A reminder to take care with adviser engagement letters

Why should I read this?

A recent High Court decision highlights the importance of being clear on the scope of terms in adviser engagement letters, particularly where these include so-called “tail fee” provisions.

What happened?

• the originally contemplated transaction never completed;
• the company went on to complete a different type of transaction with an unrelated party and facilitated by a different adviser (in which the original adviser played no role); and
• the engagement simply expired with time.

The Court found that the subsequent transaction constituted an “Equivalent Transaction” under the terms of the engagement letter and therefore triggered the tail fee entitlement. The adviser received US $2 million in cash and was awarded US$5 million in damages for the company’s failure to deliver “carry shares” in the resulting entity

Key findings

A “tail fee” is a contractual provision in an engagement letter intended to ensure the adviser gets paid if a transaction completes shortly after the agreement terminates, usually within 12-24 months. It protects the adviser if a client terminates the engagement to avoid fees but enters into a transaction with a party they introduce. However, on the facts, the Court found that this clause went further.

The Court treated the tail fee wording as having two independent triggers:

• Limb 1: completion of an Equivalent Transaction within 12 months of termination;
• Limb 2: completion of an Equivalent Transaction flowing from an agreement entered into during the engagement.

Significantly, the Court confirmed that, on the facts, Limb 2 did not require early termination. Whilst expiry by effluxion of time did not amount to termination, the adviser’s claim succeeded here because a standalone trigger under Limb 2 was satisfied.

Even though the transaction mechanisms differed (the successful transaction was a US “de-SPAC” merger (effectively, a transaction with a listed cash shell), as opposed to a reverse takeover envisaged when the original engagement letter was entered into), the Court held that the economic substance was sufficiently similar as to trigger the fee provisions.

Finally, on analysing the fee provisions, the Court found that one of the risks the relevant clause intended to mitigate against here was the company engaging another adviser to complete a different transaction with another party.

Key takeaways

The decision turns on analysis of the specific drafting of the fee provisions in the engagement letter and the facts. Whilst the Judge in this case had some comments around the drafting of the relevant fee provisions, he found the meaning to be clear, without any real ambiguity. The decision reinforces that courts will hold parties to the commercial allocation of risk agreed at the outset.

This case is a reminder that terms of adviser engagement letters may be scrutinised once a transaction has taken place, and will be important not only for advisers seeking to protect their fee entitlement, but also for clients wishing to avoid unexpected liabilities and disputes.

Points that may require specific review and negotiation, as highlighted by this decision, include:

• Defining an “Equivalent Transaction” carefully to be clear what types of transaction this is intended to capture.
• Being clear when tail fees or success fees apply. Should tail fees be payable after expiry of the term, or only on termination? What activities during the term trigger entitlement (e.g., would signing a term sheet or heads of terms be sufficient?). Is the involvement of the original adviser in a subsequent transaction required?
• If the fee entitlement does not extend to unrelated or subsequent transactions which the original adviser did not facilitate, or did not make an introduction, this should be made clear. 

Clients should:

• Manage overlapping adviser mandates carefully when running multiple processes and with the potential for multiple fee claims.
• Keep clear records of live adviser mandates and signed engagements.