This article is written by Aditya Kasiraman, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
From applying the better points of the M&A contract negotiations to the final expenditure of payments and escrow, the post-closure process can be difficult to navigate. The post-closure process is often complicated and can take years to complete – it requires commitment and unique expertise. Involving expert shareholder representatives can reduce significant stress on M&A transactions. Proper shareholders can identify and rectify issues before they start and resolve a wide range of post-closing requirements.
The process of post-closing can be complicated and time-consuming. By hiring an independent stock representative, he will be responsible for handling post-closing issues, such as price adjustments, refund claims, withdrawals, and broker-dealers, which can be helpful to shareholders and executives. In recent years, shareholder representatives have been increasingly used in the United States, and they are becoming increasingly popular in Canada as well.
Your relationship with your shareholder delegate
What should be sold by shareholders to the person or business they choose to act as their representatives after the closing of the sale of the business? What are the duties of a representative on behalf of the injured party? Historically, the parties thought the response was “too much.” The representative thought there was nothing to be done without the buyer making the claim, and shareholders often expected to hear more until the final settlement of any remaining escrow rates was made without asking a specific question (perhaps even then).
Shareholders are now expecting a lot from their shareholder representatives. They want more than a process manager; they need help to solve problems before they start. At the highest level, shareholders want to have confidence that the representative,
(i) has the knowledge and expertise to protect their interests and
(ii) is established and stable enough to be present until the completion of the multi-year process.
Anyone who agrees to work as a representative should view this role as important. Shareholders expect such a person to take an active interest in his or her own interests and to keep track of their financial status. Specifically, shareholders should ask a representative to perform the following functions and should believe that the representative has the following characteristics:
- Commitment and Resources: The representative must be committed to actively trying to navigate the post-closing process and to provide a single, high point of contact with shareholders. This includes ensuring that one has enough time and resources to contribute to any issue that may arise rather than paying too much attention to it. This also means feeling comfortable that the representative will answer shareholders’ questions and requests. Shareholders need information following reporting closures, audit responses, or similar matters. They need to know that their representative will not ignore their requests for information.
- Experience: The agent should have the technical depth and experience to handle the same transaction and be aware of the types of problems that may arise. This includes a wealth of information on managing complex refund claims, wage disputes, and adjustments to key operating costs. Ideally, a representative will have experience with both legal and accounting issues because these issues occur frequently.
- Stability: Shareholders often do the job of keeping track of transactional files. Shareholders need to know that their representatives are well established and organized and that it is unlikely that they will change jobs or quit or leave the post-closing process. If a representative changes jobs (or the person on the point of a representative from the institution resigns), they are less likely to remain focused on or commit to the remaining duties of a shareholder.
- Conflict Management: This is one of the most important responsibilities of shareholders. The representative must have the knowledge to investigate, negotiate, resolve disputes, and have the resources available to effectively protect the interests of shareholders. This may require a number of different areas of expertise, including a variety of unrelated legal issues (such as employment, intellectual property, environment, taxation, and accounting). It is difficult for any person or small company to be able to cover everything.
- Independence: The shareholder must not be an employee of the acquiring company or a law firm, and must not have another employee or have team members with other responsibilities. If they do, they will have conflicts and competing demands in their time.
- Tracking time: The shareholder’s representative needs to understand and record the key terms of the transaction in order to determine if a problem arises or the shareholders have questions. The representative also needs to know what rights have been negotiated on behalf of the sellers to ensure that no such rights are suddenly taken away or forgotten.
- Payment of cash received: A shareholder representative needs to be able to track each shareholder’s interest in escrows or earnings to ensure that funds are distributed quickly and efficiently and in a timely manner. This can be difficult if there are a large number of shareholders to choose from or if the target company had a complex monetary table, so the representative must have the appropriate management power. The task is even more difficult when it requires a reservation.
- Shareholder Reporting and Response: Shareholders should expect the shareholder representative to keep them informed in the event that issues arise that could affect the timing or amount of any applicable payments. Occasional reporting should be requested so that shareholders can understand whether there has been a change in their economic interests.
- Taxes: Joint agreements may require the shareholder to make tax updates or to prepare and file certain tax returns. Shareholders should feel comfortable with a representative who has the skills and resources needed to complete those tasks.
- Tracking of the Dates: The shareholder representative must have procedures in place to follow important business-related dates to ensure that none of those dates are missed. These dates can transpire in the coming years, so it is important that the systems they represent are refined and will be maintained for a long time. It is not enough to just put a few dates on a laptop.
- Account Reconciliation: The stock representative will generally receive monthly bank statements from the entry bank. Shareholders need to be aware that such statements will be carefully reviewed to ensure that they are accurate and that no unauthorized payments have been made.
