The concept of a professional shareholder representative has been used on thousands of mergers and acquisitions transactions over the past 10 years, however there are still some target companies that choose to elect a management member or institutional investor to fill that role. Whether these decisions derive from a fear of losing control, not wanting to abandon your shareholders, or a concern about cost, we believe there is only an upside to adding a professional shareholder representative as a member of your deal team.
Eliminate administrative burden while maintaining control
While we understand the desire to see the acquisition through to the end and maintain control over post-closing issues, we also know that management members and institutional investors are pulled in many directions both professionally and personally. The shareholder representative is responsible for monitoring deal terms and key dates, tracking account balances at the individual shareholder ownership level, providing regular updates to the shareholder base, promptly responding to all inquiries, negotiating claim disputes, and coordinating the release of the escrow fund. By hiring a professional shareholder representative, you can offload the administrative work to an experienced partner while maintaining control through your participation on an Advisory Committee. All post-closing activity and key decisions will be guided by the Advisory Committee, with the burden of executing those decisions and completing the day-to-day tasks placed on that professional.
Experience with the process
The shareholder representative role can require a lot of specialized knowledge, from managing liquidation waterfalls and reviewing working capital statements, to responding to a variety of claims, and coordinating an escrow distribution. Even basic shareholder questions, such as “Can I transfer my escrow interest to a relative?” or “If I don’t sign my letter of transmittal until next year, do I avoid paying taxes this year?” can leave an unexperienced shareholder representative scratching their head. A professional shareholder representative can help navigate the complexities of the post-closing period, including, ensuring every holder is paid in a timely manner at closing all the way through coordinating the final escrow distribution. Already have trusted counsel who you’ve been working with throughout the course of the transaction and want them to stay on post-closing? That’s fine! In most instances, the professional Shareholder Representative can still engage the advice of former company counsel to help on some of the bigger ticket claim issues where their expertise is most valuable.
Decrease risk, increase security
The shareholder representative is tasked with maintaining sensitive and confidential shareholder information. Often-times, this can include shareholder Personal Identifiable Information (PII) such as Social Security numbers or tax IDs. In addition to the regulatory compliance concerns that stem from holding this type of information, holding this type of information can make the representative a target for internet fraud attempts – especially in a transaction where his or her name or email is listed in a public transaction agreement. Hire a professional who has the systems, procedures, and expertise to prevent fraud, reduce this risk and increase the security of this confidential information.
Avoid potential conflicts
A management member or institutional investor who owns preferred shares may find themselves in a risky situation post-closing when forced with a decision that could benefit preferred holders, but disadvantage common holders or option holders. Liquidation preferences can cause claims to be deducted from common holders’ escrow proceeds first, leading those common holders to potentially question whether the decision to settle a claim was done in good faith. Additionally, if the management member or institutional investor still has a relationship either through employment or a rollover investment in the buyer, then there may be conflict of interest concerns with them acting as the shareholder representative. Engaging an unbiased professional who represents the shareholder base as a whole can mitigate these concerns and helps ensure fair dealing during the post-closing process.
Around the clock shareholder attentiveness
For many of the company’s shareholders, this is the first and only major transaction they will experience. A professional shareholder representative understands this experience can bring high levels of excitement, as well as confusion about the remaining aspects of the transaction. When hiring a professional, you are engaging a team with the dedication, patience, and experience to make the shareholder feel valued and supported throughout the post-closing process. For the repeat investors, a professional also understands the importance of building a relationship around their specific needs, whether that’s consolidated reporting, early dissolution of a fund family or otherwise.
If you’d like to explore the idea of using a professional shareholder representative on your transaction, feel free to reach out to one of our Client Development Officers or the Managing Director of Shareholder Representation, Fiona Boger at firstname.lastname@example.org.
This article is intended to provide general information only and is not intended to provide specific investment, legal, tax, or accounting advice for any individual. Before acting on any information included in this article you should consult with your professional adviser or attorney. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, or the opinions of professionals in other business areas of Wilmington Trust or M&T Bank. M&T Bank and Wilmington Trust have established information barriers between their various business groups.