Recent Caselaw: Investment advisor engagement letters

Certain types of agreement become frequent sources of litigation and caselaw.

One of these is Share Purchase Agreements, particularly the validity of warranty claims notices as discussed in our Article “Challenges in bringing warranty claims under Share Purchase Agreements”.

Another category is investment advisor engagement letters for capital raising transactions. Two recent cases highlight issues which have arisen in interpreting these agreements, specifically regarding the advisor’s right to a success fee after completion of the client’s capital raise.

Cantor Fitzgerald & Co v Yes Bank Limited

The first case is a lesson in contract interpretation and the importance of where adjectives are placed in contract lists. In this case, several million dollars in fees turned on the interpretation of the position of an adjective at the start of a list.

While the case did not set new legal precedent for how contracts will be interpreted under English law, it highlights an important principle: when an adjective or determiner is at the start of a list, it is generally assumed to qualify all the items in the list unless another adjective or determiner in the list suggests otherwise.

Facts

Cantor Fitzgerald (GC) was engaged by Yes Bank of India (the Bank) to assist in raising capital. The engagement letter entitled CG to a non-refundable fee and an additional fee of 2% of the funds raised by the Bank through a “Financing”.

The definition of “Financing” was the key issue. This was defined as: “one or more financing(s) through the private placement, offering or other sale of equity instruments in any form” from a specified list of potential investors.

The Bank raised funds, including US$374.5 million from some of the listed investors, in the form of a further public offer (an FPO).

CG claimed for the additional fee at, essentially, 2.0% of the amount raised in the FPO from the listed investors, being in excess of US$7 million.

The question for the Court’s determination was whether the word “private” in the definition of “Financing” qualified not only the first word in the list “placement” but also the words “offering or other sale of equity instruments”. The Court of Appeal upheld the High Court decision and determined that it did qualify all of these words. As the FPO was not a private offering or sale, CG was not entitled to this additional fee.

Court rationale

In reaching this conclusion, the Court applied the established English law principles for the construction of contracts (which were not themselves in dispute in the case). The Court is required to consider the ordinary meaning of the words used in the context of the contract as a whole and the relevant factual and commercial background. The test is what would a reasonable person, with all the background knowledge which would have been available to the parties, have understood the words in the contract to mean.

CG argued that all forms of equity financing were covered by the defined term “Financing”, including an FPO, by reference to the words “other sale of equity instruments in any form”. The Court disagreed. Applying the ordinary meaning of the words used, the natural assumption was that the word “private” qualified the entire list in the definition.

CG also argued that the concept of a “private placement” is a term of art. The Court disagreed. Although the word “private” naturally couples with the word “placement”, this did not prevent the word “private” also being applied to “offering” and “other sale” if that was what the natural meaning of the words indicated. In particular, CG provided no clear answer to what would be covered by the terms “private offering” or “other private sale” which would not also be covered by the term “private placement”.

As well as applying the natural meaning of the words in the definition, the Court considered the wider contractual context, which provided material support for the Bank’s interpretation. In particular, there was a further section in the engagement letter which explicitly contemplated that there could be some other form of equity financing which was not a “Financing”. This was directly contrary to CG’s interpretation of the definition as being all forms of equity financing.

Lessons to be learned

This case serves as a lesson in the importance of clarity in drafting contract terms. Assuming this had been the commercial intention of the parties, the parties could have avoided any ambiguity by excluding the word “private”, including the word “public” or by changing the order of the list.

When wording a list in a contract, avoid placing an adjective which is only intended to qualify part of the list at the start of the list. The defined term “Financing” could have been phrased differently as “one or more financing(s) through the offering or other sale of equity instruments or private placement”. Alternatively, the definition could have been divided into separate sub-paragraphs as “(a) the private placement of equity instruments or (b) the offering or other sale of equity instruments in any form.”

Kigen (UK) Limited v Nor Capital Limited

This second case was also a matter of contract interpretation and demonstrates how the Courts will come to a decision if there are two contradicting terms in an agreement. To reconcile the conflicting provisions, the Court will check the two different interpretations against the other provisions of the agreement and choose between them on the basis of the commercial implications of the rival interpretations.

Facts

Nor Capital Limited (Nor) was engaged by Kigen (UK) Limited (Kigen) to provide financial advisory services to secure offers from potential investors or purchasers. These efforts were unsuccessful in attracting offers from external investors. Instead, Kigen received US$20 million of new investment from affiliated companies of its parent company SoftBank Group Corp.

The question for the Court to determine was whether Nor was entitled to a success fee under the engagement letter in the circumstances that the investment had been made by affiliated companies rather than new third party investors.

The engagement letter contained two contradictory provisions in a section stipulating how the success fee would be calculated in the case of a capital raising transaction:

• “No charge for funding provided by Management or by the existing majority shareholder … or any other SBG affiliated entity.”
• “There will be a minimum Success Fee of GBP500,000 regardless of the source of the funding.”

The contradiction between the “no charge” provision for funding from affiliated entities and the “minimum Success Fee” provision irrespective of the funding source was the issue in dispute. Nor claimed a minimum Success Fee of GBP500,000. Kigen argued that no success fee was payable as the funding had been provided by SBG affiliated entities.

Court rationale

The Court again applied the established English law principles for the construction of contracts and acknowledged the paragraphs could be read as either prescribing “no charge” or as imposing a “minimum Success Fee”. There were elements of the wording which tended in favour of each of the interpretations and, considering the section in isolation, the judgment as to which is correct was finely balanced.

However, when the agreement was read as a whole and placed in its factual context, the choice between the rival interpretations was straightforward for the Court. All of the contextual factors pointed in on direction, namely in favour of Kigen’s interpretation. The terms of the agreement contemplated that Nor was engaged to find and secure internal investors. SBG wished to avoid having to make further investment into Kigen. In the circumstances, there would be little commercial sense in Kigen being obliged to pay a success fee when the actual outcome was precisely the one which it was the commercial purpose of the agreement to avoid.

On the construction of the agreement, no success fee was payable to Nor.

Lessons to be learned

Both Nor and Kigen may have separately thought that the wording was sufficiently clear to support their interpretation of the conflicting provisions. However, any reading of the relevant section of the contract was likely to conclude that they were contradictory and ultimately irreconcilable. The ambiguity could have been simply avoided by additional wording stating that the minimum success fee did not apply in the case of investment funding provided by SBG affiliated entities.

Conclusions

The success fee provisions of advisor engagement letters are probably the most important terms of these types of contract. It is surprising that they are often left ambiguous and open to interpretation.

These cases illustrate the importance of clear and precise drafting in commercial agreements. In the first case, the use of a single word in a contract list determined a liability of US$7 million. In the second case, the parties had to litigate to determine the construction of two conflicting contract terms, which would easily have been avoided.

By Jonathan Dawe.

Jonathan Dawe

Jonathan Dawe is a corporate partner at Punter Southall Law. Jonathan has specialised as a company and commercial lawyer for over 30 years, advising clients on corporate transactions and commercial agreements. He trained and qualified at Dentons and worked as a partner in the firm’s corporate teams in both London and Dubai.

• In 2006, Jonathan formed boutique corporate law firm Grant Dawe LLP with Tony Grant, with the aim of continuing to provide clients with a high-quality but cost-effective service.
• In 2023, Jonathan joined the corporate team at Punter Southall Law and acts for UK-based and international companies and business owners on their business-critical transactions.
• Jonathan is also co-founder of PaperRock Docs, a provider of online legal document templates for legal and business professionals, companies and business owners.