The role of a professional stockholder representative is complex and extensive. When considering who should act as a shareholder representative, the parties should have a discussion about the expectations of the terms of the relationship. Valuable dollars are involved, and frustration or problems may arise when the representative has a different view of the job than the one held by the shareholders.
The parties to the M&A agreement may believe that their agreement is too small or that they will lose control of the decision-making process if a professional shareholder is involved. Or, they may believe that their agreement is “pure” and that those claims will not be a problem. This is not really the case. Small deals are often at high risk, and anything that should be a small claim can shut down long-term payments. Most M&A deals have unexpected problems after the closure, which creates the need for continued support and management for years to come. Hiring a qualified shareholder representative allows shareholders to lead day-to-day management of the process while allowing them to remain involved as they seek to be in important decisions that need to be made. A professional shareholder representative can be applied to almost all sizes and types of confidential target acquisitions where there are post-closing obligations.
Advantages of a shareholder representative in an M&A deal
There are many benefits to hiring a stockbroker to deal with post-closing issues:
- Avoids conflict of interest: When a buyer decides to continue hiring targeted managers after a transaction, there is a natural conflict of interest in the targeted managers to represent the interests of the targeted shareholders. For example, if a potential claim arises in respect of a breach of representation or warranty by the buyer after closing, the supervised managers may not feel comfortable bringing a claim to the buyer, who is now their new employer.
- Technology: Many post-closure items are very complex, and the existing managers and other executives may not have the skills and knowledge to carry them out. For example, according to a study by SRS Acquiom, 73% of private M&A transactions have an existing purchase price adjustment mechanism. Purchase pricing is often difficult to calculate without expertise in taxation and auditing, and having an expert in the field of accounting management will ensure that pricing adjustments are calculated accurately and in a timely manner.
- Available for a long time: Revenue offers are becoming increasingly popular in private M&A transactions and their terms range anywhere from one year to more than four years after closure. Stockbroker representatives, instead of targeted executives, can fulfill the role of monitoring monetary gain on behalf of targeted shareholders, especially if the lead period is long.
- Shareholder Communication: Stockbroker representatives can provide updates to shareholders and answer any shareholders’ queries to improve shareholder communication after the transaction.
Target management should focus on hiring shareholder representatives to represent the stock market where their company is a widely held company. Stockbroker representatives can help targeted managers to focus on their core business and avoid conflicts of interest with shareholders.
Language of M&A agreement: establishing the role of a shareholder representative
In consultation with professional shareholder representatives, M&A agreement parties may find that the language of design in relation to the appointment of this important role is a subtle art. The merger agreement requires the successful appointment of a shareholder representative and defining the scope of the shareholder’s rights and responsibilities. A visionary approach to shareholder language strategies can help ensure that parties are protected by contract life.
Scope of power of the shareholder delegate
Some shareholders, especially shareholders of major corporations, express concern about the shareholder representative’s ability to change the terms of a merger agreement after closing. It is understandable that large corporations seek to control the terms of any contractual obligations or liabilities. As an example, some shareholders have questioned whether the broader power granted to a representative could enable them to enter into a payment agreement that would limit the ability of the shareholders to take certain steps, such as making a non-competitive agreement. While that may be difficult to enforce, the question of where the line should be drawn on the limits of the representative authority is a good one.
This potential shareholder’s desire to define and reduce the power of the agent is contrary to the buyer’s general desire to have as much power as possible. The buyer wants to know that any action that may need to be taken after the closure can be taken by the buyer and the sole agent. Buyers do not want additional approval that is required for some actions, but not for others.
There is a question as to whether any amendment that fundamentally changes the terms of the agreement approved by the board and shareholders may be enforced. However, it is difficult to explain what could have caused such a dramatic change.
This is a difficult problem to steer. If there is a problem with the transaction, there is a suggestion to add the following language, such as:
“Securityholders in this regard form and appoint a shareholder representative as a true attorney-in-chief with wide-ranging powers to take any action required under the merger agreement after closing, however, that a shareholder representative shall not have the power or authority to make amendments, exemptions, documents or anything which, in addition to any other contravention, increases any value in respect of liabilities, or reduces the profits, of any shareholder without the written consent of that shareholder.”
This leaves a certain impression of materiality. However, it appears that there may be a consensus among other shareholders’ wishes to know that the agreement cannot be materially altered without consent, as well as the buyer’s desire for the representative to be empowered to take many steps that may arise after closing.
Extension of shareholder representative control to all payees
In most transactions, there are groups other than shareholders who are considering mergers and may be interested in escrows, earnouts, or the like. Often in these agreements, it is clear that the shareholder has the authority to make decisions that may affect the economy, such as whether the escrow has declined or even if it has been agreed that income will not be earned. As these decisions affect parties other than shareholders, it is generally advisable for the authority of the shareholder representatives to cover the entire set of payees who are receiving a consideration, not just shareholders (i.e., don’t disregard option shareholders, warrant holders, or other recipients).
