Investment banking agreements are complex legal documents that govern the relationship between an investment bank and its client, usually a company seeking to issue securities or execute an M&A deal. These agreements contain key provisions on services, fees, expenses, liability, termination, and more. Properly structuring an investment banking agreement requires expertise on optimal fee structures, liability caps, market standards, and legal technicalities. For companies navigating high-value transactions, a tightly drafted agreement can prevent disputes, align incentives, and ensure the bank provides its highest level of service. This article will examine key clauses and provisions in an investment banking agreement, drawing on real-world examples and precedents.
Scope of Services in an Investment Banking Agreement
The scope of services section lays out the investment bank’s exact mandates, such as providing a fairness opinion, underwriting a bond issuance, or running a sale process. The client will want clearly defined services to hold the bank accountable, while the bank wants flexibility to adapt to changing circumstances. One approach is to combine definitive mandates like ‘underwrite $500 million in bonds’ with broader clauses like ‘provide general financial and strategic advice related to the merger transaction.’ Investment banks also prefer expansive language giving them the right to subcontract services to affiliates and third parties.
Fee Structure in an Investment Banking Agreement
The fee structure specifies the types of fees, fee amounts, and payment schedule. This is heavily negotiated because clients want fee certainty while banks want upside based on deal completion. Common structures include monthly or quarterly retainer fees, success fees upon deal closing, and discretionary bonuses. Banks prefer success fees as a percentage of deal size rather than fixed sums. Agreements also outline fee reductions if the client terminates early or the bank fails to meet mandates.
Expenses Clause in an Investment Banking Agreement
Investment banking agreements stipulate that clients reimburse reasonable expenses like travel, reports, legal fees, and other out-of-pocket costs. However, clients should cap total expenses or require pre-approval for large expenditures to prevent overcharging. It’s also common to exclude expenses like the bank’s overhead costs.
Liability Provisions in an Investment Banking Agreement
A key negotiation point is the liability carve-outs, exclusions, and caps that limit the bank’s exposure. Investment banks request broad exclusions around things like reliance on client-provided information, forward-looking statements, and actions by third-parties. Caps on liability as a percentage of fees or fixed dollar amounts are also standard. However, clients should narrowly define carve-outs and seek higher caps to protect against damages.
Termination Clauses in an Investment Banking Agreement
Termination clauses allow either party to end the agreement under certain conditions like non-performance of duties or corporate events like bankruptcy or merger. Clients prefer broad termination rights while banks want high hurdles to trigger termination, like requiring an official court ruling of illegal conduct before ending the contract. Best practice is to define specific termination triggers to prevent disputes.
In summary, meticulously crafted investment banking agreements contain provisions governing services, fees, expenses, liability, termination, and beyond. Proper structuring requires balancing the client’s need for accountability and cost control with the bank’s need for flexibility and legal protection. With billions in fees and liability at stake, experienced legal counsel helps ensure optimal terms.