Getting Someone Else to be the Rep?

If another shareholder is willing to serve as the representative, many of the other investors may consider the issue resolved. While this will pass the risks and burdens of serving as the rep to another party, it is often easier said than done. On many deals, nobody wants to do it. If you’re working on a deal and are fortunate enough to have a volunteer, there are still a few reasons the non-representative shareholders may still be concerned about whether that is the right solution.

Most importantly, the shareholders not serving as the representative will generally have little or no access to information throughout the post-closing escrow period. Most representatives take this job out of obligation and give the other shareholders little to no thought, consideration, data or feedback. The other shareholders generally will not know with any degree of accuracy what their balance in the escrow accounts may be at any given time, whether claims have been made and their status, or whether other issues are outstanding that could have an impact on the shareholders.

Second, as stated in earlier blogs, this volunteer rep typically will not manage the process professionally or have it as his or her top priority. The part-time, volunteer reps will likely care about the issues, but will often try to fit them into their schedule as time permits and will typically value getting issues resolved quickly over attempting to achieve optimal outcomes. The risk gets heightened if it happens to be a transaction in which the post-closing issues become very difficult. The average rep can quit at any time, and if things get really hard, he or she could simply tell the other stockholders “this isn’t what I signed up for” and resign. That leaves the other stockholders in a lurch at the worst possible time, with little or nothing they can do about it.

Finally, the party that volunteers to be the representative could have conflicts of interest with the other investors. For instance, if the rep now works for the buyer or is trying to sell one of its other portfolio companies to the same buyer at the time a dispute arises, they may not fight for the shareholders as vigorously as they otherwise would. These are a couple examples of many tacit conflicts that may exist.