Success fees – an unsuccessful negotiation
Market reCap February 2014 edition
- Primary Market Bulletin No.7
- Sponsor competence review under Listing Rules
- New controls on controlling shareholders
- AIM Notice 38
- Takeover Panel Practice Statement No 27
- ESMA statement
- Success fees
- Service of English legal proceedings on overseas directors
Another engagement letter has resulted in a dispute in the High Court. In this case, the controversy concerned the success fee payable for corporate finance services and neither the company nor the adviser got entirely what they thought they had bargained for.
Allproperty Media Pte Limited (Allproperty), a Singapore company, wanted to raise some additional capital. It engaged several advisers to help it identify potential investors on a non-exclusive basis, including Alegro Capital LLP (Alegro).
In the event, Allproperty found an investor without the aid of any of the advisers it had engaged, and the new investor proceeded to subscribe about 18m Singapore Dollars for new shares in Allproperty. In addition, the investor acquired a significant number of the existing issued shares from shareholders for about 36m Singapore Dollars. In all, the new investor ended up with a total stake of 41% of Allproperty.
Alegro claimed a success fee under its engagement letter with Allproperty, even though it had not been instrumental in securing the new investment. Allproperty declined to pay.
The engagement letter provided for a success fee of 3.5% of the capital raised, defined as: "the total capital provided to the Company by Investors that have been introduced to the company by Alegro directly or indirectly (including but not limited to any equity, debt and/or mezzanine capital) and transferred to, or for the benefit of, the Company at the closing of the Transaction and any subsequent instalments received by the Company. The Investors are listed in Appendix A."
The list of companies in the appendix was preceded by: "The following companies, including any affiliated companies such as shareholders, subsidiaries or group companies, are defined as Alegro Introduced Investors". The new investor in Allproperty was a subsidiary of one of the companies included in the appendix.
The first issue the Court had to decide was whether any success fee was payable to Alegro at all, since the adviser had not actually introduced the investor. This issue was resolved quickly by the Court, in favour of Alegro. The engagement letter did not require an introduction – although it referred to investors that had been introduced by Alegro, it included a list of investors in the appendix which were identified as "Alegro Introduced Investors". This meant that the success fee was payable to Alegro in relation to any capital invested in Allproperty by any of those listed investors.
The second issue was whether a success fee was payable on the S$36m paid by the new investor to existing shareholders to buy out their shares, in addition to that part of the fee which related to the new money subscribed for shares in Allproperty.
Alegro argued that the new investor would not have invested at all unless they had thereby acquired a substantial interest in Allproperty, which would not have been the case without the acquisition of existing shares. The money paid to existing shareholders was therefore "for the benefit of the Company". However, the Court held that the meaning of the provision was unambiguous and did not flout business common sense. Only the new money paid to the Company to subscribe for new shares was relevant to the calculation of the success fee.
So Allproperty, which was under the impression it would have to pay a success fee only if Alegro was instrumental in securing the additional capital it needed, had to pay more than £300,000 to Alegro. Alegro, which had understood its success fee would be based on any capital paid by an investor (whether to Allproperty or its shareholders), had to make do with around £300,000 rather than the £1m or so it had claimed.
In the words of the judge who heard the case:
"It is unfortunate that a great deal of cost will have been expended in the dispute and that it will have generated bad feeling and distrust between the two sides. It is, regrettably, a consequence of not sorting out the fine print of the agreement sufficiently in the commercial haste that gave rise to it. There is a lesson to be learned."
We could not have put it better.
The case referred to is Alegro Capital LLP v Allproperty Media PTE Ltd  EWHC 3376 (QB)