writing-engagement-letters

# Writing Engagement Letters

Structures investment banking engagement terms with scope, fees, indemnification, and tail provisions.

## When To Use

- Drafting a new sell-side or buy-side advisory engagement letter
- Documenting a fairness opinion, valuation, or capital-raising mandate
- Negotiating or revising fee structures (retainer, success fee, incentive tiers)
- Memorializing scope changes or amendments to an existing engagement
- Preparing engagement terms for a restructuring, recapitalization, or strategic alternatives review

## Inputs To Gather

- **Parties**: Full legal names of the advisory firm and the client entity, including jurisdiction of incorporation
- **Transaction type**: Sell-side M&A, buy-side acquisition, fairness opinion, capital raise (debt/equity), restructuring, or other advisory mandate
- **Scope of services**: Specific deliverables (e.g., marketing materials, management presentations, buyer outreach, negotiation support, fairness opinion delivery)
- **Fee structure**: Retainer amount and payment schedule, success/transaction fee formula (flat, Lehman-scale, tiered percentage, minimum fee), and any fee crediting provisions
- **Tail period**: Duration (typically 12–24 months) and which counterparties or transactions are covered post-termination [VERIFY: tail length norms vary by deal type and market]
- **Expense provisions**: Cap on reimbursable out-of-pocket expenses, pre-approval thresholds, and categories covered (travel, data rooms, third-party advisors)
- **Indemnification terms**: Scope of indemnity, standard of exclusion (gross negligence, willful misconduct, bad faith), contribution mechanics, and survival period
- **Exclusivity and right to act**: Whether the advisor has exclusive mandate and any carve-outs for existing relationships
- **Term and termination**: Initial term, termination-for-convenience mechanics, notice period, and post-termination obligations
- **Governing law and dispute resolution**: Jurisdiction, venue, and whether disputes go to arbitration or litigation [VERIFY: governing law selection per parties' preference]

## Workflow

1. **Classify the mandate** — Determine transaction type (sell-side, buy-side, fairness, capital markets, restructuring) as this drives scope language, fee conventions, and regulatory considerations.
2. **Define scope of services** — Draft a precise services section that delineates what the advisor will and will not do. Avoid open-ended language ("and other services as requested") unless the client specifically requires flexibility; if included, add a mutual-consent qualifier.
3. **Structure the fee provisions**:
   - **Retainer**: Specify amount, start date, frequency, and whether retainer credits against the success fee.
   - **Success/transaction fee**: State the formula clearly (e.g., percentage of aggregate consideration, tiered brackets, minimum fee). Define "Transaction" and "Aggregate Consideration" to include cash, stock, assumed debt, earnouts, and other forms of value. [VERIFY: confirm whether earnout payments trigger additional fee obligations and at what point]
   - **Fairness opinion fee**: If applicable, state as a flat fee payable upon delivery, typically independent of outcome.
4. **Draft the tail provision** — Specify the tail period, the mechanism for identifying covered parties (e.g., contacted or identified buyer list delivered at termination), and any exceptions. Address what happens if a covered transaction closes during the tail with a different advisor.
5. **Address indemnification and liability**:
   - Grant broad indemnification to the advisor and its affiliates, directors, officers, employees, and agents.
   - Exclude coverage only for losses arising from gross negligence, willful misconduct, or bad faith as determined by final, non-appealable judicial decision.
   - Include contribution language for situations where indemnification is unavailable.
   - Specify survival post-termination (commonly indefinite or matching the statute of limitations).
6. **Add standard protective provisions**:
   - Confidentiality obligations (mutual or one-way, with carve-outs for required disclosures)
   - Limitation of liability (typically capped at fees received; no consequential damages)
   - No-fiduciary-duty disclaimer — the advisor is acting as an independent contractor, not as a fiduciary [VERIFY: regulatory requirements may impose fiduciary duties in certain contexts, e.g., municipal securities under MSRB rules]
   - Conflict-of-interest disclosure, including the advisor's right to represent other parties in unrelated transactions
7. **Set term and termination** — State the initial term, right of either party to terminate on written notice (typically 30 days), and obligations that survive termination (indemnification, confidentiality, tail, expense reimbursement).
8. **Include execution mechanics** — Signature blocks, counterpart execution, and any conditions precedent to effectiveness.

## Output

The engagement letter should be formatted as a formal letter agreement addressed from the advisory firm to the client, including:

- Date and addressee block
- Recitals or introductory paragraph identifying the contemplated transaction
- Numbered or lettered sections covering scope, fees, expenses, indemnification, tail, confidentiality, term/termination, and miscellaneous provisions
- Signature block with acceptance and acknowledgment by the client
- Any schedules or exhibits (e.g., fee formula illustration, covered-party list template)

## Quality Checks

- **Fee clarity**: Confirm every fee trigger event is defined — a reader should be able to calculate the exact fee owed from the letter alone without referencing external documents
- **Tail coverage**: Verify the tail provision specifies both the duration and the process for identifying covered parties at termination
- **Indemnification completeness**: Ensure the indemnity covers all advisor-related persons, includes contribution, and states the exclusion standard
- **Scope boundaries**: Confirm the letter distinguishes between included and excluded services; verify the advisor is not inadvertently assuming responsibilities outside the mandate
- **Regulatory alignment**: Flag any FINRA, SEC, or MSRB considerations that may apply based on the transaction type and parties involved [VERIFY: broker-dealer registration requirements and applicable FINRA rules for the specific advisory activity]
- **Defined terms consistency**: Check that "Transaction," "Aggregate Consideration," "Confidential Information," and other key terms are defined once and used consistently
- **Termination symmetry**: Confirm both parties have termination rights and that post-termination obligations (tail, indemnity, confidentiality) are clearly stated to survive