The post-closing process can be complex and time consuming. Hiring a professional independent shareholder representative to manage post-closing matters, such as purchase price adjustments, indemnification claims, earn-outs and escrow management, may be beneficial for target shareholders and management. In recent years, shareholder representatives have been commonly used in the U.S., and they are becoming increasingly common in Canada.
There are many benefits to hiring a shareholder representative to deal with post-closing matters:
- Avoid conflicts of interest. When the purchaser decides to continue to employ target executives and management post-transaction, there is an inherent conflict of interest for the target executives and management to represent the interest of target shareholders. For example, if a potential claim arises with regard to a breach of representation or warranty by the purchaser post-closing, the target executives may not feel comfortable bringing a claim against the purchaser, who is now their new employer.
- Expertise. Many post-closing matters are highly complex, and the existing target executives and management may not have the skill and knowledge to carry them out. For instance, according to a survey done by SRS Acquiom, 73% of private M&A transactions have a purchase price adjustment mechanism in place. Purchase price adjustments are often difficult to calculate without proficiency in tax and accounting, and having experts in the field to manage the adjustment process will ensure price adjustments are computed in an accurate and timely manner.
- Available on a long-term basis. Earn-out provisions are becoming increasingly popular in private M&A transactions (a more detailed discussion can be found here), and their terms range anywhere from one year to more than four years post-closing. Shareholder representatives, instead of target executives, can fill the role of monitoring earn-outs on behalf of target shareholders, especially if the earn-out period is long.
- Shareholder communication. Shareholder representatives can provide updates to shareholders and answer any shareholder inquiries to improve shareholder communication post-transaction.
Target management should consider hiring shareholder representatives for share purchase transactions when their company is a widely held corporation. Shareholder representatives may assist target executives to focus their attention on their core business and to avoid conflicts of interest with shareholders.
The author would like to thank Lucy Liu, articling student, for her assistance in preparing this legal update.
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