On August 10, 2018, Judge Jesse Furman of the United States District Court for the Southern District of New York denied claims for advisory fees brought by investment bank Stone Key Partners LLC (together with Stone Key Securities LLC, “Stone Key”) against its former client, Monster Worldwide, Inc. (“Monster”). Stone Key Partners LLC v. Monster Worldwide, Inc., Case No. 1:17-cv-3851-JMF (S.D.N.Y. Aug. 10, 2018). Monster engaged Stone Key in April 2012 to assist in a “review of strategic alternatives,” including a possible sale, and agreed to compensate Stone Key if it entered into certain transactions within 12 months of any termination of the engagement; Monster engaged another financial institution as a co-advisor. The engagement letter with Stone Key did not clearly require written notice of termination and provided that Stone Key would be paid 55% of a fee that “shall be mutually acceptable . . . and consistent with compensation agreements customarily agreed to by” investment banks for similar transactions in connection with any “partial sale” transaction within the tail period. The Court found that the engagement ended in August 2013, when it was clear (in the eyes of the Court) that the sale exploration process was over, and thus denied claims for transactions completed in 2015 and 2016. The Court also rejected as unenforceable the partial sale fee provision, finding it to be an unenforceable agreement to agree.
Stone Key asserted that its engagement could be terminated only through a sale of the company or written notice of termination. The Court disagreed, finding that an indemnification agreement incorporated by reference into the engagement letter referred to the “termination, modification, or completion” of the engagement and that the contract was “completed” when the review of strategic alternatives, which was the purpose of the engagement, was concluded. The Court also pointed to extrinsic evidence, including the absence of work by the bank after August 2013 and the bank’s failure to seek a fee until years after the first transaction.
Regarding the initial transaction for which Stone Key sought compensation, the Court found that the engagement letter’s fee provision for a partial sale was “an invalid and unenforceable agreement to agree.” The Court concluded that the language which contemplated a “fee that shall be mutually acceptable” was insufficiently definite because it contained no mechanism by which the amount of compensation due could be objectively calculated and required a “new expression” of “mutual acceptab[ility]” by the parties. Specifically, the Court found that there was no “fixed standard” for banking fees and rejected the assertion that a “fee run,” which yielded a range of potential fees based on comparable transactions, could yield an adequately specific number. The Court pointed out that further negotiations would have been required for the parties to agree on compensation for Stone Key and emphasized that the parties never discussed a fee for the partial sale, much less how the fee would be calculated. The Court also determined that the initial transaction did not qualify as a transaction for which Stone Key was entitled to receive a fee. The Court did, however, award expenses incurred by Stone Key during the course of its work for Monster.
The decision rejects the New York State Appellate Division’s treatment of a similar provision in Cowen & Co., LLC v. Fiserv, Inc., 31 N.Y.S.3d 494 (N.Y. App. Div. 2016). Specifically, in Cowen, the New York court held that the fee provision, which also necessitated a “fee run” and analysis of fees in comparable transactions, was enforceable “inasmuch as it may be ascertained by public price indices and industry practice.” In Stone Key, Judge Furman noted that Cowen was distinguishable because the parties there had discussed comparable transactions and percentages for the potential transaction fee before litigation, but added that Cowen was “[i]n any event . . . not binding.” Also worth bearing in mind is that under the unique facts in Stone Key, the investment bank waited several years to make any fee demands and the Stone Key banker with the company relationship moved from Stone Key to another investment bank well before any such demand was made.
In light of this apparent conflict, investment banks (and other fee-charging advisors) may want to reexamine the relevant provisions of their engagement letters. Financial advisors may wish to consider proposing more objective benchmarks, such as a minimum percentage or fee floor; where there is (or may be) a co-advisor, a minimum fee could be tied to the co-advisor’s fee. In any event, including in the engagement letter greater specificity as to the parameters of a fee run, or factors to be taken into consideration in calculating fees, may reduce the risk of a finding that the provision is unenforceable.