April 23, 2014

Recent Case Affirms Protection for Selling Shareholders

The federal district court in Massachusetts ruled recently that an aggrieved buyer in an M&A transaction cannot join individual selling shareholders to a litigation over the transaction if the shareholders have appointed a representative to deal with post-closing matters.

On February 14, 2014, the Federal District Court of Massachusetts in Mercury Systems, Inc. v. Shareholder Representative Services LLC reaffirmed the position taken by Delaware courts that a shareholder representative can be authorized to act on behalf of multiple selling shareholders to protect their collective interests in an M&A transaction and shield the shareholders from inclusion in any subsequent deal-related litigation.

In Mercury Systems, a buyer in an M&A transaction attempted to include the selling shareholders as parties to a litigation by attempting to convert the case into a class action suit. The judge denied the buyer’s motion stating, “all the certification of a class of defendant security holders will accomplish is an escalation of the procedural complexity of this litigation and its cost, while eviscerating the salutary purpose of having appointed a shareholder representative in the first place.”

Selling shareholders often appoint shareholder representatives to handle working capital adjustments, earn outs and other issues that may surface after the closing of an M&A transaction, including indemnification claims and other disputes. The decision in Mercury Systems provides reassurance that shareholders can avoid the complexities of deal-related litigation by choosing a representative to protect their interests.