When selling a company, what are the advantages of going with a third-party shareholder representation firm?

QUESTION:

I’m about to sell my company, and I’m wondering what are the advantages of going with a third-party shareholder representation firm rather than just doing it myself? No one on our board seems to want to do this job, and I’m not sure if I should do it, or if we should hire someone.

ANSWER:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

In general, I don’t think I can do much better than Jason Mendelson (of the Foundry Group) who wrote this post on the topic a few years ago: http://www.askthevc.com/wp/archives/2008/05/should-i-be-a-shareholder-representative.html. As Jason notes, he is affiliated with SRS, so bear that in mind.

As you read the post, also remember that the person asking Mendelson was going to be employed by the acquirer after closing. As he points out, it’s generally a bad idea for someone in that position to serve as stockholder representative, whether or not you decide to hire an outside firm. Leaving aside the conflicts of interest that might disadvantage other stockholders and/or get you sued, it can make your life very difficult inside the acquiring organization. Of course, if there’s a fight over post-closing issues, it will be awkward for you, no matter what. In the absence of an outright fight, however, being the guy with primary responsibility for monitoring and negotiating post-closing items can make for some difficult days at the office. Even if everyone knows you have an interest, making someone else the “heavy” can bring you a lot of social and psychological benefit.

If you aren’t going to be working for the acquirer, it isn’t completely crazy to decide to be the representative. But think about whether you have the necessary skills to do a good job and consider the trouble and cost (in lost time, professional fees, potential fights with people you’d rather keep on good terms and potential legal exposure) of trying to do it yourself.

Congratulations on the sale. Good luck!

ADDITIONAL ANSWER:

by Geraldine Zaroukian at Zarig

My advice is to hire a third party shareholder representation firm.

There are several reasons to do so:

• First, negotiations during a sale can become pretty stressful, intense and bad feelings can result which might be detrimental to future and continuing relationships especially if management intends to stay on after the sale.
• The third party firm acts as a shield and protects management from the stressful negotiations.
• When a third party is involved, management can assist in the negotiation and still be focused on the business. Management should be focused on the business just in case the sale does not go through.
• Finally a third party firm can help you decide what is best for you when it comes to a sale, compensation and their tax consequences.

One of the disadvantages of hiring a third party is that it adds an extra expense. However, that expense is insignificant compared to benefits provided by the third party. Imagine for example not being ready for sale and the deal falling through or the price decreasing. Or having bad feelings between management and employees of the acquired firm towards the buyer.

Best of luck with the sale.

ADDITIONAL ADVICE:

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

I agree with the second answer wholeheartedly, but I think it may misunderstand the question (as I understood it, in any event). A “shareholder representative” usually refers to a person designated in a stock transaction (or merger) to deal with the buyer after closing on behalf of all of the stockholders (there usually isn’t a shareholder representative in asset deals because the selling corporation fulfills the role). The shareholder representative handles things like working capital adjustments, claims for indemnification and earnouts. If you’re going to use this kind of shareholder representative, it’s good to get them involved as early as possible, but not crucial. They won’t be doing anything until you close.

That’s very different from hiring someone to represent the sellers in the negotiation of the sale. Depending on the size and nature of the deal and the number and type of shareholders, the sellers are usually represented by one or more law firms and, in larger deals, one or more “financial advisers” (usually an investment bank or consultancy). Zarig appears to fill the latter role.

In even the smallest business sale, it is crucial for the sellers to be represented by at least one experienced lawyer (usually one lawyer can represent everyone if they want that). As the second answer notes, one important advantage to representation is to buffer the sellers from the tougher aspects of the negotiation (if they want that) and allow management to keep their focus on operations. More importantly, business sales are a once-or-twice-in-a-lifetime transaction for many sellers but usually not for the buyer. There are a lot of ways a buyer can draft acquisition documents to give the sellers a lot less than they were expecting or even turn the deal into a source of significant net liability. So it’s important for the sellers to have advice from someone who has been around the block a few times. A lawyer can fill both of those roles, but a good financial adviser is also very important, both in canvassing the market for buyers and in negotiating the terms of sale.

ADDITIONAL ADVICE:

by Geraldine Zaroukian at Zarig

My advice is to hire a third party shareholder representation firm or a law firm if the deal is fairly large and complex. If the deal is relatively simple and straight forward and the number of shareholders is small then, as Ethan mentioned, you can use a single law firm to represent all shareholders.

No matter the deal size or number of shareholders, I suggest hiring a third party (shareholder representation firm or law firm).  The benefits of hiring a third party are numerous.  First, they are independent and have the necessary experience.

They will take care of the following time consuming and burdensome tasks:

• Shareholder communication
• Payments validation
• Ensure compliance with the terms of the merger
• Ensure compliance with escrow agreements.
• Allocate amounts to each shareholder.
• Ensure timely return and release of escrow funds.
• Handle administrative duties
• Handle dispute resolutions

A great advantage is that they act as a shield between the seller or management and the buyer. This is especially helpful in case of a dispute.

The disadvantage of hiring a third party shareholder representation firm or a law firm is that they add an extra cost.

My previous post dealt with the complete sale process of a company. I strongly advise businesses looking to be acquired to hire a law firm and an investment banking or consulting firm when they are interested in selling. Being prepared can save you from a lot of headaches. In the big scheme of things, it is best to hire consulting firms, law firms and third party shareholder representative firms than to have a deal fall through or possible litigation later on. The benefits provided by these experts outweigh the costs.