M&A transactions in the technology sector are often accompanied by sell-side M&A advisers. They assist the sellers (usually led by the founders and M&A experienced board members) in preparing the transaction and managing the sale process. In addition to these support activities, the core role of M&A advisers is to identify and approach suitable buyers and to assist the sellers in the commercial negotiations.
The contracts concluded with M&A advisers are as sophisticated as they are complex. They are often negotiated without legal assistance. This often leads to costly misunderstandings. This is particularly true of the so-called "long tail" clauses, which can be found in almost every M&A advisory contract and whose economic impact is usually misjudged.
Remuneration of M&A advisers
M&A advisers usually receive a fixed fee for their work. However, this retainer is usually only a small part of the total fee.
Most of the total fee is a success fee. This is only payable if the intended M&A transaction is completed. The retainer is then usually credited.
The success fee is usually around 2-3% of the transaction volume; a minimum fee independent of the transaction volume may be charged.
As you can see: M&A advisory contracts are highly remunerative. Success fees can quickly reach the high six-figure and sometimes seven-figure range. Surprisingly, M&A advisory contracts are all too often negotiated without legal advice. This can lead to misunderstandings that can be very costly.
Decision of the OLG Frankfurt a.M. (1 U 311/20, GmbHR 2023, 443)
This was also the case in a recent decision of the Higher Regional Court (OLG) of Frankfurt a.M. (legally binding). In this case, the owners of the company, who were willing to sell, had entered into an M&A advisory agreement with their bank. At the time the agreement was concluded, the sellers were already in advanced negotiations with a potential buyer.
According to the M&A advisory agreement, the bank provided typical transaction-related services (filling the data room including document redaction, preparing calculations, preparing SPA attachments, etc.). In the event of a sale, the bank was to receive a success fee calculated as a percentage of the transaction volume.
The M&A advisory contract was to run until the end of 2018. However, the contract also provided that the success fee would be paid if the sale took place within 24 months of the end of the contract - this clause was the main issue here. This is known as the "long tail" clause, which can be found in one form or another in virtually every M&A advisory contract.
The inevitable happened: the sale with the "first" buyer did not take place. The company was eventually sold, but not until 2019 - after the M&A advisory contract had expired. The M&A advisor had not even been identified as a buyer and had not been involved in the sale. His "involvement" was merely that the documents he had prepared were "recycled" as part of the sale in 2019.
The M&A advisor now sued for his success fee, which the sellers did not want to pay because the M&A advisor's involvement was perceived as too low.
How would you decide?
The Higher Regional Court of Frankfurt a.M. ruled that the success fee had to be paid despite the time of the sale (2019) because the M&A advisory contract clearly provided for this in the form of the "long tail" clause. The court even went one step further: even without an explicit "long tail" clause, the success fee would have been payable.
The OLG Frankfurt a.M. did not accept the argument that the sellers were not represented by lawyers at the time of the conclusion of the M&A advisory agreement and therefore might not have understood the scope of the "long tail" clause.
In the opinion of the OLG Frankfurt a.M., the degree of cooperation of the M&A advisor - or even the buyer's concrete evidence - was also irrelevant. The cooperation services provided were sufficient and the M&A advisory contract (as is generally the case) would be sufficient for any sale transaction.
Conclusions for practice
As this practical case shows: M&A advisory contracts are complex and not easy to penetrate.
For example, if the sellers are already in concrete sales negotiations, the success fee can almost always be reduced. "Long tail" clauses cannot usually be negotiated away - but the time frame as well as exceptions or a reduction of the fee for certain case constellations can usually be agreed. There must always be a clear connecting factor for the beginning of the "long tail" (typical case in practice: the "long tail" follows the termination of the M&A advisory agreement, which is regularly forgotten).
Based on the OLG's decision, even in contracts without a "long tail" clause, care should be taken to ensure that transactions carried out after the end of the contract do not trigger a success fee.