Once a M&A deal has closed, merger parties are looking for a few things from their payments administrator: they want the process to be as simple as possible to complete, the payees want their money in their account as fast as possible, and the buyer wants timely reports on which payments have been completed. We’ve put together a quick checklist of the top 10 things to watch for in M&A payments to make the decision of choosing a payments administrator an easy one when the time comes.
- Physical Stock Certificates
On some transactions, collection of physical stock certificates and paper letters of transmittal (LOTs) may still be required. Often times, however, this is not the case, and the payments process can be significantly simplified. With merger transactions, under UCC § 8-207, buyers can rely on the target company cap table when making payments, eliminating the burden of collecting and keeping track of physical certificates. Find a payments administrator that understands this and will help streamline document collection.
- Human Error
Illegible handwriting on paper LOTs can lead to errors or payment delays. Like physical certificates, paper LOTs are not always required to receive payment. An online LOT platform enables holders to enter information directly, removing the risks of deciphering handwriting or improperly completed forms, resulting in fewer errors, elimination of the possibility of the user editing the terms of the LOT, and faster and more accurate payments.
- Compensation Payments
Merger consideration classified as employee compensation can be a hassle for the buyer, particularly for post-closing payments like escrow or earnout distributions. Payments administrators that can handle compensatory payments help acquirers avoid adding staff or implementing new systems to make post-closing compensation payments to current or former employees.
- Required Tax Documents
Define in the LOT which tax documents will be required for holders to receive payment. This starts with assessing the shareholder base, especially for foreign holders and non-employee option holders. Having clear instructions about how to complete and where to find tax forms can prevent unnecessary delays or shareholder phone calls.
- Tax Treatment
Clarify in the payments agreement the tax reporting to be done by the payments administrator (or other parties) for all payments. This eliminates uncertainty months later at tax time and allows for collecting other information needed for tax reporting, like cost basis or date of acquisition for covered securities.
- Closing Payment Calculations
Oftentimes, a portion of the merger consideration is held back in an escrow or expense fund, resulting in the initial closing payment lower than the purchase price. Make payees aware of those calculations to avoid confusion upon receipt of payment. Many shareholders call to ask us why they didn’t receive their pro rata portion of the announced deal value that could be avoided if they understood these deal terms.
- Required Paperwork
Consider every type of payment and the documents needed from each for a smooth closing. Different paperwork may be required for warrant holders, vendors, creditors, and holders of different classes of shares. Inquire whether your payments administrator is able to handle both the processing of payments and the pre-closing solicitation and collection of any related documents.
- Payment Methods
Understand which payment methods are available to payees and the pros and cons of each. ACH is often a free option, but can take one to three business days to become visible in a payee’s account. Wires process immediately, but are often accompanied by a processing fee. Checks are usually the slowest option but are still preferred by some merger parties.
- Contact and Payment Information Updates
Typically, post-closing payments are processed using the same payment instructions used for closing payments. Inquire how payees will be able to update this information with the payment administrator after closing.
- Single Provider for Payments and Escrow
Finally, treat your payments administrator as a toolbox to make your closing and post-closing payments go smoothly. For an even more streamlined process, find an administrator that also provides escrow options. Doing so can reduce fees and streamline the coordination of closing and post-closing tasks to be performed.