As M&A advisors, focus often lays on the most immediate priorities to get the deal closed and much less on downstream or post-closing issues. However, it pays dividends to understand how these downstream issues can negatively impact the interest of the sellers as well as how you can help them avoid some of these issues at the outset of a transaction.
One of the most prevalent issues affecting the downstream deal process for clients is shareholder representation, or the need to secure a professional shareholder representative to ensure investors can maximize their return after the deal is closed. This previously was usually handled by an individual volunteering for what is often a thankless and potentially risky role but has evolved a great deal in recent years with the best practice of hiring a professional shareholder representative.
Read our top questions and considerations for M&A advisors below to learn how to better maintain control of the deal process and protect your clients, without adding to your workload or exposing yourself to unnecessary risk.
What is a professional shareholder rep?
Before most acquisitions of privately held companies, the seller must appoint a representative who will act on the shareholders’ behalf and serve as a single point of contact to the buyer. The professional shareholder representative is responsible for crucial and frequently onerous responsibilities post-closing. These responsibilities often require considerable expertise in managing purchase price adjustments, indemnity claims, earnouts, and escrow releases. They also negotiate with adverse parties if disputes arise, field inquiries from selling shareholders, prepare schedules, and ensure that full payments are made after closing.
A professional shareholder representative is an independent service company that protects the interests of the sellers and helps investors maximize their return while minimizing their need to personally engage in time-consuming tasks after closing.
Why does an M&A deal need a professional shareholder representative?
When an individual shareholder volunteers to undertake the responsibilities of shareholder rep, he or she may be exposed to personal and professional risk—especially if he or she becomes a named party in post-closing litigation. Post-closing duties also can be unpredictable and may require expertise and substantial resources not readily available to a volunteer shareholder rep. Additionally, if the volunteer shareholder rep is an employee who continues to work for the company, he or she may face conflicts of interest in trying to advocate for the former shareholders against his or her new employer. The SRS Acquiom professional shareholder representative assumes these risks and complex workload while ensuring that all payments and obligations are completed after closing, a process that can take several years.
Pro Tip: Ask yourself, “Does your client want their attention distracted by complicated administrative tasks or litigation? Does your client have the time or resources to address the needs of the other selling shareholders?”
How do the selling shareholders maintain control if they hire a professional shareholder representative?
Your clients should have a professional shareholder representative working on their deal to act on behalf of the selling shareholders and at their direction. In most engagements, an advisory committee is formed that will be informed of any post-closing issues and will have the opportunity to instruct the professional shareholder representative on how to proceed. A good professional shareholder representative will have substantial prior experience with similar matters to help guide the discussion and offer solutions to issues that arise, but the shareholders have ultimate control over decision-making.
What should clients look for in a professional shareholder representative?
- Experience across many transactions. Effective protection of shareholder interests requires specialized experience with similar transactions and the knowledge needed to anticipate, plan for, and solve issues that may arise. This includes substantial experience managing working capital adjustments, indemnification claims, and earnout disputes. A professional shareholder representative with thousands of deals under their belt will have unprecedented insight into the intricacies of private sale transactions and the full spectrum of issues that may arise. Depth and breadth of exposure to post-closing matters enables the professional shareholder representative to identify transaction terms that can become problematic and, in many cases, offer a tried-and-true solution.
Pro Tip: Ask your shareholder representative about the number of transactions it has supported. The greater the number of transactions, the better.
- Dispute management expertise. While the possibility of post-closing indemnification claims or litigation is always a reality, less apparent is the risk assumed by the representative and the costs that may arise if outside counsel is needed. The role of shareholder representative is unique in that by virtue of being the agent for all selling shareholders, the named shareholder representative runs the material risk of being targeted in litigation despite having done nothing wrong. As shareholder representative on more than 2,200 private-target M&A deals, our data shows 64% of deals have post-closing issues, and 51% of deals have claims against the escrow.
- Depth and breadth of dispute management team. At the time of closing, it’s usually impossible to know what post-closing issues may arise. Understandably, it would be difficult for any individual or small firm to manage protracted disputes in addition to providing coverage for disparate issues, such as those requiring legal, tax and accounting expertise. In representing the interests of the selling shareholders, any professional shareholder representative should have a deep, experienced in-house team with experts in investigation, negotiation, and dispute resolution as well as in other unique issues that frequently arise such as working capital calculations, the accuracy of financial statements, litigation, intellectual property, tax, accounting, life sciences, and employment issues.
Pro Tip: Clients should ask their shareholder representative about the depth and breadth of in-house resources. Make sure they understand what it will handle in-house vs. what it may outsource. Outsourcing can be expensive, so make sure that costs are included in upfront fees.
- Understand in-house support vs. outsourcing. Make sure that clients understand what will be handled in-house vs. what may be outsourced. For instance, a professional shareholder representative should be able to handle the negotiation of many issues in-house in the event of a typical claim. Beware of shareholder rep approaches that rely on expense funds to cover additional fees to hire outside counsel or other experts.
- Commitment and resources. The key to effective representation is the administrative capability to track each stakeholder, keep stakeholders informed of the status of their financial interest, and maintain focus on long-term deadlines that can occur years in the future. These tasks become increasingly difficult if there are large numbers of shareholders or option holders, if the target company has a complex capitalization table, or if tax withholding is required. In addition to handling these obligations efficiently, a truly effective shareholder representative may also be able to take over the distribution, collection, and tabulation of the myriad documents required to close your deal.
Pro Tip: Ask their shareholder representative about the kind of support it provides both pre- and post-closing.
An Effective Professional Shareholder Representative
Post-closing responsibilities are often time-consuming and complicated, but the right professional shareholder representative will provide the depth and breadth of expertise needed to solve issues that arise and alleviate stress and uncertainty for M&A advisory clients—allowing clients to truly enjoy the fruits of their labors post-close.