Typically, M&A deals have been done by two law firms – one for the buyer and one for the selling company. Recently, however, we’ve seen a trend toward having a separate firm that represents the interests of a stockholder or group of stockholders.
The stockholders will do this for a couple reasons. The first is to ensure that their interests are fully protected with respect to issues such as how merger proceeds are distributed, whether third parties are receiving payments that could reduce the amount paid to stockholders, and what liabilities are being assumed by the stockholders or their representatives in connection with the transaction.
The second reason for separate stockholder counsel is to ensure that at least one of the attorneys who represented the sell side in connection with the deal will continue to be available to them after the closing of the transaction. The selling company’s attorneys may be conflicted out from assisting the selling stockholders after closing. The company (rather than the stockholders) was that firm’s client, and that client was merged into the buyer, which means the buyer may own that attorney-client relationship after closing. In contrast, a lawyer who represented the stockholders in the deal will not have any such conflict.
Similarly, the question has been raised as to whether the party agreeing to serve as the shareholder representative following closing should be separately represented. Whoever agrees to assume that job is taking on significant responsibility and potential liability and should make sure they fully understand and agree to the terms applicable to them in the agreement. While seller’s counsel may consider it part of their job to negotiate for favorable terms applicable to the shareholder representative in some cases, the representative typically is not their client. In fact, the interests of the representative are to some degree in conflict with the interests of their client (or the beneficial owners of their client) on issues such as the level of indemnification the representative receives from the selling shareholders and the duties the representative owes to such shareholders. We have seen several agreements in which the final document contained terms that, in our view, representatives never should have agreed to and likely would not have had they been separately represented in the negotiating process.
Our suggestion is that anyone considering serving as the representative on a volunteer basis should tell the company that their willingness to possibly take the job is dependant on them first being represented by separate counsel in connection with the negotiations, and that they will expect the company to be responsible for payment of the related legal expenses regardless of whether they eventually agree to accept the position. Even with separate representation, the person may elect not to accept the position, but the separate representation should be a condition to be met before other factors will even be considered. This should be acceptable to the company because having a strong representative is in the best interests of all of its shareholders, and this should be a necessary step in making that happen.
Paul Koenig is a co-founder/managing director of Shareholder Representative Services (www.shareholderrep.com), which serves as a professional shareholder representative following the acquisition of a VC-backed portfolio company. Read his past peHUB posts here.