The role of the transferors' representative: a crucial function in structuring acquisition transactions in a complex environment

By Edouard Narboux, Managing Director at Aether Financial Services and Clotilde Billat

, Partner at Stephenson Harwood LLP

Over the years, acquisition and merger operations have become increasingly international and sophisticated, involving a growing number of stakeholders. Financial stakes are higher than ever in a buoyant economic environment, particularly for certain sectors such as technology and life sciences. This intertwining of factors makes transactions more complex to execute, even though there are professionals whose role is precisely to streamline the process.

The Complexity of Acquisition Operations

Consider the relatively common case of a foreign listed company acquiring a business based in France. The capital of the acquired firm may be highly fragmented: founders, "friends and family," seed funds, venture funds, and corporate funds from various fundraising rounds. However, not all will play the same role in the acquisition: the main shareholder is often a particularly involved fund due to its investment, while the founders may adopt a more passive stance. As for the deal, it may revolve around a highly composite offer with a payment in cash and shares, a price adjustment, all potentially accompanied by adjustments to the number of shares to be issued. Additionally, there may be an escrow account with staggered releases, adjustments to working capital requirements, or proceeds from future disposals or grants. All of this must also consider a complex guarantee of assets and liabilities, particularly covering ongoing litigation and limited but existing tax risks. These elements create intertwining factors of complexity, both from a social and governance perspective (negotiation, potential tensions in the event of exit, etc.) and from a financial perspective (transaction structuring). Furthermore, the signing of the deal is dissociated from the closing by several weeks or even months in order to satisfy suspensive conditions, which may lead to developments.

The Shareholder Representative: An Intermediary to Streamline Operations

To frame these developments between the signing and the closing while closely supervising the execution of the share purchase agreement (monitoring commitments, identifying beneficiaries of the SPA, calculating the GAP, sending notices, etc.), the selling shareholders typically appoint a “sellers’ representative“, or representative of the sellers. This is usually the principal shareholder or the shareholder-executive who led the negotiations. They are indeed at the center of the process and therefore the most legitimate to act as a liaison between the buyer and the historical shareholders. This appointment contributes to the success of the transaction by ensuring the emergence of an intermediary dedicated to reconciling the interests of all parties in a situation that may involve a significant number of shareholders, sometimes in disagreement.

Clotilde Billat, partner at Stephenson Harwood, notes in this regard that “among the significant pitfalls we encounter during divestiture transactions are misunderstandings and misalignment of interests among outgoing shareholders.”.

Indeed, the exercise of a liquidity clause in the shareholders' agreement can create particularly tense relations between majority and minority shareholders, making the implementation of standard representation clauses impossible. In this context, the involvement of an independent third party often helps to defuse relationships and find a compromise.

The necessity of appointing the right representative: independent agents

One may wonder whether the most recently arrived shareholders or those who remain withdrawn are suited to take on this role. The crux of this appointment lies in the trust placed in them by other stakeholders and the attention given to potential conflicts of interest. This role requires both theoretical and practical knowledge of various professions, recognized experience in the sector, and internal resources to analyze the SPA.

Clotilde Billat rightly points out that “the lack of resources in legal and financial departments to monitor the application of financial clauses in post-closing transfer agreements is a source of difficulties.”

This is particularly true for the structuring of pricing mechanisms in certain Sale and Purchase Agreements (SPAs), which are becoming increasingly sophisticated and require advanced analytical tools. An independent financial agent, whose role involves overseeing contracts and ensuring their execution, will therefore possess the necessary expertise to act as a representative of the sellers and to ensure the proper execution of an SPA. They guarantee complete neutrality, guided solely by the documentation and best practices, along with a rigorous organization concerning administrative details: regulations, processes, deadlines, etc. All of this is achieved without any risk of conflict of interest and without pressure to influence the representative's decisions.