[This insight was written by Bob Holmen for Fortis Advisors. Additional insights may be found at Fortis Insights.]
When a third party claim arises following the closing of an M&A transaction, which party controls the defense and resolution of the claim can impact the cost of the claim. Funds held in escrow to cover post-closing claims are at risk if the buyer has full control of the defense, but the selling securityholders are paying the costs. Of course, sellers recognize this, and in analyzing data from almost 400 transactions in the past three years where Fortis Advisors has served as shareholder representative, over 80% of the time the seller reserves the right to participate in the defense or has a limited right to assume control of the defense.21
Data source: Forsite M&A Deal Tool.
That said, we do note an interesting trend in the data: over the past three years the percentage of M&A transactions where the seller was able to reserve a full right to assume defense has dropped from 10% to 3%, while the percentage of deals where the seller has no right to even participate in the defense has increased from 6% to 14%. Are sellers becoming more aggressive in retaining control of claims? We will follow the data and report on this further in the future.