Could Your Shareholders Disrupt Your Deal?

Companies’ shareholders and investors understandably care about the future of your business and decisions that affect it. When they agree with management decisions, their support is reassuring. However, when they oppose a proposal — such as a sale or acquisition plan — you could have trouble on your hands.

Shareholders rarely have contractual rights to block a company’s merger unless they’ve negotiated that power as a condition of the investment. But even without official authority, unhappy investors can throw up roadblocks to a pending deal.

Discontent leads to roadblocks

In planning a deal, both the seller and the buyer need to consider their major stakeholders. For example, a public company seller could alienate private equity investors by accepting an offer that investors consider too low. The buyers’ shareholders might object on the grounds that the two companies make a poor strategic fit.

Either group can easily get in the way of deal proceedings. Even if a major investor is only lukewarm about your proposed deal, that low-level grumbling can influence other stakeholders until they’re all unhappy. Worse, a strongly opposed investor in a public company could lobby other shareholders to push for a proxy vote to reject the transaction. Angry investors could even file a lawsuit claiming the deal damages the value of their holdings.

Consider interests and potential objections

To head off conflicts over a planned M&A deal, start by considering major investors’ specific interests. Are you dealing with a strategic investor who concentrates on companies in a single market sector? Such an investor might object to a merger with a widely diversified, multi-industry company.

Purchase costs often get investors riled up, too. M&A deals can be expensive for buyers, and their investors are likely to keep a wary eye on the bottom line. If you’re buying a company, be prepared to provide specific examples of how the deal will reduce costs or increase revenues — and ultimately boost profits — and how long it will take to repay any new debt you’ll be assuming.

If you are promising synergies from a deal, risk-averse investors may be skeptical. Provide them with detailed, specific data to make your case, such as:

• Objectives of the deal, including projected growth rates
• Increased cash flows from existing assets
• Expanded market shares

Valuation is often a major concern, particularly among private equity investors. Investors don’t want to sell their holdings too cheaply. Or, if they own a stake in the acquiring company, they don’t want their shares devalued when the buyer issues stock for a potentially overvalued acquisition. Work with your M&A advisor to develop a current, supportable market value.

Keep communicating

The key to managing investor objections? Keep the lines of communication wide open — especially with those you know might cause trouble. If major stakeholders have a history of contentious management relationships, meet with them personally to explain your plans and how you arrived at certain decisions.

Even mild-mannered investors require care. Stakeholder resistance to a deal often has its roots in resentment over being ignored or neglected. Investors who supported your company in its early stages are likely to be particularly sensitive. So be sure to regularly debrief and solicit feedback from all of your major investors, both through formal communications and informal meetings about important decisions, such as those involving price or deal structure.

Protect yourself from liability

Despite your best efforts, it may not always be possible to get every major player on board. If you proceed with a deal over the objections of a major investor, be sure to take steps to protect yourself from legal action that could block the transaction.

To begin with, carefully organize all records that discuss management’s consideration of alternatives to the deal, such as offers from other buyers and why they ultimately were rejected. Consider obtaining a fairness opinion about the deal’s financial viability from an objective outside expert. Finally, when dealing with disgruntled investors, involve your legal counsel in every major deal-related decision.

If you have questions about issues related to a potential deal, Weaver’s transaction advisory professionals can help. They offer practical experience with just tricky issues as valuation or projecting tax implications. Contact us if you’d like to find out how Weaver can help.

© 2018