Consulta Jurídica Elaborada a Pedido de Escritório de Advocacia de Tel Aviv - Israel

  1. Question of Research and Definition of Scope

The questions presented was framed around the three following points:

  1.  Which ones the industry praxis are for compensation under investment banking engagement letters in US.
  2.  Weather, under business relevant state and federal courts in US, during the investment banking engagement letter service duration (term), any and all deals made upon the object of the service will yield payment to the engaged bank.
  3. And weather, in case of payment for transactions that the bank played no role but was engaged onto the object, require the courts as mandatory to define these conditions for payment in expressive terms in the Agreement.

The specific economic transaction target is agreements in where a company engage an investment bank in order to, in use of its know-how and market network, prepare the company or environment necessary, as well as introduce relevant parts, to pursue a selling of a block of stock shares, including control or totality of shares;  purchase of block stock shares, including control or totality of block shares; acquisition of stock shares in retail stock & exchange market in order to build a relevant block of stock shares; obtain investors in debt bond issuing transactions; obtain loan for specific business needs; and obtain investors for project finance transactions.

  1. Data Base and Results Analyzed

As for acquiring data to address the questions above, we have used Find Law for Legal Professionals Cases & Codes, and Corporate Counsel - Contracts data bases. Thomson Reuters’ FindLaw for Legal Professionals  is one of the first and most popular online source for legal content, including the largest US data base available online on legal documents, as well caselaw from state and federal courts, and statutes from nearly all the 50 states, with a quite well structured search engine.

Searching for the terms “engagement letter” and “investment banking” in the Corporate Counsel - Contracts data base, it was provided 2922 results, from which we selected 7 after excluding all non-related to the business transaction in our scope.

When exploring caselaw data base, we narrowed our search to the courts related the states of New York (28 results), Delaware (23 results) and California (38 results). After reading the files of the results, only 3 cases, from the United States District Court for Southern District New York, the Supreme Court of New York and the United States Court of Appeal 2nd Circuit[1]  respectively, showed relevant as to the scope, as either in a parallel point, the questions above.

  1. Relevant Content of Conclusions

  1. Industry Praxis

As from the categories of compensation provided in the contracts, we have identified 4 categories, as well as 2 related clauses to our research questions. The categories are:

  • Retainer fee: compensation due upon the signing of the engagement letter or in specific dates provided in it. Such provision is usually linked to compensation of services of best efforts in preparation of a desired transaction, but not linked to its occurrence. Sometimes, the such fees are deductible of a provided transaction fee, when the transaction turns out successful.
  • Transaction fee: compensation due to the closing of a pursued transaction under the scope of the engagement letter. Usually provided as a percentage of the total consideration involved in the contract resulting of the transaction.
  • Issuance of Warrant/Purchase option: an alternative used for both, retainer fee and transaction fee, upon which instead of a higher cash layout, the engaged bank is related to risk of the transaction pursued as its payment are upon the value of a determined call option or vesting of a block of stock interest in the object of the engagement.
  • Reimbursement of Expenses: a provision for the compensation of costs of the engaged bank in specifically layouts made pursuant the engagement.

Analyzing the rational of the contracts, as well as some fact backgrounds provided in the caselaw files bellow mentioned, it was possible to affirm that higher retainer fees and reimbursement of costs are usual in cases where great part of the service engaged by the bank is to prepare the company for the transaction (for instance, IPOs, price building, financial organization for pension funds investment, venture capital, financing for loans). As well as, transaction fees and issuance of warrants are usual in cases where the finding of investor and closing the deal are the keystones of the engagement.

More on the analysis of the contracts, we could identify two types of clauses that seemed closely relevant for the questions above, as well as mentioned in the reasoning of the cases bellow referred. Those are:

  • Tail Period: the definition of a period after the end of force of the engagement letter, during which transactions related to object of engagement, as well as with the parts introduced by the engaged bank, shall yield payment of the transaction fee or trigger the vesting of determined parts of warrants issued.
  • Exclusivity: the definition that the services provided as scope of the engagement shall not be pursued  by the contractor with any other bank, as so making the engagement in the pursing the desired transaction, and potentially gain of a provided transaction fee, in the engagement letter shall be exclusively hold by the engaged bank.

