Recent Case Affirms Protection for Selling Shareholders

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.