This article is written by Rashmi C, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).
Table of Contents
Introduction
Investment banking plays a fundamental role in enabling financial stability and management in an enterprise. These specialized financial services enable companies to raise, manage, and allocate capital resources in an effective and efficient manner, thereby paving the way to achieving their established objectives. The centerpiece of investment banking services is an “Investment Banking Agreement”, also called “Investment Banking Engagement Agreement”.
Investment banking
In common parlance, the term “banking” instantly reminds us of depositing our funds and obtaining credit facilities such as loans, credit cards, etc. This is only one part of the entire banking system, called “Commercial Banking”. Investment banking, on the other hand, is a completely different service vertical, separate and distinct from commercial banking.
Investment banking is a special segment of banking operation that helps individuals, organizations, and sometimes even Governments, raise capital and provides financial consultancy services to them. These services are one of the most complex and intricate mechanisms in the financial services market. Investment bankers provide a range of services ranging from the creation of capital to the dissolution of a company. Some of the important services rendered by investment bankers include:
Valuation of an enterprise
Valuation of an enterprise is required whenever important capital transactions, such as Initial Public Offer (IPO), Follow-on Public Offer (FPO), private placement, long-term business credit facilities are made. The primary purpose of a valuation is to determine the net worth of the shareholders’ funds of an organisation.
Raising of capital
Companies resort to raising capital funds through Initial Public Offer (IPO), Follow-on Public Offer (FPO), private placement, issue of debt securities (debentures, corporate deposits, consortium financing, etc.), and such other means. Investment bankers primarily aid companies in the preparation of documents, liaison with bankers and investors, preparation of public issue and private placement documentation, and acting as lead agents and advisors for the same.
Mergers & acquisitions
Mergers & Acquisitions (M&A) is a general term that describes the consolidation of assets or companies through different types of financial transactions such as tender offers, acquisitions, mergers, consolidations, purchase of assets, and management acquisitions. In a merger, two or more companies are amalgamated to form a single entity and carry on business under a single brand name. In an acquisition, however, one company takes over the assets and liabilities or the management of another company and absorbs it within itself, and carries on business in its own name. Investment bankers facilitate and provide advisory services, both on the buyer and seller side, throughout the M&A process for the successful completion of transactions.
Underwriting
Investment bankers also function as underwriters to corporate entities to cover financial risks during a capital transaction in exchange for a fee, termed as underwriting commission. If, during a public issue, a company is unable to reach a minimum subscription, the investment banker, acting as the underwriter, purchases shares to make up for the deficit between the securities subscribed by the investors and the stipulated minimum subscription.
Asset management
Investment banking entities, on behalf of clients, acquire, manage, and dispose of assets that have the potential to grow in value, with a view to increasing the total wealth of the clients.
Equity research
This service vertical focuses on conducting research and analysis of equity securities and assisting clients in their decision-making on their investments and trading transactions.
Sales & trading
Investment bankers help identify and match buyers and sellers of securities in a secondary market for a fee or commission. They also assist in price negotiations between the parties and act as intermediaries in the completion of all procedural documentation relating to the transaction.
Trusteeship services
Trusteeship services include intergenerational distribution of wealth and assets of a deceased person (Executor Trusteeship), safeguarding security and protecting the interests of holders of both public and private placement (Debenture Trusteeship), and safeguarding the interests of the creditors in obtaining the custody of loan documentation.
Investment banks can be separate financial institutions or a part of a larger bank or financial institution. Companies hire investment bankers either as retainers for recurring financial advisory services or on a one-time basis for ad-hoc requirements.
Investment banking agreement
An investment banking engagement agreement is a contract wherein the investment banker provides professional services to a client in exchange for remuneration or fee. It is a written document executed between an investment banker and the client, outlining the parties to the contract, particulars of the services, term or duration, compensation, rights, duties, obligations, and liabilities of the parties, indemnification, termination, and other miscellaneous provisions.
Negotiation of investment banking agreements
Negotiation refers to the process by which parties arrive at a common conclusion and mutual understanding through discussion and resolution of points of conflict, without the involvement of any third party. In the case of Werner v. Hendricks, “Negotiation” was defined as below:
“To negotiate is to transact business, to treat with another respecting a purchase and sale, to hold intercourse, to bargain or trade, to conduct communications or conferences. It is that which passes between parties or their agents in the course of or incident to the making of a contract; it is also conversation in arranging the terms of a contract.”
The terms of investment banking agreements/contracts can be customized according to the needs and requirements of the parties. The popular legal maxim “consilia omnia verbis prius experiri, quam armis sapientem decet”, meaning an intelligent man would try all his plans through words (meaning negotiations), before taking up arms, is relevant here. Therefore, prior to executing a contract, it is essential that the parties discuss, negotiate and understand the terms of the agreement.
Considerations for successful negotiation of investment banking contracts
Contract negotiations can be frustrating, challenges, cumbersome, and time-consuming. Investment banking agreements are no exception, since this banking service vertical, by its very nature, is complex. However, with the right tools, skills, and techniques, and with clearly established objectives and goals, negotiations can be very fruitful and eventually result in a win-win for all parties. Some important points to consider while negotiating an investment banking agreement are:
Commence discussions with a draft
Discussions are better when parties bring to the table their draft version of a contract. Draft contracts usually signify the initial intentions of both sides and enable a quick assessment of what the expectations of the parties are.