Data sharing: ensuring the right levels of communication support
The general provision in consolidation agreements stated is that those in the agreement would not be bound by any of its terms or related matters to any third party, subject to the general exception. While this sounds reasonable enough, it fails to consider that a shareholder representative will be required to pass on certain information to former shareholders, who are not parties to the merger agreement. For example, if a claim arises, the shareholder representative will need or want to tell all or some of the previous shareholders about the claim and get their response as to how they think the representative should proceed. In addition, the representative will need to have some contact with former shareholders associated with the claim once it has been resolved, and if there was a related payment, to inform shareholders why their declining interest rate has been reduced.
On the other hand, since many claims are related to sensitive topics, the buyer may be seeking protection that the information will no longer be widely disseminated, especially if there are hundreds of shareholders.
The representative must be able to communicate with shareholders or be able to communicate with a small group of shareholders who are bound by confidentiality obligations. Language such as the following may be added at the end of the confidentiality section of the agreement:
“A stockholder representative may disclose information as required by law or to employees, advisers, or advisors of the stockholder representative and shareholders, in each case who is required to know such information, provided that those persons (A) agree to comply with the provisions of this Section __or (B) are bound by confidentiality obligations required to the stockholder representative of a higher standard such as those prescribed by a stockholder representative under this Section __.”
With regard to communication between shareholders or between shareholders and a shareholder representative, the parties must ensure that such communication remains justified, especially when the buyer has made a claim for restitution or the shareholders believe the buyer has breached one of his obligations under a merger agreement. When shareholders choose to hold conferences and/or discussions to resolve disputes or lawsuits or potential disputes, shareholders are advised to have the shareholder representative’s advice and the advice of the council be included in all such calls and conferences. Submission of counsel should reserve the right to negotiate which right is available. Involving the shareholder representative helps protect shareholders from unnecessary risk.
Restoration of the shareholder representative’s advisory committee
If you have an advisory committee on a shareholder representative, consider including them in the terms of the bond that applies to the shareholder representative. This committee is often a portion of the trading shareholder and may provide guidance to a representative related to
post-closing issues. It should be clear that they are not getting into debt for doing so. Suggested sample language:
“A Shareholder Representative and any member of the Advisory Committee established under the shareholding letter of a Shareholder Advocate (jointly, “Representative Group”) will not be liable for any kind… and shareholders will bind all the Representative Group and face any losses…”
Termination or removal of the stockholder representative
Consolidation agreements should make it clear that a shareholder representative may resign or be removed by a shareholder at any time. A representative represents a group of shares, and that group must be able to nominate a successor whenever he or she wishes. While this may seem obvious, there are situations where the agreement contains language that could limit that ability. There is a simple fix to avoid this problem.
Specifically, avoid language, such as:
“If any shareholder representative dies or is unable to work legally, or otherwise is unable to perform his or her duties below, other shareholders of the company will nominate one person to replace the deceased or legally disabled person as the following shareholder representative hereinafter.”
The above language may inadvertently indicate that a representative has the right to resign or be removed from office only if he or she dies or is unable to work. Instead, think of a language like this:
“If any shareholder representative dies or is unable to act legally, or otherwise fails to perform his or her duties below, or resigns or is otherwise dismissed by the shareholders of the company, other shareholders of the company shall appoint an alternate shareholder representative as the following shareholder representative hereinafter.”
In addition, it would be advisable to add a sentence that a representative can resign at any time, and provide a replacement representative if the shareholders do not elect a replacement. For example, a language like this might be recommended:
“If a shareholder representative resigns or is dismissed for any reason, the shareholders of the company will nominate a substitute shareholder representative within __ days. If there is no representative of such a shareholder appointed as such, the company’s shareholder with the highest interest rate in the escrow fund, or in any remaining claim when the escrow fund is exhausted, shall be deemed to be a shareholder representative, and shall have all the rights and obligations of a shareholder representative hereinafter.”
Professional stockholder representation: reduce risk, improve M&A agreement process
The responsibilities of post-closing are often time-consuming and complex, but professional representative shareholders can reduce stress and uncertainty. From the beginning of the transaction to the final payment, hiring a qualified shareholder representative to symbolize investors allows investors to dispose of heavy management items after closing while giving them the freedom to focus on what they do best. Protecting the economic interests of trading partners and shareholders requires an in-depth understanding of the M&A agreement process. Everything from investigations, negotiations, and resolution of disputes related to accounting, benefits, reimbursement claims, intellectual property, taxes, accounting, and labor problems may arise after closure. Finding suitable shareholder representatives can reduce difficulties for M&A agreement groups and shareholders. The right team can fully control the process and solve problems before they start. With the right partner, M&A contract teams can ensure that the potential for a multi-year process is fully settled to its completion.
References
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
