Some shareholders, especially large corporate shareholders, express
concern over the ability of the shareholder representative to change the terms of the merger agreement after closing.1 Because they are large organizations, they want to understand and control the terms of any agreements under which they have obligations or liabilities. This is certainly understandable. As extreme examples, some shareholders have wondered whether the broad powers typically granted to a representative would give it the ability to enter into a settlement agreement that would restrict the ability of the selling shareholders to take some action, such as executing a non-competition agreement. While that would be tough to enforce, the question about where the line should be drawn on the limits of the representative’s authority is a good one.
This potential desire of these shareholders to define and curtail the powers of the representative is in conflict with the typical desire of the buyer for these powers to be as broad as possible. The buyer wants to know that any action that may need to be taken after closing can be taken by the buyer and the representative acting alone. Buyers do not want additional approvals to be needed for some actions, but not for others.
As a legal matter, we question whether any amendment that fundamentally changes the terms of the deal that were approved by the Board and shareholders would be enforceable. We understand, however, that it is difficult to define what would constitute such a fundamental change.
This is a hard problem to navigate. If it becomes an issue on one of your transactions, we suggest adding language such as the following:
The Securityholders hereby constitute and appoint the Representative as attorney-in-fact for the Securityholders with [broad powers to take any actions necessary under the merger agreement following closing]; provided, however, that the Representative shall not have the power or authority to execute an amendment, waiver, document or other instrument that, notwithstanding any other provision to the contrary, increases in any material respect the obligations or liabilities, or decreases the benefits, of any Securityholder without the prior written consent of that Securityholder.
This leaves some ambiguity regarding materiality. However, it seems to be a possible compromise between the desires of some shareholders to know that the deal cannot be materially changed without consent, and the buyer’s desire that the representative have the power to take most actions that may arise after closing.
1 We note that it would be very difficult to enforce a settlement between the representative and the buyer that would require a payment from shareholders in excess of the escrow or that would require the shareholders to take, or refrain from taking some action. As a result, most buyers will insist that the shareholders directly agree to such settlements. Nevertheless, some corporate stockholders will not be sufficiently comfortable with this and will request language included in this article.