Under new rules FCA regulated firms providing ‘primary market and M&A services’ are prohibited, at any time after 3 January 2018, from entering into written agreements with their clients which contain ‘future service restrictions’.
‘Primary market and M&A services’ are services that constitute designated investment business or MiFID business and that are either (i) services provided to an issuer comprising structuring, underwriting and/or placing an issue of shares, warrants, certificates representing certain securities or debentures, or (ii) advice and services relating to mergers and the purchase or disposal of undertakings. This covers equity capital market services, debt capital market services, and both public and private M&A services, and the rules apply to all FCA regulated firms doing this work regardless of size or location.
A ‘future service restriction’ is a contractual provision which grants a firm (or its affiliate): (i) the right to provide any future primary market or M&A services to a client; or (ii) the right to provide future primary market or M&A services to a client before the client is able to accept any offer from a third party to provide those services.
The new rules will not apply to specific and certain future transactions, to clauses which allow firms to pitch alongside others for future work, or to ‘right to match’ clauses allowing a firm to match the terms offered by another (provided there is no obligation to choose a particular firm). It is clear however that ‘tail-gunner’ clauses containing right to act or right of first refusal provisions, which in the past have been common in the terms of engagement of investment banks and corporate brokers, are no longer permitted. The FCA has warned against the use of verbal agreements to avoid the rules.