Compensation Clauses for Overseas Financial Consultants

Due to the complexity of cross-border investment and mergers and acquisitions, an increasing number of Chinese companies are seeking the assistance of financial advisors in their overseas investment and M&A processes.

Understanding the commercial and legal issues related to financial advisor agreements is critical for successfully completing transactions, whether for Chinese companies seeking overseas financial consultants services or intermediaries providing financial advisory services. Based on our experience representing companies and financial advisors, this article shares our insights on the compensation clauses in financial advisor agreements.

Meaning of compensation clauses in overseas financial comsultants agreements

For companies, the most confusing part of financial advisor agreements is likely to be the compensation clauses. This section is often several pages long and serves as an attachment to the financial advisor agreement.

The compensation clauses primarily require the company to compensate the overseas financial comsultants, its directors, employees, and affiliates for losses incurred due to the provision of advisory services.

This section may also include an exculpatory clause, which prohibits the company from suing the financial advisor, its directors, employees, or affiliates based on the advisory services provided.

The specific language of these clauses may vary, but the main requirements are that the company is responsible for the financial advisor's service activities. In the current market practice, virtually every financial advisor agreement includes such compensation clauses.

Key points in negotiating compensation clauses of overseas financial comsultants

The key negotiation points for compensation clauses typically include :

• The exceptions to the company's liability for compensation, such as when the company is not responsible under compensation clauses due to the financial advisor's gross negligence or intentional behavior, and is not subject to the restrictions of the exculpatory clause;

• Whether a maximum total compensation amount or a maximum single compensation amount and a minimum compensation amount should be set;

• Whether the company can participate in or lead legal proceedings related to third-party claims against the overseas financial comsultants;

• Whether limitations on the time for assuming liability for compensation should be set.

In short, the financial advisor agreement is one of the important legal documents signed in the early stages of equity investments and M&A transactions, and it involves complex compliance issues and highly specialized content.

Companies and financial advisors need to carefully analyze the specific circumstances of the transaction with their respective lawyers, assess the qualifications required for the financial advisor (if they are not registered with the SEC as brokers), and thoroughly review and negotiate the key provisions of the financial advisor agreement.

On this basis, both parties can reach a financial advisor agreement that is both compliant and accurately reflects their intentions and clearly defines their rights and obligations, laying a strong foundation for the successful completion of the transaction.