Summary
Corporate finance advisors – and their clients – should be aware of recent legal developments relating to success fees. A high court ruling within the past year has confirmed that a client may still be liable to pay its advisor even where the engagement has come to an end and the client has proceeded to completion on a separate transaction with a new advisor (incurring liability to pay success fees to the new advisor, as well).
Overview
The case, Seymour Pierce Ltd v Grandtop International Holdings Ltd, turned on the construction of the advisor's engagement letter / agreement. The Seymour Pierce agreement provided that its client would remain liable to pay a success fee for a period of twelve months following termination of the engagement. This so-called 'non-circumvention' (or 'tail' or 'tail-gunner') clause is a regular feature of finance advisors' terms of engagement, and tends to be drafted as widely as possible to prevent clients from avoiding liability to pay advisors for their work by simply terminating the relationship.
It is because such provisions are so widely drafted, however, that there has been doubt as to their enforceability, particularly where the non-circumvention would have the effect of capturing transactions which were not in the contemplation of the parties on entering into the engagement. Resolving any doubts on the subject, the judge in the Seymour Pierce case asserted that 'the matter comes down to a question of interpreting the particular provisions now before the court'. Rejecting the defence's argument that additional terms should be implied into the agreement between the parties (namely that the success fee should be in some way conditional upon Seymour Pierce being the effective cause of the success), the court found in favour of Seymour Pierce. In answer to the defence's rhetorical question 'If the deal which the parties were contemplating failed, why should any Success Fee be payable?', the judge's concise reply was 'It is because the contract expressly so provided'.
The principle here is that 'contract is king': The court will give effect to what the parties have agreed, and so both sides to an engagement should review the terms very carefully.
Conclusions
Finance advisors should continue to press for protections to ensure that their hard work is rewarded.
Their clients should seek amendments to guard against inequitable consequences, for instance linking the success fee to completion of a specific transaction (although this may be resisted by advisors to the extent that it could allow clients to restructure a transaction to escape payment).
Finally, it is worth noting that, if the terms of agreement are unclear, the court will construe the terms against the party that drafted them (usually the finance advisor).
Next Steps
Corporate finance advisors should review their standard engagement terms to be certain that they provide sufficiently robust protection and will stand up to judicial scrutiny. While Seymour Pierce's non-circumvention provision was upheld, it was more restrained than others in the market.
When appointing advisors, clients should seek legal advice on the engagement to ensure the greatest operational freedom and to guard against unintended consequences from the drafting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
