned portfolio companies—utilize professional shareholder representation to manage the post-closing process following the closing of an M&A transaction. While counsel may often outsource the shareholder representative function on deals with a large number of shareholders, there are myriad reasons to avoid serving as a volunteer shareholder representative.
Why? The role of shareholder representative comes with a number of duties, obligations, and responsibilities. Sellers and their counsel who scrutinize the risks and legal responsibilities of taking on the role typically choose not to to avoid unnecessary (and uninsurable) personal risk, the time commitment, and the distraction. Most sellers quickly conclude that the benefits of hiring a professional far outweigh the modest cost.
Seller executives and board members, who have built their success knowing when to hire professionals, can be tempted to take on the role of shareholder representative. Here are five (excellent) reasons to avoid the role of shareholder representative:
There is clear risk when an individual (or entity) signs up to be the shareholder rep. The rep typically is the named party to a legal dispute with the buyer, even if the rep personally has done nothing wrong. There is no insurance that can be purchased for this role (D&O coverage or tails do not apply here). The rep is held to a high standard and must adhere to all applicable legal terms of the definitive agreement. The rep must also deal with a variety of unexpected tasks, such as receiving subpoenas when a seller is divorcing, transfers of interest in post-closing distributions, assessing the consequences of bankruptcies of buyers, providing documentation to auditors for sellers, interceding on behalf of sellers with banks and tax authorities, and generally being the final destination for any task that no other party wants to handle. Hiring a shareholder representative like SRS Acquiom with direct, substantial experience handling such matters will make their resolution far speedier and smoother than a do-it-yourself (DIY) shareholder representative might achieve.
Shareholder reps have a wide array of deadlines and details to which they must pay attention after closing. Most DIY reps aren’t trained to read and understand the legal agreement where all of their responsibilities are laid out—nor do they often have time to do so. DIY reps often have other professional and personal responsibilities (e.g., new job, full-time retirement, managing other investments or portfolio companies, etc.) where handling post-closing matters is a distraction or side gig, not their core job. If a shareholder rep misses something, they can be held responsible. For example, many merger agreements provide that if the shareholder rep does not respond to an indemnity claim notice within 30 days, the claim is deemed accepted. Such a result could have a substantial, negative economic consequence for the selling shareholders and could subject the rep to claims from the selling shareholders for being negligent in their duties.
The DIY rep is usually one person. A single person, no matter how intelligent and experienced, is unlikely to have the skills or expertise to handle the entire range of issues that could come up after closing. DIY reps may not have a network of skilled experts to call upon when needed or the funds from merger proceeds readily available to pay for any such experts, but the rep is still on the hook legally for managing the process well. A high-quality professional shareholder representative has dedicated in-house experts with specific, relevant backgrounds to handle claim matters and other issues that come up in the course of the post-closing period. Not only is it more efficient if the rep has in-house expertise in such areas as working capital, tax, employment, and intellectual property (to name a few), but leveraging the in-house expertise of the rep is also much more cost-effective than hiring third parties and depleting the shareholder rep expense fund. In the situations in which a professional representative needs to engage outside parties, it will have numerous contacts from prior engagements and substantial experience with managing the claims process. The best professional shareholder representatives handle hundreds of deals every year and have seen—and solved with expert in-house teams—the full breadth of post-closing problems.
Since the DIY rep often ends up hiring professionals to handle the details of post-closing matters, the cost of work done is often in excess of the fee a professional rep would charge for the engagement. If the sellers do not set aside an expense fund for the DIY rep, the cost of those professionals may be out of the rep’s pocket, at least until he or she can seek reimbursement from other holders. A professional shareholder representative who can handle most of these matters in-house can quickly save the shareholders substantial dollars, often enough to outweigh their fees.
DIY reps usually don’t have the time, expertise, or experience to skillfully handle post-closing issues, so there is a significant risk of ending up with a less desirable outcome than a professional could obtain. Whether it’s working cap adjustments, indemnity claim defense or earnout management, hiring a professional rep is the best way to realize the full value of the transaction, whether it’s negotiating indemnity claims, working capital adjustments or earn-out results. It is not uncommon that, at the end of the post-closing period, the up-front cost of a professional rep with in-house expertise is more than paid for when measured against the positive outcomes achieved.