After Closing: Who Should Be the Shareholder Representative?

This is the first article in Fortis Advisors' After Closing Series highlighting frequently occurring post-closing issues that should be considered before signing an M&A agreement. The series will focus on helping the selling shareholders avoid common pitfalls in the post-closing period.  

In the world of private M&A deals, much is at stake following the closing. Significant value remains at risk in the form of working capital, purchase price adjustments, potential indemnification claims against escrowed funds, and contingent payments based on earnouts and milestones. How these matters are handled directly impacts how much the selling shareholders will ultimately receive in the transaction. Successful results often depend on who is managing the process.Historically, selling shareholders have appointed an individual (typically a member of management or a representative of an investor) to serve as the shareholder representative. That decision is often one that is not carefully considered by either the seller or the individual selected to serve in this capacity. The burden, responsibility, and risk of serving as the shareholder representative should not be taken lightly.Because real value is at stake, experience, expertise, and a commitment to serve for an extended period of time are all essential characteristics for any shareholder representative. Unfortunately, in many cases, the appointed individual lacks one or more of these traits, putting shareholder value at risk.Before making the decision about who should serve in this role, selling shareholders should ask themselves the following questions:  

  1. Does the representative have the necessary legal, financial, accounting, and administrative experience to handle all facets of the job?
  2. Does the representative have the time to commit to the role, which could potentially be substantial and last for multiple years?
  3. Will the representative be effective in communicating with the shareholders on a regular basis and responding to their questions and needs as they arise?
  4. Is the representative independent and free of any conflicts such that all shareholder interests are fairly represented? 

Often, the answer to one or more of these questions is going to be "No". Most individuals lack the comprehensive skills required to serve effectively, and often day jobs or other constraints impact the amount of time they can devote to the demands of the shareholder representative function.Independence may also be lacking, such as when the seller's representative becomes a member of the buyer's management team, or represents an investor whose interests in the outcome of post-closing matters may differ from those of other shareholders. Any of these circumstances can threaten the representative's decision-making abilities. For these reasons, there is a rapidly growing trend, particularly in the institutional investment community, to outsource the shareholder representative function to a professional services firm that has the experience, time, and expertise to address the full range of matters that arise post-closing. 

Venture funds and private equity firms often recognize that their staffs are not necessarily the right people to carry out the shareholder representative responsibilities, and that assuming the shareholder representative role is not the best use of their time. They understand that their interests may be better served by hiring an experienced professional team to manage and advise them through the entire post-closing process, for which a modest fee is borne by the entire shareholder group.Facilitating the decision to outsource is the fact that the shareholders (through an appointed advisory group) retain control over all material decisions affecting the shareholders' economic interest. The decision to outsource to a professional team ultimately gives the selling shareholders an experienced lineup of experts who are dedicated and committed to serving as the shareholder representative. This professional team then assumes the full burden, responsibility, and risk of serving that function, while the shareholders retain the authority to make key decisions regarding their economic interests.