Don't Leave Out the Yankees

We’ve seen a few deals recently that missed the implications of recent changes to the New York General Obligations Law. This statute could make it significantly more burdensome for an individual in New York to properly grant power of attorney to someone else. This could create a meaningful challenge in merger transactions that require the appointment of a shareholder representative since such representatives are granted a power of attorney to represent the interests of the former shareholders of the target company. Among other things, the new law dictates the size of font that must be used, creates new guidelines pertaining to the revocation of a power of attorney and requires that specific cautionary language be included in the document that grants such power.

These new rules apply to any power of attorney signed by an individual in New York, no matter where they live. Since no assumptions can be made as to where individual stockholders will sign their paperwork, the New York rules appear to apply to almost any transaction that has a target company with multiple stockholders. Therefore, in order to comply with the New York rules, most mergers in which a stockholder representative is being appointed will now have to either use a carefully crafted letter of transmittal that is checked against the requirements of the regulations or use a separate side letter agreement appointing the stockholder representative. Failure to follow the New York rules could result in a stockholder who signed their letter of transmittal in New York later arguing that the representative does not have the power to speak for their interests. Alternatively, an escrow bank could decline to recognize the ability of the stockholder representative to act on behalf of all stockholders if the bank is unsure whether the New York law applies and where stockholders executed the applicable paperwork. This could tie up escrow accounts well into the future. Neither the buyer, the bank, nor the seller wants this uncertainty.

While we understand that state legislatures feel a need to protect their citizens from manipulation, we do not think this law should apply to the granting of a power of attorney by a group of stockholders in an M&A transaction. In the M&A context, it adds a significant burden if followed, and leaves substantial uncertainty if not. We also do not see that it provides much additional protection. The grant of the power in this situation is done by a large group of stockholders rather than an individual. It is significantly less likely that the stockholder representative getting the power of attorney would be able to deceive the whole group. Finally, if every state did this, it would be extremely difficult to get deals done. States would likely have different requirements related to this issue, and trying to navigate them all would be a nightmare.

Our suggestion is that New York revisit this law and more carefully tailor it to the situations where there is the most potential for abuse. We also suggest that it specifically carve out situations in which the law should not apply, such as the appointment of a representative of the stockholder group in mergers. In the meantime, deal professionals will have to be careful to consider the implications this new law will have on their drafting of transactional agreements.