  1. Court Analysis and Parameters of decision

According to the cases analyzed from the courts, any fee due to the signing of the contract, when not provided its link to the success of any transaction, is due, even if the purpose of engagement is not successful.[2]

Upon the possibility of due payment to the Investment Bank for transactions during its period of term as peer as the engagement letter, no matter if it played or not a role in the transaction, it is recognized by the courts as a valid assumption.[3] However, such possibility shall be provided in the contract as intended by the parts, or at least have in the contract enough ambiguous provision that admits the use of external evidence to clarify which were the intentions of the parts in contracting.[4]

In summary, as general principles of interpretation of the contract, the courts inform that no external evidence, besides the strict provisions of the contract, shall be considered to create or deny any obligation of the parts.[5] As such, the non-reference of such payment of compensation for any and all transaction with the object of engagement shall not yield payment due to the engaged bank. On the other hand, when the provision of such payment shall be provided, any and all transaction would yield payment due to the engaged bank. [6]

Analyzing an ambiguous provision in the contract, only because the ambiguity, the court admitted the use of external evidence to proof the intention of the parts by the moment of drafting the provision, from which the interpretation in both alleged ways were possible just upon merely reading.[7]

[1] Is one of the thirteen United States Courts of Appeals. Its territory comprises the states of Connecticut, New York, and Vermont.

[2]“[…] the Engagement Letter required Hollander to deliver the warrants to OGSI “shortly after the execution of the Engagement Letter.” As a result of his failure to do so, the district court concluded that Hollander “unequivocally” breached the Engagement Letter.” (see OSCAR GRUSS SON INC v. HOLLANDER [2003])

[3] “[…]can be reasonably read as requiring a fee even when defendant played no active role in the transaction and this interpretation (which is a reasonable but not a mandated interpretation of section two) finds some further support in a later section providing for a fee up to 24 months after termination of the agreement 1”. (see CV HOLDINGS, LLC v. ARTISAN ADVISORS, LLC [2004]); “[…]the mere fact that CIBC did not locate or identify the Series-B Investors is wholly irrelevant to whether Techtrader is obliged to pay a transaction fee to CIBC.” (see CIBC World Markets Corp. v. TechTrader [2001]).

[4] “When the terms of a written contract are ambiguous, however, a court may turn to evidence outside the four corners of the document to ascertain the intent of the parties. Scholastic, Inc. v. Harris, 259 F.3d 73, 82 (2d Cir.2001); Curry Rd. Ltd. v. K Mart Corp., 893 F.2d 509, 511 (2d Cir.1990).  If contractual terms have a definite and precise meaning and are not reasonably susceptible to differing interpretations, they are not ambiguous. Seiden Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir.1992).” (see CIBC World Markets Corp. v. TechTrader [2001]).

[5] “A contract will not be interpreted as creating an exclusive right to sell unless it “clearly and expressly provided that a commission was due upon sale by the owner or excluded the owner from independently negotiating a sale” (id. at 916, 502 N.Y.S.2d 835).” (see CV HOLDINGS, LLC v. ARTISAN ADVISORS, LLC [2004])

[6] “The Series-B Investment involved a significant transfer of securities and a change in control of Techtrader, so it was within the contractual definition of a "Transaction" for which a fee is due under either party's reading of the Agreement” (see CIBC World Markets Corp. v. TechTrader [2001]).

[7] “Our reading of the agreement reveals ambiguity regarding the disputed issue of whether a fee is due when defendant had no involvement in the transaction.   Having found an ambiguity, consideration of evidence outside the contract is appropriate.” (see CV HOLDINGS, LLC v. ARTISAN ADVISORS, LLC [2004]).


  • Lucas Fulanete Gonçalves Bento

    Advogado e treinador titular-responsável pelo Núcleo de Arbitragem e Mediação da FDRP-USP, formado em Direito pela Universidade de São Paulo, com período sanduíche na Universidade de Illinois em Urbana-Champaign, mediante Bolsa de Estudos de Mérito Acadêmico- USP. Concluiu o programa Análise Econômica do Direito Societário e Contratos Comerciais do Instituto Coase-Sandor de Direito e Economia da Universidade de Chicago e desenvolveu seus estudos de pós-graduação, nível mestrado, em Direito Comercial na Universidade de São Paulo. Atualmente é Pesquisador e Doutorando na Universidade de Hamburgo com financiamento Albrecht Mendelssohn Bartholdy Graduate School of Law e vinculado à cadeira de Law & Economics do Institut für Recht und Ökonomik.

    Atuo com Consultivo e Contencioso Estratégico de Direito Societário, Mercado de Capitais e Contratos Comerciais, incluindo processos administrativos e sancionadores CVM.

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