The High Court recently upheld a so called ‘tail gunner’ clause, entitling an adviser to a substantial success fee even though their engagement had been terminated.
Tail gunner clauses
It is common market practice for the engagement letters of financial advisers appointed on corporate transactions to provide for a fee to be paid on the successful conclusion of the matter. Given that such engagements can typically be terminated on fairly short notice, however, this leaves the adviser at the risk of a client terminating their engagement before completion in order to avoid paying the success fee. To overcome this, the adviser’s engagement letter will often include a ‘tail gunner’ clause providing that if the transaction completes within a specified period after the engagement has been terminated then the success fee will still be payable by the client.
A recent case: the facts
In a recent case, a shareholder was causing problems for a company, publicly criticising the board and proposing resolutions at a general meeting that, if passed, would remove the existing chairman and appoint a number of the shareholder’s nominees to the board
The company engaged corporate finance advisors, Rothschilds, to help manage the situation and tasked them to “develop and implement a strategy to persuade [the shareholder] to agree to withdraw from activism against [the company]”. Rothschilds were to be paid a monthly retainer plus a substantial success fee if certain events occurred, one of which was the shareholder reducing their holding in the company to below 5%.
In fact, the resolutions proposed by the shareholder were resoundingly defeated at the general meeting and, shortly afterwards, Rothschilds stopped providing any services to the company. Six months later, the company entered a formal auction process and the shareholder sold their shares to one of the potential bidders. This prompted Rothschilds to ask for their success fee.
“But they didn’t do anything!”
The company argued that the shareholder selling their shares arose as a result of the auction process and had nothing to do with the work done by Rothschilds which had finished six months earlier. But Rothschilds argued that didn’t matter: on the true construction of the engagement letter, it was entitled to its fee regardless of whether it was an effective cause of the shareholder selling their shares.
The court agreed with Rothschilds, holding that since a relevant triggering event had occurred, the success fee was payable without further enquiry. It was not necessary to read the clause requiring Rothschilds efforts to be an effective cause of the triggering event particularly since, given the hostile nature of the shareholder, it would be very difficult for Rothschilds to prove this. In addition, the most important thing for the company was that the relevant event had occurred (and therefore the problems being caused by the shareholder had ceased): the actual reason for the sale did not matter to the company.
What can companies do to avoid the tail gunner?
The inclusion of a ‘tail gunner’ clause in a financial advisers’ engagement letter is often non-negotiable but with careful drafting, their application can be restricted for example, by:
- reducing the period for which they are effective post-termination;
- including a sliding scale, so the success fee reduces depending on how long after termination the successful transaction takes place;
- providing that the fee is only payable where the engagement was terminated by the client (and not the adviser); and
- providing that the fee will not be payable where the client terminates as a result of a breach by the adviser.