May 27 2008 by Jason

Should I Be A Shareholder Representative?

Note:  This was actually a question that I received from a colleague via email, but thought I’d post it here given the content. 

Q:  My company is close to signing a contract to sell the businessAlthough I’m prepared to do the role, one of the board members has suggested that we consider using a third party shareholder representation firm instead.  Jason – I see that you’re involved with Shareholder Representative Services, the firm my board member suggested.  I’m pretty committed to my company so what are the advantages and disadvantages of going with a third party rather than just doing it myself? BTW, I’m currently the CFO and plan on staying on for at least a while post closing.

A:  (Jason)  My short answer is that under most circumstances you want to avoid this job if at all possible.  The shareholder rep issue is a problem that we and many other VCs have been struggling with for years on our M&A deals.  Most buyers require that the stockholders appoint someone to have power to speak for all of the stockholders following closing to ease the administrative process.  On most of our prior deals, somebody (usually one of the VCs) had to be the rep, and usually nobody wanted to do it.  To be blunt, the job sucks.  It takes a lot of time and is a big distraction if the person does the job properly, and not doing it properly can subject the person to risk of being sued under some legal theory like negligence, breach of fiduciary duties, unequal treatment, conflicts of interest or something similar.

In your particular situation, you have the added complexity of inherent conflicts of interest. If you are going to work for the buyer following closing, which is effectively what will happen if you continue to work for the company, you’ll have the problem of having to argue on your former stockholders’ behalf against your new employer if any claims come up. That significantly adds to the legal, ethical and emotional challenges you’ll be facing if you serve as the representative, especially if you personally have financial interests on one or both sides.

For all these reasons, I got involved with Shareholder Representative Services.  I serve on their advisory board, but more importantly, our funds have used them on a few of our recent exits and have been very pleased.  The selling company hires SRS to serve as the shareholder rep, and they professionally manage the entire process.  We’ve found that we get better information and quicker responses from them than if one of the other investors serves as the rep, we get to avoid the risk and burdens of being the rep, and we still maintain significant involvement in the decision making process when material issues do arise. 

Because of SRS, we’ve determined as a fund that it is highly unlikely that we’ll ever serve as the rep again – it would have to be a deal with unusual circumstances that I can’t think of right now.  It’s not a good use of our time and is not in the best interests of our fund or our LPs.  Besides, we hire professionals to manage every other aspect of the M&A deal process.  Why wouldn’t we do the same with respect to the post-closing period?