By Susan Milberger, Director, Payments, SRS Acquiom
Closing can be the most stressful time of an M&A transaction, with deal fatigue setting in and deal parties and their counsel handling a number of last-minute issues to get the deal over the finish line. One of those issues is selecting a payments administrator to distribute closing payments to selling security holders. This decision should not be hard, but there are a number of things to keep in mind. We’ve put together a quick checklist of the top 10 things to watch for in M&A payments to make the decision an easy one when the time comes.
1. Physical Stock Certificates
While collection of physical stock certificates and paper letters of transmittal (LOTs) still dominates the payments process, deals are becoming increasingly paperless. Under UCC § 8-207, buyers can rely on the target company cap table when making payments, eliminating the burden of collecting and keeping track of physical certificates. Find a payments administrator that understands this and will help streamline document collection.
2. Human Error
Illegible handwriting on LOTs can lead to errors or payment delays. Like physical certificates, paper LOTs are not always required to receive payment. An online LOT platform enables holders to enter information directly, removing the need for manual completion of complicated forms and data entry, and resulting in faster and more accurate payments.
3. Compensation Payments
Merger consideration classified as employee compensation can be a hassle for the buyer, particularly for post-closing payments like escrow or earnout distributions. Payments administrators that can handle compensatory payments help serial acquirers avoid adding staff or implementing new systems to make post-closing compensation payments to current or former employees.
4. Required Tax Documents
Define in the LOT which tax documents will be required for holders to receive payment. This starts with assessing the shareholder base, especially for foreign holders and non-employee option holders. Having clear instructions about how to complete and where to find tax forms can prevent unnecessary delay or shareholder phone calls.
5. Tax Treatment
Clarify in the payments agreement the tax reporting to be done by the payments administrator (or other parties) for all payments. This eliminates uncertainty months later at tax time and improves the odds of collecting other information for tax reporting, like cost basis or date of acquisition for covered securities.
6. Closing Payment Calculations
Oftentimes, a portion of the merger consideration is held back in an escrow or expense fund, resulting in the initial closing payment lower than the purchase price. Make payees aware of those calculations to avoid confusion upon receipt of payment.
7. Payee Types
Consider every type of payment for a smooth closing. Be prepared for various termination agreements, LOTs, joinder agreements, and other necessary documents. If vendors need to be paid upon close, make sure they are included on the payment spreadsheet.
8. Payment Methods
Understand which payment methods are available to payees and the pros and cons of each. ACH is often a free option, but can take one to three business days to become visible in a payee’s account. Wires process immediately, but are often accompanied by a processing fee from the administrator or the receiving bank. Checks are usually the slowest option.
9. Contact and Payment Information Updates
Typically, post-closing payments are processed using the same payment instructions used for closing payments. Stay in constant contact with your payments administrator to communicate changes and prevent outdated contact, tax, or payment information.
10. Single Provider for Payments and Escrow
Finally, treat your payments administrator as a toolbox to make your closing and post-closing payments go smoothly. For an even more streamlined process, find an administrator that also provides escrow options, so all aspects of your transaction are under one roof.
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