April 9, 2014

Case Confirms Only Shareholder Rep Party to Litigation

Here’s news from SRS (also see this Akin Gump blog):

In a recent case in which Shareholder Representative Services is serving as the shareholder representative, the buyer in the underlying M&A transaction attempted to include SRS and the selling stockholders as defendants in a class action suit. Mercury Systems, Inc. v. Shareholder Representative Services LLC, et al., Action No. 13-11962-RGS, Dkt. #34 (D. Mass., February 14, 2014). A defendant class would have exposed individual stockholders to burdensome discovery obligations and added expensive complexity to the case. SRS opposed the inclusion of the stockholders, arguing that SRS was the only proper defendant. The judge quickly and vehemently agreed, calling “the common practice of appointing a shareholder representative…a helpful mechanism for resolving post-closing disputes efficiently and quickly.”

The decision reaffirms that shareholders of a target company can effectively remove the risk of being dragged into any deal-related litigation by not serving as the shareholder representative themselves. This is increasingly important to funds and individuals for a number of strategic reasons. Obviously, nobody wants to be a party to a lawsuit if they can avoid it. It can be time consuming and stressful. In addition, most funds have a strong desire to avoid being named an adverse party to a strategic or financial buyer they might see again on future deals. This is increasingly true as funds become more specialized and the universe of buyers in their industry narrows. Finally, most funds would like to avoid having to disclose any litigation when it comes time for fundraising.
SRS has managed more than a thousand indemnification, working capital and earnout claims over the nearly 600 transactions on which we have been engaged. On the vast majority of these, we are able to successfully resolve the issue with buyers without any need for the matter to rise to litigation. However, some claims do not settle and necessitate elevated methods of dispute resolution. To our knowledge SRS is the only professional representative that has been named a litigant on behalf of stockholders, and we’ve taken on this burden in dozens of cases. Any other alternative as a shareholder representative, whether a volunteer or outside source, may be going through the process for the first time,

When engaging SRS, shareholders are able to rid themselves of the risks and burdens of being a shareholder representative without giving up control of the process or any material decisions that need to be made. Our process allows stockholders to have the best of both worlds – control of the issues they care about while ridding themselves of the baggage they don’t want.