The general terms to be included can be discussed beforehand and simple, standardised, and unambiguous language can be used to enable ease of understanding. If at the draft stage itself the negotiations become complicated, it is better to go back to the drawing board and start with a fresh draft.
Break the contract into smaller parts
Even the simplest of investment banking contracts can run into tens of pages, with a whole multitude of clauses. It can be quite overwhelming for parties to agree upon such huge swathes of a contract in a single go. Hence, it is a good practice to break down the larger contract into smaller, more manageable contracts. Thus, parties can negotiate smaller pieces more effectively and avoid the “all-or-nothing” approach.
Keep the initial terms simplistic
Investment banking contracts contain a lot of technical and nuanced language. While such terms are necessary, they tend to make an already complicated negotiation process even more challenging. Hence, commencing initial discussions with simple terms, such as the duration of the agreement, parties to the contract, etc., and gradually moving to the technical and complex terms can help parties feel more comfortable with discussions.
Collaboration is key
It is important for both parties to understand that it is important to work together in a spirit of collaboration rather than being competitive and aggressive. Collaborative behavior is an inherent necessity for business success. Some of the important principles for effective collaboration are:
Honest inclusion, meaning there must be honesty and trust between the parties.
Considered communication, meaning communication should be simple, consistent, complete, realistic, and free from assumptions and conjectures.
Action from the first day, meaning parties should spring into action from the first day itself, and keep the momentum constant.
Simplifying complexity, meaning that parties should keep negotiations simple, and reduce ambiguity and complexity wherever an opportunity presents itself.
Establish and prioritize objectives
Having a keen understanding of, and prioritizing the objectives and essential needs help in identifying which aspects of the investment banking agreement are important and which can be modified to accommodate the counterparty’s objectives and requirements. Once the essentials are met, the other points can also be arranged in the order of importance, with an evaluation of the risks and rewards of not being able to meet them.
Understand the counterparty’s motives
Clients look for investment bankers providing the best and widest range of services at a reasonable cost. Investment bankers focus on client satisfaction. By understanding the counterparties’ objectives, the party can be in a better negotiation position by fulfilling its requirements as well as accommodating the counterparty’s needs and interests.
Research well
To have a complete understanding of investment banking agreements, it is essential for the parties to come well-prepared with proper research and analysis of all relevant information. Data-based research on matters such as scenario analysis, trend analysis, decision-making models, flow charts, and pie charts are some of the important tools that parties can use for carrying on research activities.
Professional judgment should not be clouded by emotions
Whenever a contract negotiation takes place, there are bound to be points of disagreement or conflict, leading to heated discussions. Such situations should be handled in a sound and professional manner, without letting human emotions come in the way. Investment banking is business, and thus, discussions should be made treating it as such.
Positive approach
Positivity plays a huge role in the successful conclusion of an investment banking agreement. Identify points that can be agreed upon quickly. Acknowledge the efforts of the counterparty in the contract drafting and negotiation process. The ultimate objective should be to arrive at a common conclusion that serves the interests of all involved parties.
No hurrying
It’s a great idea to take sufficient time, do proper research, and have sufficient deliberations before finally signing the contract. However, unusual delays are not appreciated, as the other party would also be inconvenienced due to such delays. Taking sufficient time before, during, and after the negotiations would enable parties to evaluate the effects of the contract on its interests.
Do not make quick major concessions
Although it is a good idea to make smaller compromises in the initial stage itself, making a major concession too early in the negotiation process would send a signal to the counterparty to increase their expectations, and give them an edge early on in the negotiating process.
No blanket acceptance
Investment banking engagement contracts are highly customized and complex documents. Go over each individual term of the contract and agree upon them separately. This would enable the parties to have a clear understanding of the contract terms, identify areas requiring further deliberations and changes, and prevent misinterpretation and possible litigations. Blanket acceptances should not be given.
Relevance
Discuss only those matters that are relevant to the negotiation process. In some cases, it is better to remain silent than to speak, as the more information the counterparty obtains about one party, the greater his bargaining power. It also saves a lot of time, effort, and energy for all parties.
Professional skepticism
Not all information provided by the counterparty needs to be correct, complete, and reliable. There are huge possibilities of differences between expectation and actuality, in terms of the services offered, the promises made, the expertise offered, or the application of contract terms. Hence, it is always good to view negotiations and the other parties with a reasonable level of skepticism and critique. Doing independent due diligence prior to contract finalization would go a long way in protecting the parties’ interests.
Conclusion
Investment banking agreement negotiations, if carried out in a scientific, systematic, and holistic approach, can be very fruitful. The above tips and tricks can serve as great tools for successful negotiations and thereby enable both parties to protect their interests, achieve their goals, collaborate effectively, and maintain a long-term business relationship.
References
1. https://www.karrass.com/10-contract-negotiation-strategies
2. https://www.legalbites.in/negotiation-meaning-scope-adv-dis/#_ftn1
3. https://www.investopedia.com/terms/m/mergersandacquisitions.asp
4. https://corporatefinanceinstitute.com/resources/careers/jobs/investment-banking-overview/
5. https://m.economictimes.com/definition/investment-banking/amp
6. https://ironcladapp.com/journal/contract-management/contract-negotiation/
7. https://www.lawinsider.com/contracts/2e9uJh5a5PR
8. https://www.centralbankofindia.co.in/en/node/1833
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