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Abort fees in engagement letters – a case study


United Kingdom

Following recent litigation in the High Court concerning the payment of an abort fee in a nomad and broker's engagement letter for an IPO

Market reCap October 2013 edition 


Following recent litigation in the High Court concerning the payment of an abort fee in a nomad and broker's engagement letter for an IPO, we thought it might be useful to review the key facts of the case and raise points to consider when drafting abort fees in engagement letters in general.

The engagement letter - the abort fee provisions

The company in question engaged the broker to act as its nominated adviser and provide corporate finance and brokerage services with respect to an admission. The engagement letter entered into between the parties provided that:

  • the company will pay the broker an abort fee in the event that the company aborts the transaction "for reasons unconnected to the broker or its performance of the marketing and the book build process"; and

  • no abort fee would be payable "if upon completion of the marketing and book build process both parties agree that the admission cannot or should not proceed".

The facts

The events leading to the abandonment of the transaction were convoluted and, not surprisingly, the parties' respective recollections of meetings and events differed. In essence it was a case of disappointed expectations - after several months' work, the broker's research note gave a valuation for the company which was slightly lower than the director and main shareholder's estimated valuation.

After attempts to seek further interest, the broker provided an assessment to the company that, whilst the results were not as might have been hoped for, the company was advised to proceed at the valuation provided. This course of action was recommended because the documentation was already prepared, a loss of momentum would lead to investors being more wary on a subsequent attempt and there was no guarantee of achieving a better result six months later (if at all).

The company decided to abort the admission due to the slightly lower than expected valuation, although it instructed the broker to continue to contact potential investors for a short further period, with the formal communication of the decision only being given a few days after the decision to abort.

As a result of the company's decision not to continue with the transaction, the broker claimed that the abort fee was payable. The company denied that it was liable.

The company's defence

The company's primary argument was that a term should be implied into the engagement letter that the broker had to act reasonably in agreeing that the admission "should not proceed" and it was unreasonable to advise to proceed at the lower value.

This argument was rejected comprehensively for a series of inter-related reasons:

(a)  it was common ground that the broker was required, as with any commercial contracting party, to act rationally,and not arbitrarily or perversely (and no suggestion was made that it had breached such requirement). Accordingly, it was not true to say that the engagement letter did not give the company any protection unless the term was implied;

(b)  this level of protection made perfectly good business common sense without the need to imply a further term;

(c)  if the parties had intended there to be an obligation to act reasonably, the court would expect this to be set out expressly;

(d)  if the term was implied, it would introduce uncertainty into a previously clear provision. The court had no objective basis for assessing whether the broker was acting reasonably, and expert evidence would not assist;

(e)  due to the instruction to continue to seek interest from investors, the judge was not satisfied on the evidence that the marketing and book build process had in fact been completed (which was necessary for the second limb to be satisfied - "if upon completion of the marketing and book build process both parties agree that the admission cannot or should not proceed"); and

(f)  finally, and fatally for the company, the company had never formally asked the broker to agree that the admission should not proceed, and the company did not at any point complain about the absence of any such agreement. The company had simply unilaterally informed the broker that it was no longer proceeding, whilst aware that the broker did not agree with this decision.

The company's secondary argument was that its decision to abort the transaction was for reasons connected to the broker and its alleged deficient performance of the marketing and the book build process. If so, the company would not be liable to pay the abort fee. The difficulty for the company was that it had at no point alleged that the broker was in breach of the terms of the engagement. In particular, the broker had not failed to use reasonable endeavours to procure placees pursuant to the intended placing.

The company therefore sought to argue that "performance" (see the specific wording of the abort fee clause above) meant something broader than a breach of contract, and applied more generally to the broker's conduct. The judge disagreed. He held that performance had to be measured against something that the broker had actually agreed to do, which could only mean the services defined in the engagement letter. The company attempted but did not press a case that the broker had promised a minimum valuation or fundraise; so there was no basis for a contention that this alleged promise was somehow reflected in the performance which the broker was required to give.

The company was therefore liable to pay the abort fee.

Abort fees - general drafting points to consider

Following this recent piece of litigation it may be worth considering the points below when drafting an abort fee clause in an engagement letter.

(a)  In what circumstances are the fees payable? Engagement letters tend to be less heavily negotiated than placing agreements, but it is worth thinking at this stage about the various ways in which the engagement can be terminated and setting out in which circumstances the various fees and commissions become payable. Should the fees and/or commissions be payable upon termination due to: (i) a breach of a term by the company? (ii) a breach of a term by the broker? (iii) an act of force majeure? (iiii) a mutual decision to end the engagement? Does it matter at what stage in the transaction the above termination event occurred? Generally, if the broker has built the book and the engagement has been terminated by the company and the broker is not in breach, it would seek to recover all of its commissions and fees.

(b)  Should a minimum valuation be specified? The company engaging the broker may propose that a minimum fundraise or valuation be added to the engagement letter, such that if it is not met the engagement terminates with no fees becoming payable. It is fairly common for engagement letters to specify a minimum fundraise figure (which is usually tied to the company's minimum working capital requirements) but rare to see a valuation figure, thereby acknowledging that the market will effectively determine the placing price. Brokers will probably wish to avoid a specific minimum fundraise or valuation figure, so that it is not deemed to be an explicit term of their scope of engagement.

(c)  Interaction with termination provisions Often engagement letters specify that certain fees are payable upon termination, but the specific termination provisions contained elsewhere in the letter either contradict this by stating that all rights and obligations of the parties to the letter lapse upon termination or are unclear. If a clause in a letter states that fees are to be paid upon termination, then those specific clauses should be stated to survive termination, otherwise the broker's right to the payment may be deemed to have terminated along with the rest of the agreement.

(d)  Interaction with the placing agreement The terms of the engagement letter, in particular the fee arrangements, will generally be reflected in the placing agreement and the nomad and broker agreement, to the extent that it is appropriate to do so. It is common to find that the fee arrangements in the engagement letter are less precisely drafted than those in the placing agreement and, as such, it should be made clear in the placing agreement that its terms will prevail over the terms of the engagement letter should there be any conflict between the two.


Edward Westhead is an Associate in the Corporate Group of Field Fisher Waterhouse LLP in London.

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