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.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.