In what capacity should the Shareholder Rep be signing the merger agreements?

We’ve seen lots of contracts in which the shareholder rep just signs the agreement in his or her individual capacity. This is surprising, because these are individuals who have been well trained not to sign other agreements as individuals. For instance, a typical signature on a typical contract is something like this:

XYZ, Inc.

By: Joe Smith
Its: CEO

When serving as the rep, often this hypothetical Joe just signs as Joe. This opens the individual to the potential of being sued personally. Even though the rep typically has pretty broad indemnification in the agreements, getting sued personally can cause significant short-term disruptions. As an example, a good friend of mine was sued as a rep at a time he was applying for a mortgage, and the bank had no choice but to put a freeze on his loan application until the suit was cleared up. Even if this isn’t a factor at the time, defending yourself from any lawsuit is usually stressful, distracting, expensive and highly tedious.

One of the ironic reasons we’ve heard for having the individual be the rep instead of the venture fund (which is actually the stockholder in the acquired company) is that the fund can’t subject itself to that kind of risk. It seems very strange that the fund and the fund managers are then comfortable subjecting their principals to whatever this risk may be.

If the individual has to be the rep to get the deal closed, our view is that the rep should make clear in the introductory paragraph and the signature block that the rep is signing “solely in his/her capacity as the [Stockholder Agent] as agent for and on behalf of the Stockholders.” The rep may still get sued, but it will hopefully be in his or her capacity as an agent for the principals in the deal (meaning that it’s really the principals who are being sued) and not individually. While this may not be perfect, it will hopefully mitigate the personal risks described above.