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Companies typically grit their teeth and pay the hefty fees owed to lawyers and investment bankers after striking a deal. But in a series of recent dust-ups, clients are pushing back and going to court to wriggle their way out of hefty invoices.
Stablecoin company Circle is challenging an engagement letter contract it signed in 2020 with Financial Technology Partners, a boutique fintech investment bank. Circle says under the terms of the agreement, it could owe FT Partners 10 per cent of its value if it is sold at any point. After its June initial public offering, Circle’s share price has surged, giving the company a current enterprise value of around $50bn. That implies a fee would be a staggering $5bn if the stablecoin company is sold.
In different circumstance, two other US companies are balking at paying legal fees on deals they were forced to complete through litigation. In both cases, they are disputing the fees to the lawyers for the acquired companies which led the successful legal action to close the deals.
The law firm Quinn Emanuel successfully forced the 3D printing company Nano Dimension to earlier this year close a signed deal for its client Desktop Metal. It has recently sued Nano for failing to pay a $30mn bill related to that lawsuit. And in an ironic twist, Quinn’s longtop client, Elon Musk’s X, is currently trying to wriggle out of paying the Wachtell Lipton law firm $90mn for helping Twitter force Musk to buy the social media company in 2022.
Typically in M&A, the buyer ends up bearing the cost of the seller’s transaction expenses. In the case of Circle, its board knows that if it is on the hook for a multibillion-dollar deal fee to FT Partners, the buyer will merely deduct that liability amount from its equity purchase price. Hence Circle’s interest is seeing that rate reduced (its legal argument in federal court is that FT Partners has not lived up to the terms of the contract, making the signed agreement void). FT Partners has said Circle is merely feeling buyer’s remorse on the fee arrangement.
The more intriguing arguments are, however, over the legal fees that are racked up after a deal is announced as in the cases of Desktop Metal and Twitter. Those are fees that were uncontemplated at the time that the respective deals buyouts were signed. But after the buyers were forced to complete the deals, those accompanying legal bills became the problem of Nano and Elon Musk, respectively.
The buyers were, of course, unhappy about having to close the deal and pay for assets they no longer wanted. They were therefore not going to be very enthusiastic about paying the lawyers on the other side responsible for that outcome.
In the case of Musk, his complaint is now being adjudicated in an arbitration proceeding. He argues that the $90mn “success” payment for a few months of work exceeded Wachtell’s $17mn in hourly billings and that the difference constitutes “unjust enrichment”. Wachtell counters that ensuring the $44bn deal closed was worth every penny.
The chess match between Desktop Metal and Nano may be even more interesting. Quinn in its complaint said that it charged a lower hourly rate with the rub that if the deal closed, fees would flip to a premium. That led to the $30mn bill for a $173mn merger that required a few months of intense litigation.
Quinn speculated in its lawsuit that it believes Nano will put Desktop Metal in bankruptcy. That move, which has not happened so far, would leave the law firm with a claim as a general unsecured creditor at the back of the line to be repaid. This nightmare scenario worried enough for the law firm to ask, ultimately unsuccessfully, for the Delaware courts to amend the merger contract allowing for it to be paid pre-closing. (Twitter decided to wire the funds to Wachtell right before Musk officially took control.)
M&A transactions are watershed moments for companies and are often tense. Professional advisers can prey on that moment to extract juicy terms, especially from sellers who will not ultimately bear the cost. The advisers argue that the service they are providing is worth it and tied to a successful commercial outcome — the completion of a big deal — and thus sellers should not be price sensitive.
Contracts are usually plainly interpreted with little wriggle room to walk away. For that reason, do not expect a flurry of adviser/client lawsuits. No one also wants to be known as the company that shirks bills or the adviser that plays hardball with clients. But expect bankers and lawyers to draw up new mechanisms to guarantee that money they think they are owed arrives on time.
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