Joel Espelien

Good advice, Rob. Note that escrow in a cash deal is obviously also cash. But there are still stock deals out there. And so we head back to Dan Bernstein on this important topic, Dan?

Dan Bernstein

Taking on public stock in a transaction does not mean that you can immediately liquidate it. Stock has to be registered by the company before it can be sold on a public exchange. Companies can complete a shelf registration, basically registering stock to put on a shelf until they need it, and then issue it as fully registered.

More likely though, your stock will be unregistered, leaving you with the option of selling it in a private 144A placement to an accredited investor at a discount to the market and with stiff fees. Or you can rely on the issuer to register the stock after you get it. If you do take unregistered stock, you should insist on either piggyback registration rights, which require the issuer to register your shares with the next set of shares that they register, or that they file to register your shares directly. Because the issuer has to remain in compliance with the SCC regulations, that may bar them from registering shares during a certain period. It can't guarantee when your stock will be registered and tradeable.

Joel Espelien

Good points. Next, we head over to Europe to hear from Managing Director of Corum Group International, Jon Scott, on shareholder approvals.

Jon Scott

Shareholder approval thresholds can be an issue. Typically, the buyer will require that a specified percentage of shareholders sign off on a deal before closing. You want to keep this at a realistic level in the sales and purchase agreement, 80% or 85%, but never higher.

If there are multiple shareholders who are inactive or ex-employees, one or more of them may hold out approving the contract by trying to exercise their appraisal rights and stop the deal. This could be disgruntled employees or shareholders who have unrealistic valuations in mind for their very small portion. You don't want the buyer to use this as last-minute leverage to lower the valuation of the transaction or to extract more favorable terms.

I was in one transaction where we literally did not know if the dissident shareholders were gonna walk into the shareholders meeting and try to stop the transaction. Fortunately, this didn't happen.

Joel Espelien

Good insight, Jon. These approvals can vary from quite simple to exceedingly difficult. Next, we look at another tricky third party dependency, namely the assignment of third-party contracts. 


This is a segment from Tech M&A Monthly: Best Practices for Definitive Agreements in Tech M&A (August) webcast. For more information, please visit Corum Group's Software M&A Webcast Archive.