The vexed question of success fees in fundraising efforts came back before the High Court in the recent case of NOR Capital v Kigen. Construing the relevant terms of the engagement letter in issue, the Court determined that, in line with commercial common sense, the success fee was only triggered by a new money investment. 

Background

Kigen, the Claimant, is a software developer. NOR Capital, the Defendant, is an investment banking firm. 

Kigen was seeking new investment. Softbank, Kigen’s ultimate owner, preferred not to make that investment itself. Softbank therefore introduced NOR Capital to Kigen. NOR Capital was advised that Kigen sought to raise around £30-40m. NOR Capital told Kigen it considered this to be a challenging mandate that would require around 6 months of work. Kigen and NOR Capital agreed an engagement letter (the Agreement). 

The key term of the Agreement was clause 3, pursuant to which, as well as a monthly retainer fee, NOR Capital was entitled to a success fee if there was a Capital Raising Transaction. 

NOR Capital performed its obligations under the Agreement, but did not find any external investors who were willing to invest on acceptable terms. In the end, Softbank invested a further £20m in Kigen.

NOR Capital subsequently sent an invoice to Kigen for £500,000, claiming that the success fee was due. Kigen denied that the fee was payable, and applied to the Court for a declaration to that effect.

Clause 3 of the Agreement 

Clause 3.1.2 of the Agreement provided: 

"If a Capital Raising Transaction is completed during the period of this Agreement or within six (6) months of its termination, on the closing date of such transaction, in consideration of NOR Capital agreeing to provide the Services, the Company [i.e. Kigen] shall pay NOR Capital a cash Success Fee calculated as follows:

• no charge for funding provided by Management or by the existing majority shareholder Softbank Group Corp (“SBG”) through Softbank Vision Fund or any other SBG affiliated entity including Arm Limited or any bank financing separately arranged by Management; 
• a Fee of 4.0% on funding provided by any other new investor up to GBP 20m; 
• and a Fee of 3.0% on funding provided by any other new investor above GBP 20m;

Any fee payable pursuant to this clause 3.1.2 will be reduced by the Monthly Retainer Fee (payable pursuant to clause 3.1.1) down to the minimum Success Fee.

The Success Fee will be invoiced simultaneously with the closing of the transaction. There will be a minimum Success Fee of GBP 500,000 regardless of the source of the funding.

Assuming new investor(s) acquire existing shares of the Company, i.e. as part of a secondary transaction(s) instead of primary funding, the fee will follow the same structure as the Capital Raising Success Fee outlined above but will be payable pro-rata by the selling shareholder(s).”

NOR Capital claimed it was entitled to the “minimum Success Fee” as this should be read as a minimum sum payable in the event of any Capital Raising Transaction going ahead. Kigen, however, said this was not payable given that the first bullet point in 3.1.2 stated there was “no charge” for funding provided by Softbank.

How will the courts interpret a contract? 

The principles of contractual interpretation are well-established. Contractual interpretation is an objective exercise in which the Court seeks to identify what a hypothetical reasonable person in the position of the parties would have understood the contract to mean. 

In the first instance, the Court will consider the ordinary and natural meaning of the words. If the natural and ordinary meaning of a contractual term is ambiguous, the Court will consider rival interpretations and test them against the language elsewhere in the contract and the relevant factual background. 

Kigen argued that the natural and ordinary meaning of clause 3.1.2 was unambiguous and that no success fee was payable. Kigen relied on:

• the first bullet point of clause 3.1.2 which stated that there was to be “no charge” for funding originating from Softbank or any other Softbank affiliated entity; and
• the wording after the first three bullet points of clause 3.1.2 (which stated “Any fee payable pursuant to this clause”). Kigen said that this wording expressly contemplated circumstances in which a Capital Raising Transaction may occur but no success fee would be payable.

Kigen offered two explanations for the phrase “There will be a minimum Success Fee of GBP 500,000 regardless of the source of funding.” This could have been included either because: (i) the minimum success fee is payable even if there are multiple external investors; or (ii) the minimum success fee is payable regardless of whether capital is raised by way of acquisition or, for example, new equity, or existing equity, or through debt or other financial instrument. 

Kigen also strongly submitted that the factual background further supported its interpretation. The purpose of the Agreement was to identify external investors, because Softbank did not want to invest further sums itself. It would defy commercial common sense for NOR Capital to receive a success fee in circumstances where Softbank had needed to invest further after all: the very outcome the engagement of NOR Capital was intended to avoid. 

NOR Capital argued that the wording of clause 3.1.2 unambiguously led to the opposite conclusion, that a minimum Success Fee of GBP 500,000 was payable. It argued that the Agreement contemplated a three-stage process.

• Stage 1: the fee is calculated in accordance with the three bullet points of clause 3.1.2.
• Stage 2: the fee calculated in step 1 is reduced by the total amount of a monthly retainer fee already paid by Kigen to NOR Capital.
• Stage 3: the fee calculated at stage 2 is then adjusted so that, if less than £500,000, it is raised back up to £500,000, i.e. the “minimum” success fee applied in all circumstances.

NOR Capital also said that the phrase “regardless of the source of funding” meant regardless of whether the funding came from management, from Softbank (or its affiliates) or from any other new investor. 

Judgment 

The Judge held that no success fee was payable. He said that clause 3.1.2 taken in isolation was ambiguous, and neither party had been able to provide an entirely satisfactory explanation (though Kigen’s reading was marginally preferable). However, on conducting an analysis of the wider terms of the Agreement and the factual background, the meaning was clear.

• Textual analysis: the Agreement as a whole indicated that the trigger for the success fee was external investment. In particular: (i) there were no provisions exclusively dealing with encouraging Softbank affiliates to provide funding; (ii) the engagement letter expressly contemplated NOR Capital “secur[ing]” external investors; and (iii) clause 3.1.3 excluded a success fee on the sale to an affiliate of Softbank. 
• Contextual analysis: perhaps most importantly, the commercial context pointed towards no fee being payable. The purpose of the Agreement was to avoid Softbank needing to invest further in Kigen. There would be little sense in a success fee being payable if Softbank did have to provide the funding.

Comment

Parties should make sure clauses governing the payment of contingency or success fees clearly set out the relevant trigger for the additional payment. This dispute may have been avoided if the parties had, for example, defined the term “success”. If a party agrees to work on the basis of a contingency fee and the relevant contractual term is not clear, they should not assume that the Court will agree with their reading of the clause. 

When negotiating contracts, it is important to take a step back and consider what a reasonable reader would understand by the words on the page to ensure this reflects the bargain struck. Given the disagreement in this case, parties also should be careful that they each understand that bargain in the same way. Had they sought to define “success”, the parties in this case may have realised they had differing views on this point.