Every Dog Has Its Day: Tail-Fee Provisions Under New York Law
A tail-fee provision is a contractual term that requires a client to pay an investment banker (or other consultant) a fee in the event that a transaction is consummated within a certain period of time after the parties' agreement terminates. This provision typically protects a banker, or a consultant who works on commission, from being denied compensation when the client completes a transaction soon after the agreement ends.
Under New York law, courts frequently take a dim view of commercial clients who don't honor tail-fee obligations -- even, as in a case decided this week, when the precise terms of compensation aren't set forth in the agreement.
In Cowen and Co. v. Fiserv, a client refused to pay a "tail fee" due in connection with a completed investment banking transaction, arguing that no payment was required because the contractual agreement between the parties did not definitively set the amount of the fee to be paid. In language that reflects the courts' willingness to enforce such tail-fee agreements, the Appellate Division acknowledged that even though "[t]he parties did not define the 'Transaction Fee' by a dollar amount or percentage value," they did agree "to a provision which referenced 'investment banking industry practice' for comparable transactions," and which required the parties "to work in good faith to determine the amount of the Transaction Fee."
Under these circumstances, the Court noted that "[w]here, as here, the record demonstrates that sophisticated parties intended to be bound by an agreement, the doctrine of definiteness should not be used to defeat the bargain of the parties." In other words, the fact that the parties didn't specify the exact fee to be paid was not fatal to the claim: Cowen & Co. may be entitled to a tail fee, commensurate with standard investment banking practices. The case will now proceed to trial (or, more likely, to settlement).
As one might imagine, given the prevalence of financial pursuits in New York, tail-fee disputes are not unusual in the New York courts. The message from the courts is clear, however: when you sign a contract that includes a tail-fee provision, be prepared to honor it.