Lessons Of The Crew Gold Decision On M&A Engagement Letters

Financial advisors are often critical to the success of an M&A transaction. Often, but perhaps not always. Should the fees payable to a financial advisor be denied if, through no fault of its own, an M&A transaction is completed without any involvement of the advisor? This question is the subject matter of Crew Gold[1] a decision of the Ontario Superior Court which was recently affirmed by the Ontario Court of Appeal.

In M&A sell-side roles, financial advisors are typically retained to advise boards on strategy, as well as perform a number of related tasks, including: preparing a timetable, identifying prospective purchasers, preparing a confidential information memorandum (CIM) and standstill agreement, providing a market check on any offers received, assisting in the due diligence process, providing an opinion as to the financial fairness of any offers, reviewing various deal documents and assisting with communications to, and at times interacting with, the public, key stakeholders, rating agencies and proxy advisory firms.

M&A advisory fees for sell-side roles are typically success-based, payable on completion of a transaction. Prior to completion, the advisor may receive a fee for the delivery of an opinion relating to financial fairness and periodic work fees, all of which are usually credited against the success fee. Work fees are typically modest compared to the success fee, as most issuers prefer not to run up huge advisory costs if no transaction is ultimately completed. Besides, it is often argued, any success fee is effectively for the account of the acquirer.

The decision in Crew Gold is clearly stated to be an exercise in contract interpretation, but there are nevertheless some key take-aways for advisors in drafting engagement letters. Given that the success fee as claimed by the financial advisor (Advisor) in Crew Gold amounted to US$7.2M, a significant quantum of money was at stake in the dispute. A brief summary of the facts is pertinent:

In early December 2009, Crew Gold Corporation (Crew Gold), a TSX-and Oslo-listed mining company, concluded a debt restructuring pursuant to which debt holders were issued 95% of Crew Gold's equity in consideration for cancelling their debt. GLG Partners, a London-based hedge fund, became the largest shareholder, holding 31.6% of the outstanding shares. In mid-December 2009, Crew Gold formally retained the Advisor pursuant to the terms of an engagement letter (Agreement) in connection with...