What should selling shareholders expect from the person or entity they elect to serve as their shareholder representative following the closing of a sale of the business? What functions should the representative perform on behalf of the group he is representing? Historically, the parties assumed the answer was “not much.” The representative typically assumed there was nothing to do unless the buyer made a claim, and the shareholders usually expected not to hear much until the final disbursement of any remaining escrow balances unless they asked a specific question (and maybe not even then).
Recently, however, shareholders have come to expect more. At a high level, shareholders want confidence that the representative (i) has the experience and expertise to protect their interests and (ii) is established and stable enough to be there until the multi-year process is completed. Anyone agreeing to serve as the representative should view this role as a serious responsibility. The shareholders expect that such person will diligently look after their interests and keep them informed on the status of their remaining financial stake in the transaction. Specifically, the shareholders should ask the representative to perform the following tasks and should believe that the representative has the following traits:
1) Commitment and Resources. The representative should be committed to actively managing the post-closing process. This includes making sure the person has enough time and the appropriate resources available to devote to any issue that may arise rather than giving it minimal attention. This also means getting comfort that the representative will be responsive to shareholder questions and requests. Shareholders need information following closing for reporting, audit responses or other similar matters. They need to know their representative is not going to ignore their emails.
2) Experience. The representative should have experience managing similar transactions and be knowledgeable about the types of issues that may arise. This includes substantial experience managing complex indemnification claims, earnout disputes and working capital adjustments. Ideally, the representative would have experience with both legal and accounting issues as these matters arise most frequently.
3) Stability. Representatives are often tasked with maintaining files related to the transaction. The shareholders need to know their representative is well established and organized and is not likely to change jobs or otherwise quit or leave in the middle of the post-closing process. If the representative changes jobs (or the point person for an institutional representative leaves), he is unlikely to remain focused or committed to the remaining tasks of being a representative.
4) Management of Disputes. This is the most important responsibility of a representative. The representative should have experience with investigation, negotiation, and dispute resolution and should have the resources available to thoroughly protect shareholders’ interests. This can require a number of unique areas of expertise, including various unrelated legal issues (such as employment, intellectual property, environmental and others), tax and accounting. It is very difficult for any individual or small firm to be able to cover them all.
5) Independence. The representative should not work for the acquiring company or a law firm, nor have another job or have team members with other jobs. If he does, he will have conflicts and competing demands on their time.
6) Term Tracking. The representative needs to understand and record the important terms of the transaction for ready availability should an issue arise or shareholders have questions. The representative also needs to know what rights were negotiated on behalf of the sellers to ensure no such rights are inadvertently forfeited or forgotten.
7) Disbursement of Proceeds. The representative needs to have the ability to track each shareholder’s interest in escrows or earnouts to ensure funds are promptly and correctly distributed at the appropriate time. This can be difficult if there are large numbers of shareholders or optionholders or if the target company had a complicated capitalization table, so the representative must have the appropriate administrative capabilities. The task is even more complicated if withholding is required.
8) Shareholder Reporting and Responsiveness. The shareholders should expect the representative to keep them reasonably informed should any issues arise that could impact the timing or amount of any applicable payments. Periodic reporting should be requested so the shareholders understand whether there have been any changes to their economic interests.
9) Taxes. Merger agreements may require the representative to perform tax reviews or to prepare and file certain tax returns. Some agreements require the representative to prepare tax forms, such as Form 1099, for mailing to the shareholders. The shareholders should have comfort that the representative has the skills and resources necessary to complete such tasks.
10) Date Tracking. The representative should have processes and systems in place to track important dates related to the transaction to ensure no such dates are missed. These dates can occur years into the future, so it is critical that the representative’s systems are sophisticated and will be maintained for long periods. It is not enough to just enter a few dates onto a laptop.
11) Account Reconciliation. The representative typically will get monthly bank statements from the escrow bank. The shareholders need to know that such statements will be carefully reviewed to ensure they are accurate and that no unauthorized charges have been made.
When considering who should serve as shareholder representative, parties should have a conversation regarding the expectations for the terms of the relationship. Significant dollars are involved, and frustration or problems can arise when the representative has a different vision of the job from that held by the shareholders.