• 2023.06.22
  • M&A

Advisor Agreements in M&A

What is an Advisor in M&A?

What is an M&A Advisor?

In M&A, an advisor plays an important role by finding a counterparty to the transaction and advising on various operations to complete the transaction, etc. A person who provides such services (services) in M&A is called an advisor or financial advisor. Advisors or financial advisors can be corporate entities or individuals such as lawyers, accountants, or people with M&A experience. In the case of individual advisors, they have the advantage of providing services for relatively low fees. On the other hand, M&A is an important transaction that can affect the fate of a company, and a good or bad advisor can make a big difference. In order to seek comprehensive advice from an advisor from a professional standpoint regarding the search for a counterparty, negotiation of the transaction price, and assistance in closing, it is preferable to work with a specialized advisory firm that specializes in M&A transactions.

Types of M&A Advisors

Specialized M&A advisors include independent firms such as Japan M&A Center, M&A Capital, and Strike, as well as foreign investment banks (Morgan Stanley, Goldman Sachs, etc.), subsidiaries of major city banks, and major accounting firms such as Deloitte and EY, who may serve as advisors. In recent years, small M&A (small-scale M&A) is becoming more and more common. Recently, in small M&A (mergers and acquisitions on a small scale), some companies have emerged that provide M&A matching platforms and act as intermediaries via the Internet. These companies include M&A Plus, Succeed, Batonz, and Tranbi. The same matching sites range from those targeting companies to those targeting individual M&As. You should consider the size of your transaction and the nature of the transaction to determine what type of advisor to appoint.

Role of M&A Advisors

M&A advisors search for potential buyers, mediate contract negotiations, propose schemes, assist in closings, and introduce lawyers, accountants, and other professionals. In this way, M&A advisors play an important role in all stages of the M&A transaction process, but the most important part of the process is divided into finding a potential partner (finding) and executing a successful closing by putting the agreement in writing (execution). The contractual relationship between the client and the advisor is the contractual relationship between the client and the advisor. The contractual relationship between the client and the advisor is an outsourcing contract. Therefore, the Advisor is entitled to receive advisory fees for performing the services stipulated in the contract. Therefore, it is important that the advisor’s duties be clearly described in the advisory agreement.

(Example of Contract Clauses)
The services to be provided by the Advisor under this Agreement shall be as follows

Introduction and mediation of target companies to the First Party (Client)
Arranging, advising and assisting in negotiations related to this case.
Advice and assistance with various procedures envisaged up to the closing of the case.
Services other than the above as may be agreed upon between the First Party and the Second Party
(Advisor) from time to time.

How to Select an M&A Advisor

The client is free to decide whether or not to retain an advisor for the M&A transaction and, if so, which firm to retain as an advisor. In most cases, advisors are recommended by an acquaintance or a lawyer who is an advisor to the client. However, in a large-scale M&A transaction, the outcome may differ greatly depending on the advisor’s ability. Therefore, in order to select the best advisors, a bidding process is sometimes used to select advisors. In the bidding method, several advisory firms are asked to submit proposals in writing by a certain date, describing their strengths, how they search for eligible candidates, advisor fees, and so on. The client selects the advisor it considers most favorable for the project from among the advisory firms that have submitted proposals, based on a comparison of their services, expertise, experience, and fees. Since the advisory firm prepares and submits the proposal at its own risk with the expectation that a contract will be concluded, the preparation and submission of the proposal is generally free of charge.

Obligations of M&A Advisors

M&A Advisor’s Duty of Care

Although the contract between a client and an M&A advisor is an outsourcing contract, the nature of the contract is a typical contract under the Civil Code, such as a power of attorney or a contract of engagement, and the M&A advisor is to perform the services stipulated in the advisor agreement in accordance with the advisor agreement. Regardless of whether or not the M&A Advisor performs the services set forth in the Advisor Agreement, he/she is subject to the general provisions of the Civil Code in performing his/her duties. Accordingly, an M&A advisor owes a duty of care to the client in the course of performing advisory services. The duty of care means the duty to exercise due care as a good manager in the course of performing the requested services. The level of care is determined based on whether or not the advisor has exercised the duty of care that an ordinary person in the industry would naturally exercise, depending on the nature of the industry in question. Therefore, the level of duty of care required of M&A advisors is extremely high. Therefore, if, in the course of performing their duties, they breach their duty of care and cause damage to the client, they will be liable to the client for damages.

