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Engagement letters



United Kingdom

Two recent cases in the High Court have highlighted the pitfalls that can be encountered when drafting engagement letters for the provision of corporate advisory services.

Market reCap September 2014 edition 


Two recent cases in the High Court have highlighted the pitfalls that can be encountered when drafting engagement letters for the provision of corporate advisory services.

The first case involved Edmund de Rothschild Securities (UK) Ltd, which was engaged by Exillon Energy Plc to help it respond to shareholder activism by a hedge fund, Worldview Capital Management. 

Worldview held about 12% of Exillon's share capital.  It had made public criticisms of Exillon's board and requisitioned a general meeting early in 2013 to remove the chairman and appoint three of its own nominees.  In the event, Exillon withdrew its requisition when it became clear that its proposals would be rejected by other shareholders.  In the autumn of 2013, Exillon received two takeover bids and Worldview sold its stake to one of the potential bidders.

Rothschild had advised Exillon on its strategy in dealing with Worldview's general meeting requisition and prepared several shareholder circulars, for which it was paid a monthly retainer.  But it also claimed that it was entitled to a success fee of US$300,000 as a result of the sale of Worldview's stake in Exillon, even if it did nothing to help bring that about.

The engagement letter between Rothschild and Exillon provided for a success fee to be payable "if a resolution of the issues posed by Worldview's requisition has been achieved, such achievement being assessed because one or more of the following has occurred:… iii. Worldview has reduced its shareholding in the Company to below 5%..."

Rothschild argued this meant it was entitled to a success fee when Worldview sold its stake in Exillon, whether or not it played any part in Worldview's decision to sell - it did not have to show that this result was achieved as a result of its efforts.  The court agreed.

The judge said that this was the natural meaning of the wording of the engagement letter.  That natural meaning was powerfully supported by:

  • the difficulty that Rothschild would have in proving that its work was an effective cause of the sale of Worldview's shares, even if that was in fact the case, as Worldview was unlikely to co-operate in explaining its reasons; and

  • the fact that it did not matter to Exillon why Worldview decided to sell, only that it had done so.

Rothschild was therefore entitled to its success fee.

The second case also concerned success fees and again turned on the drafting of an engagement letter. 

African Minerals Ltd is an AIM company, with subsidiaries which hold rights to exploit mineral deposits in Sierra Leone.  In August 2008, an engagement letter was signed appointing Renaissance as African Mineral's financial adviser in connection with the sale of one of its subsidiaries.  This was later amended to provide that "if any Sale is consummated" within one year of termination of the engagement, Renaissance was entitled to certain success fees.  The engagement letter was terminated with effect from September 2010.

Agreement was reached on the sale of a 25 % stake in the subsidiary in July 2011.  It was agreed that this was a "Sale" for the purposes of the engagement letter, but the parties disagreed about whether the sale had been "consummated" within one year of termination of the engagement (the tail period).

Although the sale agreement was entered into within the tail period, it was subject to numerous conditions precedent, including government and regulatory approvals.  These took longer than anticipated to sort out, and the sale eventually completed in April 2012.  This was outside the tail period.

The question therefore was whether the sale was "consummated" when it was completed, or at an earlier stage when the conditional sale agreement was made or when the conditions were satisfied.

Renaissance argued that, as the engagement letter referred to "completion" elsewhere, the parties must have meant "consummation" to mean something other than completion.  The judge agreed with this interpretation.  He noted that, where different words are used in a legal document, they are presumed to mean different things. "Consummation" occurred when agreement was reached on the transaction, whether or not the agreement was conditional.

Renaissance was therefore entitled to a success fee on the transaction, although it completed after the end of the tail period provided for in the engagement letter.

However, Renaissance did not succeed in an argument that it was entitled to fees in relation to the sale of other subsidiaries of African Minerals that were included in the same transaction.

There was a further aspect to the case, which arose under a more general engagement letter between African Minerals and Renaissance.  This agreement provided that, if African Minerals made an offer of equity or debt securities during the term of the engagement, it would "acting in good faith, give Renaissance the first and a reasonable opportunity to submit a proposal" to act as its financial adviser in respect of the offer.

Renaissance argued this gave it a right of first refusal, under which it had the right to be offered the financial adviser role on terms which African Minerals was prepared to accept, or to match any third party offer which African Minerals might be minded to accept.

The judge did not agree, saying that African Minerals was only required to give Renaissance a first and reasonable opportunity to submit a proposal, during which time it would not consider any third party proposals.  So the clause gave Renaissance a potential advantage in that its proposal would be the first to be made, but African Minerals was not obliged to negotiate with Renaissance and were free not to accept its proposal.

These two cases illustrate the need for careful consideration and drafting of engagement letters for corporate advisory services, both by companies and by those they engage to advise them.


Danielle Harris is a Senior Associate and Professional Support Lawyer in Fieldfisher's Corporate Group in London.

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