This is the fourth article in Fortis Advisors' After Closing Series highlighting frequently occurring post-closing issues that should be considered before signing an M&A agreement.
It is in the best interests of both parties in an M&A transaction to maintain essential information rights, not only for the buyer during the pre-closing period, but also for the shareholder representative during the post-closing period.
Indemnification provisions contained in private M&A agreements are quite detailed with respect to the responsibility of selling shareholders to indemnify the buyer for post-closing claims. But as experienced M&A professionals know, buyer indemnification claims, and the selling shareholders' liability for them, are often the subject of disputes.The challenge for sellers is that, as a legal and practical matter, after the closing, the buyer controls information about the acquired company, including information relevant to the indemnification claim. Selling shareholders, acting through the shareholder representative, must have the information needed to evaluate the claim and its merits to resolve the question of indemnification.Unfortunately, many M&A agreements fail to adequately address this need for information from the sell-side perspective. The imbalance in the parties' access to information can lead to inefficiencies in resolving indemnification issues and aggravate disputes.
Confidentiality Concerns: At first blush, buyers may be reluctant to grant the shareholder representative access to information. One concern may be confidentiality. This can easily be addressed by having the shareholder representative agree to confidentiality in the merger agreement or specifically through a non-disclosure agreement when an issue arises. Shareholder representatives should not hesitate to agree to maintain the confidentiality of information, as it is in the selling shareholders' best interest to learn as much as possible about the indemnification matter to assess the selling shareholders' responsibilities.Addressing Cost IssuesAnother reluctance the buyer may have is the burden and cost of providing the information. That too can be easily addressed by limiting (usually through a reasonableness standard) the amount of time the shareholder representative can spend with buyer personnel and having the shareholder representative bear the cost of producing whatever documented information is requested.An additional simple workaround to the cost issue is to provide the shareholder representative with an electronic copy of the documents placed in the data room provided by the seller prior to closing. This could eliminate the need for the shareholder representative to chase down readily available information and thereby save time, effort, and expense. For buyers who might be sensitive about making the data room generally available post-closing, a provision could be made to place a copy of the data room in escrow for release to the shareholder representative only in the event of an actual or potential indemnification claim.
Neutralizing Strategic Advantage: Lastly, buyers may be reluctant to provide post-closing access to information simply because they think they will be strategically advantaged in their indemnification claim by keeping the shareholder representative as uninformed as possible. This is a shortsighted perspective, since the shareholder representative is likely to be more, rather than less, defensive about an indemnification claim when operating in a vacuum of information, particularly when relevant information is requested of and denied by the buyer. This is particularly so when, for example, the indemnification matter relates to the settlement of a third-party claim and the shareholder representative's consent is required to make the settlement effective.It is in no one's interest to extend the resolution of indemnification issues simply because one party does not have sufficient information to make a judgment on how the matter should be resolved. Buyers should recognize that the shareholder representative is expected to act in their clients' best interests. That means the representative will not entertain any significant indemnification claim without the ability to fully evaluate the merits of the claim, including information it deems material that is accessible only through the buyer.Time, effort, expense, and even goodwill between the parties can be saved when the shareholder representative is allowed to make an informed judgment about the matter.
M&A Drafting Tip: The post-closing access to information issue should not be overlooked when drafting M&A agreements. Counsel for buyers and sellers should be as creative as necessary to reflect the respective interests of their clients. At a minimum, the parties should include something to the effect of the following sample language:
[After the Closing, Agent, on behalf of the Target Stockholders, shall have reasonable access (including by electronic means, to the extent available), during normal business hours to the documents, books, records (including Tax records), agreements, and financial data of any sort relating to Target or any of its Subsidiaries, and to discuss the applicable affairs of Target or any of its Subsidiaries with its officers, as may be necessary for the performance of the Agent's obligations under this Agreement and to address any matter associated with any [Working Capital Adjustment] [Indemnification Claim] or [Milestone Payment]. Acquirer shall, and shall cause the Surviving Corporation and its subsidiaries to, retain all such materials that relate to any period ending on or before the Closing Date until the date that is seven years from the Closing Date.]