5 Key Points to Consider When Making a Proper M&A Advisory Agreement

When considering or executing M&A, companies that will become sellers or buyers will search for potential partner companies and conclude contracts for closing. In this process, they may enter into a contract with an advisor to obtain advice and assistance with the actual procedures.

In this article, we will explain how to create the so-called ‘Advisory Agreement’ that companies enter into with their advisors, and the key points to consider.

What is an Advisory Contract?

Generally, an advisory contract is similar to a consulting contract or a retainer agreement, and there are various types of such contracts.

In this article, we will focus on the key points of advisory contracts concluded in the context of Mergers and Acquisitions (M&A).

What is an Advisor?

What does “advisor” mean in the context of an advisory contract?

Even within the realm of M&A advice, there are various fields such as finance, taxation, labor, and legal affairs. Each process of M&A requires highly specialized knowledge, and the content of the advice varies depending on the field of expertise.

The “advisor” referred to here is someone who uses their expertise to advise companies in the context of M&A. For example, there are “financial advisors”, “tax advisors”, and “legal advisors”, depending on their area of expertise.

M&A Advisory Contract

In M&A, many tasks require specialized knowledge, such as company valuation and acquisition audits (due diligence). These specialized tasks are difficult for the parties involved to handle on their own, so the assistance of an M&A specialist company is necessary.

An “advisory contract” in M&A refers to a contract concluded between a company and an advisor to receive support from an M&A specialist company for specialized tasks.

Advisor’s Involvement

There are two types of “advisors”, depending on how they interact with the company. One is to provide advice to maximize the interests of either the selling company or the buying company in relation to M&A. This form is called the “advisory form”.

The other is to stand between the selling company and the buying company, conclude contracts with both the seller and the buyer, and provide advice to both parties from a neutral position. This is called the “intermediary (or mediation) form”.

Difference from Retainer Contracts and Consulting Contracts

A retainer contract is typically a contract concluded to provide continuous professional advice by professionals such as lawyers, tax accountants, and management consultants.

While it is similar in the sense that it provides specialized knowledge, an advisory contract differs in that it provides specialized knowledge specific to the M&A process.

It is also similar to a consulting contract in that it provides specialized knowledge, but a consulting contract is more about leading to the resolution of business problems, while an advisory contract is mainly about introducing and selecting M&A partners and providing advice on the execution of the M&A process.

For more information on retainer contracts, please refer to this article.

Related article: Checkpoints when concluding a retainer contract for management, etc.[ja]

Types of Advisory Contracts

There are two types of advisory contracts: ‘exclusive contracts’ and ‘non-exclusive contracts’.

In the following, we will explain the personalityistics, advantages, and disadvantages of each type.

Type of Contract 1: Exclusive Contract

An exclusive contract refers to a contract that is exclusively signed with one M&A specialist company.

The term ‘exclusive’ here means that the contracting company does not enter into an advisory contract with any other company. Therefore, during the contract period, the contracting company cannot enter into a contract with any other M&A specialist company.

In the case of an exclusive contract, the only source of information is the contracted M&A specialist company, which can reduce the risk of information leakage.

Also, for the M&A specialist company, the possibility of earning a fee increases, so the case is treated as a priority, and there is a higher expectation of being introduced to a better partner.

Type of Contract 2: Non-Exclusive Contract

A non-exclusive contract is a type of contract where the contracting company can enter into contracts with multiple M&A specialist companies at the same time.

If you choose the form of a non-exclusive contract, you can reduce the risk of the M&A not going well due to a bad match with the M&A specialist company or its representative. Also, there is the advantage of being able to obtain information and opportunities from multiple companies.

On the other hand, increasing the sources of information is synonymous with increasing the sources of information leakage, and the risk of information leakage increases. In fact, if information is leaked, there is also the disadvantage that it becomes difficult to identify the source of the leak.

Also, remember that the priority within the M&A specialist company may be lower compared to an exclusive contract.

Five Key Points to Check in an Advisory Agreement

Here, we will introduce typical clause examples of an advisory agreement and explain the key points to check for each clause example.

Please note that in the clause examples, “Party A” refers to the selling company or buying company executing the M&A, and “Party B” refers to the advisor.

Clause on Scope of Work

Article X (Scope of Work)
During the term of this contract, Party A appoints Party B as its M&A advisor to carry out a business alliance (hereinafter referred to as “this business alliance”) with the target company. Party B will perform the following advisory services (hereinafter referred to as “this service”):
1. Introduction and provision of information on potential business alliance candidates
2. Advice or support for the execution of this business alliance
3. Advice and support for the creation of necessary contract documents and other written documents in relation to this business alliance
4. Other services related to the above items

Executing M&A requires highly specialized knowledge, and the expertise needed varies with each process. Therefore, when entering into an advisory contract with an advisor, it is important to clearly define the scope of work.

