The Hong Kong Court of Final Appeal (CFA) has issued an instructive judgment this month on the interpretation of tail gunner clauses (TGCs).  The case is Eminent Investment (Asia Pacific) Limited v Dio Corp [2020] HKCFA 38.

TGCs are an important part of many deal sourcing and corporate finance advisory agreements.

Advisers typically require a percentage success fee for funds raised and, naturally, want to protect against the client avoiding paying the fee by terminating the agreement once the majority of the adviser’s work has been done.  For this reason, TGCs provide for a period of time post termination during which the success fee is still payable if the transaction then closes.  

From the client’s perspective, when they are looking for fund raising or transactional opportunities, the thought of a few percentage being allocated to fees appears to be a small price to pay for the advisor’s expertise and the bigger riches on offer. However, if the relationship sours and the agreement is terminated, the success fee is often portrayed by the client as an unfair and unmerited burden.

Because of the potential for dispute post termination, TGCs can be extremely verbose, trying to capture the many potential scenarios in which the fee may become due to the adviser.  This is to underline that the client cannot simply repackage the deal and avoid paying the tail fee.

In the Eminent case, a Hong Kong financial adviser – Eminent Investment (Asia Pacific) Limited – was hired by the DIO Corporation to advise on capital raising and provide other strategic advice.  The agreement included a 3% fee to Eminent on funds raised. There was TGC to protect this fee arrangement for two years post termination.

In April 2009, Eminent set up a call between a NASDAQ listed company, Dentsply International Inc, and DIO. The call was, apparently, very general in terms and nothing concrete was discussed on how any specific transaction might be structured.  The discussions did not progress whilst Eminent was still the adviser.

Nine months later, the advisory agreement was terminated.  Subsequently, Dentsply and DIO reopened talks  and, by the end of 2010, Dentsply agreed to acquire DIO in a deal valued at some USD50 million.

Based on the evidence at the original trial, it was clear that the lion’s share of the work done to make closing happen was by DIO itself and little value was attributable to Eminent’s initial efforts.  Nonetheless, Eminent sued for its full success fee relying on the TGC. 

The CFA considered three relevant contractual provisions:

• Firstly, the engagement clause, which gave a “laundry list” of professional services that would be provided to DIO by Eminent, including a best efforts undertaking to assist in closing a fund raising/transaction.

• Secondly, the transactional fee clause, that tied the 3% fee to the fund raising or other closing.

• Finally, the TGC.  This said that if DIO “completes a transaction including – and not limited to a secondary listing or fundraising with any third parties – or receives funds from a financing source introduced by Eminent”, then the success fee would continue to be payable.

Essentially, the court was being asked to consider whether, having made the introduction to Dentsply, this in itself entitled Eminent to their success fee.

The court said that it did not.

It found that Eminent could not merely claim the success fee based on the pure introduction:  they were also obliged to provide the services stated in the engagement clause.  Had they done so and had DIO terminated before closing, then this would have entitled Eminent to their success fee under the TGC.

It is worthwhile noting that this case was largely decided on the construction of the contract. The CFA made it very clear that “there is no special approach to the construction of contractual terms governing post termination payments to financial advisers”. 

TGCs can involve considerable fees and, whilst care is needed to incorporate appropriate anti-avoidance provisions, the Eminent case underlines the need for drafters of TGCs to be far more specific about what exactly the adviser is being compensated for. 

As a side note, the provisions of such services in Hong Kong do require a licence in Hong Kong and this matter was also previously the subject of a prosecution under the Securities & Futures Ordinance.

For any enquiries related to this article, please contact Mr. Chris Lambert of our firm.