Joinder Agreements and Contribution Agreements in M&A

Ensure that you can enforce the terms of your purchase agreement and protect shareholder’s rights in your next M&A deal. Here, the team at SRS Acquiom offers thoughts on contribution and joinder agreements. 

Acquiring companies commonly require the seller’s shareholders to enter into side agreements or for shareholders to enter into agreements with each other to be certain of their post-closing rights. Two common types of shareholder agreements, or side agreements, used to resolve concerns about the enforcement of purchase agreement terms against shareholders are joinder agreements and contribution agreements. All selling shareholders of a target may not be required to sign the purchase agreement for a transaction to be valid. But even if the transaction closes, certain provisions, such as a general release, may not be enforceable directly against shareholders unless handled correctly. 

What are Joinder Agreements and Contribution Agreements? 

• Joinder Agreements 
  Joinder agreements are signed documents where individual shareholders agree they are subjectto all or certain terms of the M&A purchase agreement. For major shareholders, the acquiring company may also include voting agreements in a joinder agreement. 
• Contribution Agreements 
  Contribution agreements are used among the shareholders and are designed to allocate any post-closing liabilities on a pro rata basis. If any shareholder pays more than their pro rata share, the other shareholders will reimburse them as necessary to balance each shareholder’s pro rata portion.  
  Contribution agreements are particularly important if the shareholders are liable under the purchase agreement for any obligations and one shareholder pays the entire obligation.  Shareholders may have to decide whether to incur the expense of defending a post-closing claim, potentially requiring them to go out of pocket.  In practice, it is difficult to collect these additional costs from shareholders pro-rata, so if a major or key investor wants to pursue the defense, they often end up footing the bill upfront. 

M&A Purchase Agreement Terms Aren’t Always Enforceable Against Shareholders 

Depending on the structure of the transaction, it is rare that all selling shareholders are signatories to the purchase agreement. As a result, certain terms of the purchase agreement may not be enforceable against shareholders.  

Some courts have invalidated certain shareholder obligations if the shareholders have not specifically agreed to be bound by those requirements in the purchase agreement.   

• For example, in Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc. the DE Chancery Court invalidated certain post-closing obligations of the shareholders set forth in only the letter of transmittal, which is a form that shareholders must complete and sign to receive their payments. 
• M&A transaction parties prefer to avoid ambiguity, particularly around deal term enforceability, and shareholder agreements are commonly used to provide more certainty.   

Caution: M&A Deal Timelines May Suffer 

Whenever additional signatory parties and agreements are added to an M&A transaction, the schedule and cost of the deal may be impacted.  

• Getting separate agreements signed by individual shareholders prior to closing can be costly and time-consuming. Some shareholders may push back or want to negotiate the documents. Others, particularly those receiving little or no benefit from the transaction, may not cooperate or act in a timely manner. A professional paying agent can help streamline the process and make shorter work of time-consuming solicitations with an efficient, easy-to-use online platform.

A 2022 analysis from SRS Acquiom showed that shareholder agreements were included on more than half (51%) of 100+ merger deals closed in 2022. Deciding to pursue separate shareholder agreements depends on many factors, including the type of deal and deal terms, the number of shareholders, and the perceived risks. There is no single solution. Whether side agreements are necessary or advisable is a difficult analysis; the team at SRS Acquiom recommends that an assessment be handled on a deal-by-deal basis.