M&A Advisor’s Duty of Loyalty

As a fiduciary of M&A services, an M&A advisor has a duty of loyalty to the client. The duty of loyalty means that the client’s interests should come first, and the advisor must not seek to benefit himself or a third party. For example, suppose the client asks you to search for a manufacturing company that can be purchased for 100 million yen, and after searching, you find a very good company, so you decide that it is better to buy the company yourself rather than introduce it to the client, and you or your relative’s company buys it. In this case, even though the advisor was originally acting for the client, the advisor violated his/her duty of loyalty because he/she deprived (took advantage of) the client’s commercial opportunity (business opportunity) for his/her own or a third party’s benefit. If the M&A advisor breached his/her duty of loyalty, he/she will be liable for damages to the client. In the U.S. contract, it is sometimes said that the fiduciary owes a fiduciary duty to the client. Fiduciary duty is a combination of the duty of care and the duty of loyalty.

Conflicts Issues

When selling a company, the seller, on his/her part, wants to sell it for the highest possible price. On the other hand, the buyer, on the other hand, wants to purchase the company at the lowest possible price. Thus, if the company sells for a high price, the seller will gain, but the buyer will lose. Conversely, if the buyer is able to purchase the property at a lower price, the buyer will gain, but the seller will lose. Thus, the seller and buyer stand in a relationship of mutual conflict of interest. This relationship is called a conflict. If the advisor represents both the seller and the buyer, the buyer will lose if the advisor represents the seller’s interests, and the seller will lose if the advisor represents the buyer’s interests. Since the advisor plays an important role in determining the price, an extremely high level of neutrality is required. Therefore, it is fair that separate advisors are appointed for the seller and the buyer, and the price is determined through negotiations between the advisors. In general, however, advisors are permitted to represent both the seller and the buyer on the assumption that they will perform their duties in a fair and neutral manner. Such a contract is called a “two-sided contract. Under a two-sided contract, the advisor may receive compensation from both the seller and the buyer. The advisor will often insist on representing both the seller and the buyer in the hope of receiving compensation from both parties, but the client is free to decide whether both should be represented by the same advisor or by separate advisors, it does not mean that you have to follow the advisor’s suggestion. It is important for the client to fully consider the advantages and disadvantages of using the same advisor for both the seller and the buyer before making a decision.

Advisor Agreements in M&A

M&A Advisor Agreements

An advisor agreement is executed with the M&A advisor. The advisor agreement may also be referred to as an advisory agreement, advisory services agreement, or M&A advisor agreement. The advisor agreement specifies the services to be performed by the advisor, under what conditions, and for what compensation. By entering into an advisor agreement, the advisor assumes a duty of care and fidelity to the client and is obligated to perform the services specified in the agreement. The client is also obligated to pay the advisor the compensation set forth in the agreement if the advisor fulfills the conditions set forth in the agreement.

Exclusive and Non-Exclusive Agreements

In an advisor agreement, there are two types of agreements: an exclusive agreement, which commits the advisor to work exclusively with that advisor for a certain period of time and not to outsource work to other advisors in parallel, and a non-exclusive agreement, which allows the advisor to outsource work to multiple advisors in parallel. When entering into an advisor agreement, it is necessary to confirm whether it is an exclusive or non-exclusive agreement. In the case of an exclusivity agreement, the advisor does not have to worry about other firms taking his/her projects, so he/she can expect a good return on the money and time he/she invests in the search for a partner and will take the project seriously. On the other hand, the client has the disadvantage of not being able to switch to another case or change advisors without terminating the contract, even if there is a better case or advisor available. On the other hand, in the case of a non-exclusive contract, even if the advisor has found a business partner, if another advisor introduces a deal with better conditions, the deal introduced by the other firm may be closed and the deal he introduced may be wasted. Therefore, in the case of a non-exclusive contract, the advisor may not be enthusiastic about the project. On the other hand, from the client’s side, there is the advantage that even if the client is working with an advisor, the client can switch to another advisor if there is a better deal available. Thus, there are advantages and disadvantages to both exclusive and non-exclusive contracts, and the client should carefully judge what is best for his or her own interests, rather than doing as the advisor tells him or her.
(Example of a contract clause)
The First Party (the Client) shall, for the period from the date of execution of this Agreement to ●●●, 2022 (hereinafter referred to as the “Exclusive Performance Period”), perform the following services with respect to the Work in question (i) The First Party (the Client) shall exclusively entrust the work to the Second Party (the M&A Advisor) for the period from the date of execution of this Agreement to the date hereof (the “Exclusive Performance Period”), and shall not consult or negotiate with any party other than the Second Party.

