UK: Liability for payment of abort fees - construction of contract

A recent case holding a company liable to pay an abort fee under an engagement letter with an investment bank after the company's proposed listing on AIM did not proceed is a useful reminder that companies should think very carefully about the circumstances in which they would (and would not) be prepared to pay an abort fee, and ensure that this is properly reflected in the engagement letter: Daniel Stewart & Co Plc v Environmental Waste Controls Plc [2013] EWHC 1763 (QB).

The Background

The claimant investment bank, Daniel Stewart, brought a claim for recovery of an abort fee from the defendant company, EWC, for services rendered to it.  The terms of Daniel Stewart's engagement were set out in the Engagement Letter signed 6 January 2011.

The primary issue of the litigation concerned clause 3 of the Engagement Letter, which provided for a fee of £150,000 plus VAT would be payable if the transaction was aborted "for reasons unconnected to Daniel Stewart or its performance prior to completion of the marketing and book build process". The clause also provided that no fee would be payable "if upon completion of the marketing and book build process both parties agree that admission cannot or should not proceed".

EWC decided not to proceed with the listing after Daniel Stewart said that it would not be able to achieve the valuation which the company (and its selling shareholder) had been looking for but nonetheless advised EWC to go ahead with the listing at a lower valuation. As EWC decided not to proceed, Daniel Stewart sought to claim the abort fee.

The Judgment

The Court held that EWC had no legitimate defence to Daniel Stewart's claim for payment of the £150,000 abort fee:

• EWC had argued that a term should be implied requiring Daniel Stewart to act reasonably when deciding whether the listing should not proceed.

The court held that Daniel Stewart was not under an obligation to act reasonably, but rather must merely not act in bad faith or capriciously in declining to agree that the listing "should not proceed". In construing a commercial contract it is necessary to ascribe the meaning that would make good commercial sense and in the current case EWC would be afforded the protection intended by the provision by merely requiring Daniel Smith to act in good faith without any need for the further implied term. Furthermore, to imply such a term would produce uncertainty since it would not be possible to identify objective criteria of fairness or reasonableness as to whether the listing should not proceed, and would make the contract unworkable.

In any event, even if this conclusion was wrong, EWC's argument would fail anyway given that the marketing and book build process had not yet been completed and hence the provision under which no fee was payable had not yet been triggered.

• EWC also argued that the reason for the abortion of the transaction was for reasons connected with Daniel Stewart's performance:

On this issue, the court held that the reference to "performance" in the abort clause should not be treated as though it embraced conduct which did not amount to breach of contract. In failing to raise the sums it had been tasked to, Daniel Stewart had not breached the Engagement Letter since the Letter did not set out a minimum amount to raise, and thus they had not breached the contract. Accordingly EWC's second argument regarding the payment of the abort fee was rejected and it was held the abort fee was payable.

Implications

The court's decision turned on the construction of the Engagement Letter.  It refused to imply into the contract a term requiring the bank to act reasonably in deciding whether to agree that the listing should not proceed (that is a term that the bank should not unreasonably withhold consent to the transaction not proceeding).

When agreeing an abort fee, a company should think very carefully about the circumstances in which it would be prepared to pay an abort fee.  In this case the company felt it had been clear that it wanted to achieve a valuation of £30 million, and so failure to achieve this valuation meant that the bank should have agreed that the listing should not proceed.  This was not, however, reflected in the Engagement Letter.