DealLawyers.com Blog

A while back, a member noted how there have been some successful responses to SEC comments regarding cautionary language when it comes to an opinion provider’s contingent fees. For example, below is an excerpt of a response (culled from this full response):

Also in our conversation, you indicated that the Staff believes it would be appropriate to include cautionary disclosure relating to the fact that a significant portion of Credit Suisse’s fee is contingent upon the consummation of the merger. In response, we respectfully disagree with this comment and do not believe that such additional disclosure is necessary or appropriate. Our reasons for not adding the additional disclosure requested by the Staff include:

– A review of the proxy statements for the largest M&A transactions in 2008 indicates that disclosure of cautionary language regarding contingent fees is not customary.

– In response to objections by issuers, the Staff has not insisted on disclosure responsive to similar comments:

– Staff comments and issuer responses in connection with the Sirius/XM Satellite transaction are available here, here and here.

Ultimately resulting in the following comment and response:

“Risk Factors, page 16

We note your statement in response to our prior comment four that neither company believes that the transaction’s contingency fee arrangements raise potential risk factor disclosure issues relating to the independence and quality of their respective financial advisor’s recommendation. Please disclose whether either Board considered the issue at all and, if so, why they concluded that the contingency fee arrangements do not compromise the independence and quality of their respective financial advisor’s recommendation.

In response to the Staff’s comment, the disclosure on pages 35 and 42 has been revised to reflect that each of the SIRIUS Board of Directors and the XM Board of Directors reviewed the material terms of the engagement letters of their respective financial advisors, including the contingent fee structure which was considered to be customary and appropriate for this type of transaction.”

Please note, if requested by the Staff, the Company would consider including similar disclosure on page 8 of the Proxy Statement under the caption “THE MERGER–Reasons for the Merger; Recommendation of Sun’s Board of Directors” to indicate that the Company’s Board reviewed the material terms of the Credit Suisse engagement letter, including the contingent fee structure which it considered to be customary and appropriate for this type of transaction.

– See also Staff comments and issuer responses in connection with the Host Marriott/Starwood transaction, available here and here.

Ultimately, no risk factor type disclosure was required. See this amendment to a Form S-4.

As noted in the Host Marriott/Starwood correspondence with the Staff:

– a contingent fee arrangement between a company and its financial advisor is customary for transactions of this nature;

– the Proxy Statement fully responds to the requirements of Item 1015(b)(4) of Regulation M-A to describe “any material relationship that existed during the past two years or is mutually understood to be contemplated and any compensation received or to be received as a result of the relationship . . ;”

– the requested disclosure reflects a conclusion (i.e., that the contingent nature of the financial advisor’s fee constitutes a conflict of interest) and we believe that it is sufficient to disclose the factual information regarding the amount and structure of the fee from which recipients of the Proxy Statement may reach their own conclusion; and

– the Delaware Court of Chancery has considered contingent fee arrangements and expressed doubt that a large investment bank with “serious reputational interests at stake” would advise its client in such a manner as to maximize its fee. See In re Toys “R” Us, Inc. Shareholder Litig., 877 A.2d 975, 1005 (Del. Ch. 2005) (holding that there was no basis to conclude that the potential fees to be paid to a financial advisor influenced its advice to the Toys “R” Us board of directors).

Based upon the foregoing, the Company does not believe that additional disclosure is necessary or appropriate. If the Staff continues to believe that such disclosure is necessary, we respectfully request the opportunity to discuss with you at your earliest convenience.