Financial Advisor Engagement Letter Litigation
July 20, 2011
A recent decision issued by the U.S. District Court for the Southern District of New York sheds light on certain interpretations of financial advisor M&A engagement letters. The case provides good news to financial advisors regarding fee collections. It provides bad news to financial advisors regarding reimbursement of their attorney’s fees incurred in connection with litigation with their clients.
Oppenheimer arose out of CIBC’s financial advisory assignment for Metal Management, Inc. in connection with its merger with Sims Group Ltd., which was announced on September 24, 2007. On November 4, 2007 CIBC agreed to sell its U.S. investment banking business to Oppenheimer. Shortly before the consummation of the CIBC sale on January 14, 2008, the top two members of the CIBC deal team left CIBC to join another firm. At the time of the bankers’ departure the only follow up work regarding the merger related to (i) the preparation of a proxy statement that contained the fairness opinion, and (ii) a request from Metal Management’s CEO for assistance in preparing for a meeting with an 8% institutional stockholder who was threatening to vote against the merger. On February 14, 2008, two days after the filing of the proxy statement with the SEC, Metal Management’s CEO informed Oppenheimer/CIBC that Metal Management deemed CIBC to be in breach of the engagement letter (and Metal Management subsequently refused to pay the transaction value based success fee upon consummation of the merger).
CIBC’s engagement letter fee structure was typical for a sell side assignment; it provided for a retention fee of $50,000, a $750,000 fairness opinion fee and a transaction fee of 0.5% of transaction value. The transaction fee was payable in the event of a transaction or agreement resulting in a transaction occurring during or within nine months of the termination of the engagement. Metal Management never terminated the engagement in accordance with the terms of the engagement letter.
Following consummation of the Metal Management/Sims merger, Oppenheimer sued Metal Management seeking (i) the transaction fee and expenses incurred in connection with the engagement, (ii) prejudgment interest, and (iii) attorney’s fees in connection with the litigation. Oppenheimer sought attorney's fees based on a portion of the indemnification provisions of the engagement letter which stated that Metal Management would reimburse CIBC for any expenses incurred in connection with claims “arising in any manner out of or in connection with the rendering of services by [CIBC] hereunder (including, without limitation, in connection with the enforcement of this Agreement and the indemnification provisions set forth herein).”
The Good News
The district court ruled decisively in Oppenheimer’s favor on the transaction fee collection issue. Metal Management argued that CIBC/Oppenheimer materially breached the engagement letter, but its only stated claim of breach related to their CEO seeking advice relating to the meeting with the institutional investor. The claim was premised on the fact that CIBC had failed to respond by Monday morning to the CEO’s Friday afternoon email requesting assistance. Because the merger ultimately received shareholder approval, however, the court inferred that Metal Management did not suffer any adverse consequences from this failure. In addition, the court stated that in order for a client “to be discharged from paying fees on account of a failed performance, the [bank’s] failure to perform must…go to the root of the agreement between the parties.” The court did not view CIBC’s failure to respond promptly to this post-signing request as being a fundamental part of the engagement.
Ultimately, the court upheld long-standing New York law that grants summary judgment to financial advisors for success-based fees that become payable upon consummation of the transaction. Financial advisors should take comfort from the continued trend of courts interpreting New York law to not allow such disputes to proceed past the summary judgment stage.
The Bad News
The district court declined to grant a motion for summary judgment with respect to Oppenheimer’s claim for litigation-related attorney’s fees.
The engagement letter provision entitling CIBC to expenses in connection with the enforcement of the engagement letter was contained within the indemnification provisions. In reaching its decision, the court noted that (i) the indemnification provision speaks most clearly in terms applicable to third party claims, and (ii) the general rule in New York is not to award attorney’s fees to prevailing parties unless there is clear language to that effect. In addition, the court believed that the clause at issue could logically be read to apply only to the enforcement of the indemnification provisions relating to third party claims. Accordingly, it declined to rule in favor of Oppenheimer at the summary judgment stage.
This finding is consistent with established New York law that states that indemnification provisions in financial advisor engagement letters relate to third party claims; not claims between the contracting parties. The inclusion of separate limitation on liability provisions in engagement letters to govern litigation between financial advisors and their clients came into practice several decades ago specifically in response to this rule. Thus, it is understandable that an expense reimbursement provision for expenses in “enforcing this Agreement,” contained in an indemnification provision (as opposed to a limitation on liability provision), could create an ambiguity.
It is unlikely, however, that financial advisors will be very successful in negotiating such a provision in the future so as to eliminate any such ambiguity. We believe such a provision is too much of a “heads-I-win-tails-you-lose” provision. We believe that financial advisors would be more successful adopting a “prevailing party” provision in their engagement letters, should they decide to seek reimbursement for attorney’s fees in transaction fee collection cases. Whether advisors choose to adopt “prevailing party” provisions will depend on a number of factors, including an assessment of whether they find themselves in the role of a plaintiff enforcing fee collection rights under an engagement letter more often than they find themselves a defendant in a dispute regarding services rendered thereunder.
 Oppenheimer & Co., Inc. v. Metal Management, Inc., June 20, 2011, U.S. Dist. S.D.N.Y.
 A portion of the litigation related to whether the engagement letter had been validly assigned by CIBC to Oppenheimer in the sale of its U.S. investment banking business. The court ruled that the engagement letter had been validly assigned.
 Metal Management had also attempted in vain to negotiate a “key man” provision into the engagement letter after the departure of the two bankers.