September 17, 2021

Investment Bankers: Overview of Engagement Letter Provisions

For the first 20 years of my career, I was the principal lawyer for the M&A group of a regional investment banking firm, which means that whatever else I had going on during a given day, I could usually count on being asked to draft or negotiate an investment banker’s engagement letter.  I don’t mind telling you that I absolutely despised that part of my job.

Negotiating bankers’ engagement letters is a completely miserable experience, but it’s something that everyone involved in M&A needs to know a little about.  That’s why I recommend this Venable memo to you if you haven’t had a lot of experience with engagement letters.  It provides a nice overview of their terms.  For example, here’s an excerpt on “tail” coverage:

Once the engagement is terminated, the “tail” period starts running. The tail provision entitles the advisor to receive its fees if the transaction identified in the engagement letter occurs during some specified period after its termination. The tail provision ensures that the advisor receives its compensation if it has performed its services and introduced the client to the buyer (or other party to the transaction, as determined by the engagement letter), even though the parties closed the deal after the term ended. It also functions as a bad-faith protection, as it prevents clients from terminating the engagement and entering into a transaction immediately after to avoid paying the fee. The tail period generally may last up to 2 years, and frequently it is applicable only to specified potential buyers or other parties to the transaction.

On this last point, in my experience, bankers frequently push to have tail coverage extend to a transaction with any party, not just those contacted during the sale process. The argument is usually some variation of “word gets around” as a result of the banker’s marketing efforts and the bankers don’t want to create an incentive for the seller or a potential buyer to engage in strategic behavior in order to avoid paying a fee.

John Jenkins