The Commercial Court has dismissed a claim by a US investment bank to recover a success fee in relation to the public offering of shares in one of India's largest banks in July 2020, where the engagement letter was interpreted to have referenced only private capital raisings. The claim was brought on the basis of an engagement letter between the parties, pursuant to which the investment bank was engaged to assist with attracting additional capital investment (as were various other advisors/institutions): Cantor Fitzgerald & Co. v YES Bank Ltd [2023] EWHC 745 (Comm).

The decision turned on the contractual construction of the engagement letter, which was a negotiated document, but included a significant amount of generic and boilerplate drafting. On this basis, the court avoided a formulaic, black-letter approach to textual analysis and focused on the ordinary meaning of the words used, as per Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24.

The court was persuaded by the use of grammar in the relevant clause, that a success fee was payable to the investment bank only where capital was raised in the private market. This interpretation was supported by the surrounding circumstances, from which it was obvious that a public offering was not viable as matters stood at the time of the engagement and was not contemplated by the engagement letter.

The decision will be of interest to financial institutions in demonstrating the court's approach to contractual interpretation in the context of investment banking advisory engagements on equity raising transactions. Contracts documenting such arrangements will by their nature be largely boilerplate, and therefore special care should be taken to ensure that standard wording is specifically tailored to ensure that it is wide enough to cover all potential eventualities. Whilst each case will turn on the particular language used and the circumstances of the transaction, the decision is an example of how a clause for a success fee drafted narrowly can lead to a negative result for the investment advisor.

We consider the decision in more detail below.

Background

In 2019, the defendant bank (Bank), based in Mumbai, was experiencing severe financial difficulties. The court observed that the Bank's lack of capital funding was "an existential crisis".

In December 2019, the Bank signed an engagement letter with the claimant (Cantor), a US broker-dealer, investment bank and financial advisor, based in New York; under which Cantor agreed to assist the Bank to raise finance. Various other advisors/institutions were also instructed by the Bank with the same brief. The engagement letter contained the following wording:

"We have been advised by the Company that it contemplates one or more financing(s) through the private placement, offering or other sale of equity instruments in any form, including, without limitation, preferred or common equity, or instruments convertible into preferred or common equity or other related forms of interests or capital of the Company in one or a series of transactions (a "Financing")."

Schedule I of the engagement letter contained a list of the potential investors who were ring-fenced for Cantor, and Cantor was entitled to 2% of the proceeds received/receivable in connection with any "Financing" under the engagement letter (in addition to a non-refundable retainer of USD 500,000). Cantor devoted time and effort to attract investors, leading to some non-binding submissions made by investors to the Bank, but the amounts involved were not sufficient and the offers were subject to significant conditions.

The financial position of the Bank deteriorated, and in March 2020 the Reserve Bank of India published a Reconstruction Scheme. Under this scheme, the State Bank of India (SBI) was to acquire a 49% shareholding in the Bank, and the Bank's financial issues were eased with an infusion of capital of approximately USD 1.3 billion from a consortium of investors led by SBI. The entire board of directors of the Bank was also replaced. This intervention had the effect of raising investors' confidence in the Bank.

The new board resolved to raise further capital investment and the Bank initiated a Further Public Offering (FPO), successfully raising around USD 2 billion. Three investors who had been identified at Schedule I of the engagement letter subscribed to shares worth approximately USD 373 million. Although Cantor had no direct involvement in the FPO, it claimed that it was entitled to a 2% fee in respect of the capital contribution made by these investors.

Decision

The court summarised the main issue between the parties as relating to the construction of "a few words in one sentence of one clause of the Engagement Letter". The question was whether, in the definition of "Financing", the adjective "private" modified all the transaction categories of "placement, offering or other sale of equity instruments in any form".

The court considered general principles of contractual construction as to the ordinary meaning of the words used, in the context of the contract as a whole and any relevant factual background, as per Arnold v Britton and Wood v Capita Insurance Services Ltd. The court observed that although the engagement letter was governed by English law, given that its subject matter was the raising of capital finance in respect of an Indian public company, it was common ground that the parties must be taken to have had some familiarity with the relevant Indian statutory and regulatory provisions.

