Checking Out

At closing, most information statements and letters of transmittal give the shareholders the option of receiving their proceeds by wire transfer or check. We think there is an often overlooked alternative: electronic checks.

Most large shareholders choose wire transfers. Funds are immediately available, wired directly into the shareholder’s bank account, can’t be reversed without the approval of the recipient. But paying agents usually charge a fee (anywhere from $30-$250) for wire transfers paid either by the buyer or, increasingly, charged to the recipient as a deduction from the payment.

Traditional checks are the low (or no) cost alternative, but there are several disadvantages. In addition to processing and mailing delays, checks are rarely issued as final payments. Because it is possible for the check issuer to stop payment, banks can place holds on deposits, further delaying fund availability. It can take up to 14 days or longer for some shareholders to get full use of a merger-related payout.

We think everyone would be better off if paying agents started using so-called electronic checks (otherwise known as ACH credits). Similar to wire transfers, ACH credits are sent electronically to the recipient’s bank account and typically received the same or next day once the payment request is made. But, similar to checks, ACH payments are very low cost and often provided by paying agents at no cost. In fact, some paying agents are considering charging for check processing in order to encourage the use of electronic checks.

So what’s the difference between wire transfers and electronic checks? Answer: wire transfers are final payments. They are immediate available and can’t be reversed without approval of the recipient. ACH credits, on the other hand, behave more like checks. They cut out the mailing and processing time, but there is still the possibility of a hold or reversal (although reversals are increasingly rare, especially given the origin of these payments). Note: ACH is available for US dollar payments to bank accounts in the US. For payments in other currencies or to non-US recipients, wires and checks may be the only option.

You’ve never been given the option for an electronic check as your payment method? You’re not alone. In fact, we’ve rarely seen an option for electronic checks in paying agent or escrow agreements or with the letter of transmittal forms provided by selling companies. When we ask the major escrow banks why not, they say that no one thinks about it at the time. We think it’s time. It’s a more reliable and convenient payment option for the smaller shareholders with no more risk than regular checks, but much faster depositing times. So why not?