Brief Introduction About the Success Fee Agreement
A success fee agreement, also known as a conditional fee agreement, is a special type of funding agreement designed for clients and solicitors. For triggering the fees of solicitors, this agreement is validated. When a company gets profits after the completion of the deals, the success fee is calculated. The alignment of interest between the advisor and client are included in the contingent fee structures. If the outcomes are not successful, then there is no fee to be paid.
In other words, a success fee contract is a return arrangement rewarded for effectively finishing a deal. The success fee is generally analyzed as a portion of the company’s project price, and is dependent on the outcome of the deal.
Who Takes the Success Fee Agreement? – People Involved
The solicitors and their clients are the individuals involved in the success fee agreement. When the case of the client is successful, the solicitors are paid. A Success fee is also known as the uplift, and is usually determined by the risks involved in claims. This is similar to attorney’s fees where the losing party in a case will have to pay the attorney’s fees incurred by the winning party. In a success fee agreement, in addition to the attorney’s fees, the clients will have to pay their attorney sums for winning the case.
Purpose of the Success Fee Agreement – Why Do You Need It?
A success fee is usually calculated as a percentage of the total amount awarded as compensation. The higher the award an attorney can negotiate, the higher will be his success fee.
This contract is also used in investment banking for closing financial deals between companies. Success fee in those cases depends on a baseline. Any monetary value above or below that baseline will constitute calculation for success fee. It simply means that the investment bankers will give a guarantee to close the deal, and if the deal is not closed, they do not get paid.
Contents of the Success Fee Agreement
- Particulars of the parties involved in the agreement including names, addresses, and the businesses they are involved in
- Nature of the business transaction that one party expects the other to involve in
- The baseline price that the party expects the deal to close including the buffer limits
- The percentage of success fee that would be calculated on closing the deal
- Events that constitute closing of a deal and calculation of success fee
- Events that exempt calculation of a success fee
- Minimum gain that is to be achieved for the success fee to be paid
- The duration within which the success fee has to be paid
- The responsibilities and disclosures required of both parties
- The requirements of the consultant in being hired
- Warranties and representations of both the parties
- Governing law and jurisdiction
- Limitations of liability in closing the deal
- Responsibility of the parties in complying with the relevant laws and payment of relevant fees
- Indemnification clauses
- Advances or security deposits that are required to be paid to either party
- Events that constitute grounds for termination and the way such treatment would be handled
- Quantification of the risk involved in the negotiation
- Acknowledgment of both the parties of the risks in the negotiation
- The nature of relationship between the company and the consultant and the powers given to him
- Legal recourse available to the parties
Points to Consider While Preparing the Success Fee Agreement
Although Success Fee Agreement has different strategies to follow when it comes to preparing this agreement, we still need to keep remember some important things here. Here are some important points that are critical to consider while preparing this agreement:
- How the risk will be calculated for determining the percentage of success fee
- How the base price for the calculation will be determined
- What events constitute completion of deals
- What events constitute forfeit of the success fee by the consultant
- The minimum amount over the base price that is required to be achieved
- The nature of relationship between the company and the consultant and the powers given to him
- The responsibility of compliance with the law and payment of any fees as part of the deal
- Responsibility of bearing all the costs during the transaction and whether they would be reimbursed
- Events that constitute forfeit of any advance or security deposit
Negotiation Strategy
Negotiation strategy would be based on the percentage of success fee. This percentage is a direct result of the risk associated with the deal and both the parties have to agree on the calculation of the risk associated in the contract. The other negotiation strategy would be about the baseline in determining the price that is needed to be won beyond which success fee would be calculated. Other strategies would be about who would bear the costs during the closure of the deal
Benefits & Drawbacks of the Success Fee Agreement
The benefits of this agreement are
Success fee as a percentage of the total amount– success fee will be payable as a percentage of total amount beyond the baseline of the deal. This way, the company isn’t committing a fixed amount irrespective of the outcome of the deal.
Different conditions– When the solicitors provide common stock, subordinated debt, instrument, convertible debentures, or other forms of equity participation, they will be paid by the clients. The kind of deliverables would be specified in the contract and upon on the delivery of which the contract would be deemed complete
A safe way to get rewarded– The risk inherent in this form of payment is relatively low because the payments would be contingent upon the successful completion of the project
Drawbacks are:
Costs related to payment of statutory fees would have a major impediment on the contract. It is important to identify who would bear the responsibility of payment of such cost
Profits of deals can vary depending on the supposed risk the complexity of the deal, and the level of competition for the deal.
Disbursement of the deal can be delayed depending on when the deal would be closed
What Happens in Case of Violation?
You need to be aware of the terms and conditions provided in the successful agreement to know what can happen if your deal becomes a case of violation. In other words, the document itself can provide you the details about the case of violation. Violation of the contract would mean that the success fee would not be paid to the solicitor. In case there is a material breach or where there is damage to the client, then the solicitor would responsible to make good the loss suffered by the client. Parties may approach a court of law for specific performance, rescission, or injunctive relief