Financial advisers’ engagement letters: watch out for the tail-gunner
Financial advisers’ terms of engagement typically provide the adviser with a premium for a successful outcome to the transaction. The engagement can normally be terminated at relatively short notice. What is to prevent the client from terminating the engagement before completion in order to avoid having to pay the success fee?
The answer is the so-called tail-gunner clause (conjuring up the image of a parting shot as the bomber flies away): it normally provides that, if the transaction completes within a given time after the client terminates the engagement without good cause, the success fee is payable to the former adviser exactly as if termination had not occurred.
The Birmingham City transaction
In a recent application by a financial adviser in the High Court the former client tried to resist having to pay a success fee under a tail-gunner clause. Seymour Pierce had been engaged in June 2007 by Grandtop International Holdings Limited to advise in relation to its acquisition of Birmingham City Football Club. Originally, a recommended takeover offer was envisaged. A success fee of £2.2m was agreed, and the engagement letter provided:
“In the event the engagement pursuant to this letter of engagement is terminated by the Company and an Offer for the Target is declared or becomes wholly unconditional as the result of any offer made by or in association with the Company within a period of 12 months after the effective date of termination the Company shall pay to Seymour Pierce the Success Fee in full."
The transaction did not proceed as planned, and after Grandtop acquired a 29.9% stake in the club in July 2007 Seymour Pierce’s involvement gradually ceased, although the engagement did not formally come to an end until May 2009. With the help of another adviser Grandtop completed its acquisition of the club that September, well within the 12-month period provided in the tail-gunner clause. Seymour Pierce sued for the fee.
Interpreting the clause
Grandtop’s counsel made what were described as a number of robust points on the supposed lack of merit in Seymour Pierce’s claim. But the judge ruled that this was irrelevant: it all came down to a question of interpreting the engagement letter.
The judge had to decide whether, despite the fact that the letter contained an entire agreement clause (excluding unwritten or extraneous terms), the letter should as a matter of business efficacy be read in a way that departed from the literal wording. In particular, Grandtop argued that Seymour Pierce was not the effective cause – or even one of the effective causes – when it finally acquired the club and so did not deserve a success fee. As a matter of business efficacy, was it not implied that, to get the success fee, Seymour Pierce would need to be the effective cause?
But the judge found, on the contrary, that the clause was entirely comprehensible without implied terms and was not in any way ambiguous. The success fee was plainly payable regardless of Seymour Pierce’s lack of involvement.
Comment
Grandtop was understandably aggrieved at having to pay two financial advisers. Most people would object to having to reward one person for another’s efforts, and pay that other as well. But sophisticated parties should not presume that the court will come to their assistance just because terms seem uncommercial or unreasonable. Everything turns on the meaning of the agreement and the real protection lies in careful drafting.
Seymour Pierce Limited v Grandtop International Holdings Limited [2010] EWHC 676 (QB)
