Explore a legal dispute between a Toronto-based investment banking firm and its M&A client. Gain valuable insights into industry lessons as we delve into a successful stock sale, the disagreement over a success fee, and the intricacies of debt assumption. Learn from the case of Fuller Landau Advisory Services Inc. v. Gerber Finance Inc., No. 17-CV-6027 (JPO), United States District Court, S.D. New York (August 8, 2018).
M&A Stories
September 13, 2018
In this article, we delve into a legal dispute between a Toronto-based investment banking firm and its M&A client, highlighting valuable lessons for industry professionals.
The crux of the matter lies in a successful stock sale by the client, where the disagreement centers on the success fee. This fee comprises a percentage of the stock sale and a percentage of the client’s debt assumed by the buyer.
Before the sale, the client had outstanding debt with a syndicate of lenders, featuring a change of control clause. This clause would trigger default if 51% or more of the client’s stock was sold.
The investment banking firm claims that the buyer not only purchased the client but also persuaded lenders to allow the change in control without defaulting on the client’s loan obligations. Disagreements arise over whether the buyer indeed assumed the client’s indebtedness.
However, it’s established that the buyer entered a limited guaranty with lenders, ensuring the due payment of the client’s debt as of the sale’s closing date. The buyer granted lenders a security interest in the acquired client shares, and the investment banking firm asserts the buyer became a party to agreements with lenders through a credit agreement amendment.
Post-purchase, the client paid a success fee to the investment banking firm based on the shares’ purchase price. The firm contends it’s entitled to an additional fee based on the client’s debt value at the time of the buyer’s purchase, a claim the client disputes. The client also allegedly withheld information on the buyer’s guaranty agreement.
In August 2017, the investment banking firm filed a breach of contract lawsuit in a Manhattan federal district court. The court ruled that, as per New York law, the buyer’s guaranty doesn’t constitute an assumption of debt, denying the firm a fee on the guaranteed debt amount. However, the dispute regarding debt assumed beyond the guaranty’s limit is left for further litigation.
Comment: Anticipating future changes, investment banking firms may consider revising engagement agreements to include success fees based on the buyer’s guaranty of the seller’s debt.
Case Reference: Fuller Landau Advisory Services Inc. v. Gerber Finance Inc., No. 17-CV-6027 (JPO), United States District Court, S.D. New York (August 8, 2018).
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