Uncover the intricacies of a recent M&A legal case where an investment banking firm secured a $1.7 million advisory fee, despite not being the procuring cause. Delve into the details of the Carriage Hill Management, LLC v. Boston Lobster Feast, Inc. case, exploring the significance of precise contractual language in determining entitlement to advisory fees. Gain insights into the court’s ruling and the implications for entrepreneurs, business owners, CFOs, and legal professionals navigating the M&A landscape. This blog post provides a compelling narrative on the importance of understanding engagement agreements to avoid unforeseen financial obligations in the M&A realm.
M&A Stories
August 6, 2018
In a recent legal development, a court granted an investment banking firm a $1.7 million advisory fee for a business sale, even though it was not the procuring cause. Let’s delve into the details of this case and its implications for those navigating the M&A landscape.
The investment banking firm, specializing in identifying, evaluating, and developing M&A opportunities, was engaged by a wholesale and retail seafood company looking to explore a sale of its business. The engagement, documented in a written agreement, outlined a $5,000 per month work fee for the first six months, along with an advisory fee of 4% of the purchase price for certain sales within the engagement term and a 3-year tail period.
Despite presenting the seller with two written offers that didn’t materialize into transactions, the investment banking firm provided a target list to the seller, including private equity firms and non-institutional investors. After the seller terminated the engagement agreement to temporarily take the business off the market, the 3-year tail period persisted until August 19, 2019.
Interestingly, during a conference, the seller’s president engaged in discussions with the CEO of a large food distribution company, the eventual buyer. Subsequent developments included the buyer’s interest in acquiring the seller, leading to a confidentiality agreement, a letter of intent on October 7, 2016, and, finally, an asset purchase agreement on January 17, 2017, with a $42 million purchase price.
The key contention arose when the investment banking firm, despite not participating in negotiations or discussions, nor being listed on the target list, sued the seller for the 4% advisory fee. The court, acknowledging the lack of direct involvement by the investment banking firm, ruled in favor based on the engagement agreement’s language.
The court emphasized that the investment banking firm was entitled to the advisory fee because the seller’s president discussed a potential sale with the buyer’s CEO during the term of the engagement, and the deal closed within the 3-year tail period. This triggered the fee under the express terms of the engagement agreement.. Consequently, the court awarded the investment banking firm the requested $1.7 million advisory fee.
This case underscores the importance of precise contractual language in determining entitlement to advisory fees, even in the absence of direct involvement in the transaction. Entrepreneurs, business owners, CFOs, legal professionals, and others involved in M&A should carefully consider the terms of engagement agreements to avoid unforeseen financial obligations.
Case Reference:
Carriage Hill Management, LLC v. Boston Lobster Feast, Inc., Case No. GJH-17-2208, United States District Court, D. Maryland, Southern Division, (July 6, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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