While the text of the engagement letter was considered, negotiated and agreed, the court noted that much of the language used looked like generic, boilerplate drafting. Accordingly, the court avoided a formulaic, black-letter approach to textual analysis and focused on the ordinary meaning of the words used. In this respect, the court referred to the conventional understanding that where an adjective (here, the word "private") is followed by a series of nouns in a list (here, the types of transaction), the adjective modifies all of the nouns in that list.

In the court's judgment, the ordinary and natural meaning of the definition of "Financing" in the clause, was that it comprised any private placement, any private offering and any other private sale. This provisional view was not substantially affected by considering the relevant words in the wider contractual context. By contrast, it was supported by the surrounding circumstances, from which it was obvious that a public offering (including an FPO) was not viable, as matters stood in December 2019. In reaching this conclusion, the court made the following observations/conclusions:

  • The court noted that the term "private placement" is a term of art in Indian legislation such as the Indian Companies Act 2013 and regulations issued by the Securities and Exchange Board of India. However, the court held, in the context of a submission by Cantor that if "private placement" was a term of art covering preferential issues and QIPs, the subsequent phrases "offering" and "other sale" would become redundant, and it was "unrealistic" in the context of the engagement letter that "private placement" was used as a term of art, rather than as a phrase in general worldwide use among professional people with a financial background.

  • The court considered the broader context of the public and private financing options available to the Bank to raise finance as a matter of Indian law. These included: a public offering, such as an initial public offering (IPO), or FPO; a form of private placement called a Qualified Institutional Placement (QIP); a preferential issue to a limited number of investors; or a rights issue to existing shareholders. A public offering would have required the Bank to issue a prospectus and make public disclosures about its financial position. At the time Cantor was engaged, the Bank was concerned that this may cause a run on the bank. Furthermore, Cantor, as a US institution, did not possess the requisite licences as an Indian merchant bank to advise as the lead manager of an IPO/FPO, QIP or rights issue (although it was acknowledged that Cantor could have acted as an offshore financial advisor in the background to such a transaction).

The court therefore ruled that the FPO was not within the scope of the engagement letter and Cantor's claim, based on the express terms of the engagement letter, failed.

The court did award Cantor interest for the late payment of the non-refundable retainer payable by the Bank, in the sum of USD 21,195.08. However, the court observed that this "minor success" was not enough to make Cantor the overall winner.

Notwithstanding the result, the court noted:

"...the nature of a contract such as the Engagement Letter is that Cantor's right to be paid is contingent on a single result and that if this had happened, Cantor would have been entitled to the fee stipulated in clause 3(b), no matter how great or how small its efforts had been, and no matter if it had introduced many potential investors or hardly any."

The court went even further adding that it would not have mattered if Cantor's efforts had had no causative effect at all. This suggests that parties will be held to the specified terms of their agreement. In circumstances where there is an "all or nothing" engagement letter, courts will be reluctant to engage in what would be a fact specific enquiry to determine whether a fee is "fair", but will simply determine whether the event occurred or not and therefore whether or not the fee is due. It will not be open for either party to re-open the bargain they have struck if it subsequently transpires that the agreed fee is not commensurate with the services provided.

Cantor's alternative case of implied term

Cantor pleaded an alternative case that the engagement letter was subject to an implied term that it would be entitled to a 2% fee for any investment it secured, even if the structure of the investments were different to those contemplated by the engagement letter. The court rejected this argument on the basis that the implied term was "not necessary as a matter of business efficacy, nor [was] it obvious" (referring to the recent Court of Appeal decision in Yoo Design Services Ltd v Iliv Realty PTE Ltd [2021] EWCA Civ 560).

Cantor's alternative case in unjust enrichment

Cantor's further alternative case was that the Bank had been enriched by Cantor's services, and that was at Cantor's expense, and unjust. However, the court denied this claim on the basis that in circumstances where the parties had agreed to the particular terms of the engagement letter, such a claim would interfere with the contractual allocation of risk, and thus override the parties' agreement (Dargamo Holdings Ltd & Anor v Avonwick Holdings Ltd & Ors [2021] EWCA Civ 1149 and Barton v Morris [2023] UKSC 3).

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.