In a decision signed July 26, 2017 in the Nephrogenex bankruptcy (case 16-11074), Judge Gross of the Delaware Bankruptcy Court approved of the application of the Debtor’s investment banker for a success fee over the objection of, among others, the Debtor and the purchaser of all the reorganized debtor’s equity. Judge Gross’s opinion is available here (the “Opinion”).
In this case, the Debtor hired an investment banker (“CS”), which was duly approved by the Court. Part of CS’s compensation included a “Sale Transaction” fee which would be earned in the event of a Sale Transaction. The term Sale Transaction was broadly defined, Opinion at *4, and included:
“any transaction or series of transactions involving (a) an acquisition, merger, consolidation, or other business combination pursuant to which all or substantially all of the business assets, subsidiaries, divisions, business segments, operations, securities, or equity interests of the Company are, directly or indirectly, combined with another company; (b) the acquisition, directly or indirectly, by a buyer or buyers. . . of equity interests or options, or any combination thereof constituting a majority of the then outstanding economic interests in the Company. . .” Opinion at *4.
As part of the Plan of liquidation, the equity of the reorganized debtor would be transferred to one of its creditors as satisfaction of that creditor’s claim. After the transfer of equity, CS filed its fee application alleging that the release of the claim, with a post-distribution value of approximately $2 million (the claim was for $4,312,698.51 and the estimated distribution was 49.5%, Opinion at *2-3), was a Sale Transaction, triggering its success fee.
After reviewing all the relevant documents and hearing the testimony of the principle of CS, Mr. Cassel, Judge Gross agreed with CS, holding that the equity transfer satisfied the definition in CS’s engagement documents. The one wrinkle that the objecting parties tried to use to oppose the the payment, is that CS’s retention agreement provided that the success fee would be paid out of the proceeds of the Sale Transaction, and there were no proceeds from this transaction. Judge Gross determined that this was not a necessary requirement of compensation on the basis of two parts of the engagement agreement. First, “the Engagement Agreement does not provide that the Sales Transaction Fee can only be paid if the Sales Transaction generates cash.” Second, “the Engagement Agreement defines ‘Sale Consideration’ to include ‘(y) the principal amount of all indebtedness for borrowed money or other liabilities of the [Debtor] or [Debtor] related entity as applicable, as set forth on the most recent balance sheet, or in the case of a sale of assets, all indebtedness for borrowed money or other liabilities assumed, cancelled, exchanged, or forgiven by a third party. . . .'” Opinion at *8.
Because people constantly try to find ways to get around definitions to maximize their profit, attorneys, like those representing CS, often draft language as broad (or narrow) as possible to best protect their client. In this case, was the recipient of the reorganized debtor truly intending to buy the company? Probably not. However, CS’s attorney’s careful drafting of their retention agreement helped ensure that even if the acquiring company was trying to avoid the success fee, CS still received it. The takeaway in this Opinion is, if you represent the retained professional, to make sure there is no language disallowing a fee for some reason, like a lack of cash in the consideration received.
John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or firstname.lastname@example.org.