There are many processes in M&A, such as selecting target companies, conducting acquisition audits, and creating contracts related to the acquisition of shares (shareholder agreements, share transfer agreements, investment agreements, etc.). The scope of work is diverse. If the scope of work is not clearly defined, there is a risk that additional fees may be incurred for work outside the scope, or that it may not be possible to hold someone accountable for breach of contract.

Confidentiality Clause

Article X (Confidentiality)
1. In this Agreement, “Confidential Information” refers to the fact that the business is being conducted, the existence and content of this Agreement, and any business or technical information disclosed or provided by the Discloser in the course of this discussion, which has been explicitly stated as confidential by the Discloser.
2. Both Party A and Party B shall not disclose or leak Confidential Information to a third party without the prior written consent of the other party.

When considering or executing M&A, companies must provide a lot of confidential information to their advisors.

The documents provided by companies in M&A include not only minutes of general meetings of shareholders and financial statements, but also documents related to labor management that are generally not disclosed, and documents related to past and current disputes. Therefore, in order to proceed with M&A promptly, it is necessary to include a confidentiality clause with the advisor.

Also, when executing M&A, the fact that M&A is being considered often becomes confidential information, so it is important to include the fact that M&A business is being conducted in the definition of confidential information.

Clause on Remuneration

Article X (Remuneration, etc.)
1. Party A shall pay Party B a retainer fee for the services under this contract within X business days from the date of this contract, amounting to X yen (excluding consumption tax. The same shall apply hereinafter).
2. If Party A wishes to consider specific matters related to the services after receiving information obtained by Party B from the target company for the business alliance, Party A shall pay Party B X yen.
3. If Party B performs tasks outside the scope of the services for the business alliance with the prior written consent of Party A (hereinafter referred to as “tasks outside the services”), Party A shall pay Party B X yen per hour spent on tasks outside the services.
4. If a final agreement for the business alliance is concluded through the services, Party A shall pay Party B X yen as a success fee for the services within X business days from the date of the final agreement for the business alliance.

One of the important clauses in an advisory contract is the clause on remuneration. The method and timing of payment can vary greatly depending on the advisor. For example, there are methods such as a monthly advisory fee, or a system of retainer, interim, and success fees.

In a system like retainer, interim, and success fees, it is necessary to clearly define under what conditions the interim and success fees will be incurred.

Also, it is important to predefine how much will be charged if tasks outside the scope of the services occur, in order to avoid disputes later on.

Clause on Mid-term Termination

Article X (Mid-term Termination)
1. Each party may terminate this contract at any time by notifying the other party in writing at least 30 days in advance.
2. If the contract is terminated by the preceding paragraph before the final agreement on this business alliance is concluded, Party B will return an amount agreed upon through separate discussions with Party A from the remuneration received from Party A.
3. Even if the final agreement on this business alliance is cancelled or the business alliance is not completed after its conclusion, Party B will not return the remuneration received from Party A.

In an M&A advisory contract, it is necessary to consider what happens if the M&A does not go well.

It is necessary to clearly define whether it is possible to terminate the contract midway if the M&A does not go well, and how to settle the remuneration in case of mid-term termination.

Other Points to Note

Article X (Prohibition of Subcontracting)
Except with the prior written consent of Party A, Party B may not subcontract all or part of the work under this contract to a third party.

Article X (Expenses)
1. All expenses incurred by Party B under this contract (including transportation costs, accommodation costs, and other expenses normally necessary for the performance of the work) shall be borne by Party A.
2. The expenses mentioned in the previous paragraph shall be settled by Party A to Party B, after Party B presents an invoice along with the receipt to Party A.

When entering into an M&A advisory contract, there are other points that should be noted.

In addition to the above, there is a clause regarding subcontracting that should be noted. M&A advisory services require highly specialized knowledge, and the success of an M&A can often depend on the capabilities of the advisor or brokerage firm. Therefore, it is necessary for companies to include a clause prohibiting subcontracting.

Also, in M&A, expenses such as transportation and accommodation costs may be incurred for hearings with the target company. It is conceivable to limit such expenses to those necessary for the performance of the main duties, and to obtain prior written consent in cases where judgment is divided.

Summary: Consult a Lawyer for the Creation and Review of Advisory Agreements

In M&A transactions, advisory agreements are commonly seen as they allow for the efficient progression of M&A with the help of expert advice.

M&A requires advanced expertise, and a wide range of specialized knowledge is needed for each process of M&A. Therefore, the contract content, such as the scope of work and the method of payment, tends to be complex.

In order to efficiently carry out M&A, it is important to determine what kind of contract will be concluded with the advisor. Therefore, we recommend consulting with experts such as lawyers when creating an advisory agreement.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the internet, and law. The creation of contracts is crucial in M&A and business succession. Our firm handles the creation and review of contracts for various cases, from companies listed on the Tokyo Stock Exchange Prime to venture companies. If you have any concerns about contracts, please refer to the article below.

Areas of practice at Monolith Law Office: Japanese Stock & M&A Related Legal Affairs[ja]