Exchange Agents and Acquisitions of Private Venture Financed Companies
written by David A. Broadwin
Although the M&A world of Boston does not have anything as eye catching as Howie Carr happening in the press right now, one trend that has quietly appeared over the past few years, is the use of exchange agents in acquisitions of private venture financed companies. I write about this dry topic now because it has caused some aggravation for sellers in a couple of recent deals. Typically, the buyer hires a large company that is in the business (like American Stock Transfer or JPMorgan) to collect stock certificates and distribute the merger consideration to the seller's stockholders. This procedure can be very helpful in transactions, especially when there are many selling common stockholders. The down side for sellers, however, is that the exchange agent sometimes has fairly cumbersome procedures. Typically, the exchange agent wants to mail a letter (commonly called “transmittal letter”) to the selling stockholders on or shortly after the closing date. This letter contains the documentation that needs to be completed and returned (together with the stock certificates) in order for the selling stockholder to get his or her consideration. I have found that the exchange agent is often resistant to changing its forms. It argues that it is using "standard" forms which have been fine in many prior transactions. Well, when you actually try to complete the forms, it turns out to be rather difficult.
By way of example, one form that I recently looked at required a so-called CUSIP number for the stock of a private company and had no place to put wire transfer instructions. Of course the private company did not have a CUSIP number and the larger stockholders wanted wire transfers (not checks placed in the U.S. mail). These kinds of things can cause delay and aggravation after the deal is closed and can create delay in getting your money to you. I am not trying to argue against this procedure, rather warning you to get your hands on the so-called transmittal letter and other required documentation and complete it before the closing. Here is a prediction: you will have difficulty with the various forms that are requested. It will be easier to get everyone's attention before the closing than a week or more after. Also, it may inspire the exchange agent to change its forms, if it sees what the issues will be. Howie may be silenced, but you shouldn't be.