Prohibition of Direct Negotiation

M&A advisors perform two main types of work: searching for a counterparty to a deal and advising on various tasks to complete the deal. Among these, the search for a counterparty is extremely important, and is the area in which the client has the highest expectations of the M&A advisor. If the client finds a counterparty to the transaction based on the advisory agreement, it may be unclear whether the transaction can be said to be an M&A transaction introduced by the M&A advisor or not. In addition, if the client skips the M&A advisor and independently negotiates a contract with the candidate introduced by the M&A advisor, the contract may not be concluded due to inadequate contract negotiations, or the contract may be completely different from what was originally contemplated. In such cases, the M&A advisor may not receive compensation and may suffer unexpected losses. For example, if the M&A advisor had proposed a 10 billion yen acquisition of a company, and both the seller and the buyer had promised to pay the M&A advisor a 3% contingency fee, in order to avoid paying the contingency fee to the M&A advisor, the seller and the buyer may have to agree to a business arrangement where the advisor After a certain amount of time has passed and the seller and buyer are no longer obligated to pay the advisor a contingency fee, they may agree to integrate their businesses. If a clause prohibiting direct negotiations is included in the agreement, the client may proceed with discussions with the potential counterparty only through the M&A advisor. If the client violates this clause and engages in direct negotiations with the other party, the client will be liable for damages to the advisor company as a breach of the advisor agreement.
(Example of a contractual clause)
A (the client) shall not contact or negotiate with the target company or its shareholders introduced or mediated by B (the M&A advisor) with respect to this matter without prior consent of B (the M&A advisor).

Confidentiality Obligations

M&A transactions are highly confidential, and if information is leaked, the parties involved will suffer significant damage. In the case of a publicly listed company, a leak of M&A-related information could have a significant negative impact on the market price of the shares traded, and in some cases, the M&A itself may not be completed. For example, if information about an M&A with a blue-chip company is leaked and the stock price soars, the transaction may not be completed at the expected price. Since M&A advisors are in a position to obtain confidential information regarding M&A, they are required to tell their clients to keep confidential information strictly confidential and not to divulge it to others. The M&A advisor is in a position to obtain confidential information regarding M&A, and is prohibited to keep confidential information strictly confidential, not to leak it to any other party, and not to use the information obtained for any purpose other than the requested work.
(Example of contract terms)
The First Party and Second Party shall keep confidential the information disclosed by the other party with respect to the work in question, the fact of the negotiations in question and their contents, and shall not use the information for any purpose other than the work in question. In addition, neither the First Party nor Second Party shall disclose such information to any third party without the prior consent of the other party. However, this shall not apply to disclosure based on a request from a government agency in accordance with tax investigations or other laws and regulations. In the event of termination of the case or agreement between the First Party and Second Party to discontinue the execution of the case, the First Party and Second Party shall return or destroy the information obtained from the other party. In the event that the First Party and Second Party have entered into a separate agreement regarding the confidentiality of information, the provisions of such agreement shall take precedence over the provisions of this Agreement regarding confidentiality.

Contract Term

Since M&A advisory services are in the nature of a business consignment agreement and are concluded for a certain purpose, the term of the agreement is not unlimited, and the term of the agreement is usually specified in the advisory agreement. If there is no clear stipulation of the contract term, it may be unclear whether the previous M&A advisory agreement will be applied or not when an M&A transaction occurs in the future. Therefore, it is preferable for the client to clearly stipulate the term of the contract to be one year or so, and to stipulate that the contract will be renewed after the expiration of that term only upon clear agreement between the parties.
(Example of a contractual provision)
This contract shall terminate at the earlier of the time when the acquisition of the target company is completed or when the decision to discontinue the execution of the project is made by the first party (the client). However, if one year has elapsed from the date of execution of this Agreement, it shall terminate on that date unless renewed by mutual agreement of the LICENSEE and the SUPPLIER.

Indemnification Clause

Even if an M&A advisor recommends a potential counterparty and negotiations for a contract are initiated, it does not necessarily mean that the contract will be completed. Even if an M&A deal is concluded, there is a possibility that the financial condition of the counterparty to the transaction may differ significantly from what was initially expected, or that unexpected contingent liabilities may arise, resulting in unexpected losses. M&A transactions are thus fraught with significant risk, and the client must make its own decision as to whether or not to complete the transaction, while taking into account the advice of its M&A advisor. Therefore, in order to clarify that the advisor is not liable for any loss or damage incurred by the client due to the existence of contingent liabilities or obstacles to the transaction in the course of executing the M&A transaction, a clause regarding the advisor’s indemnification is often included.
(Example of a contractual clause)
A (the client) shall decide whether or not to implement the transaction based on its own judgment, and confirms that A (the client) shall make the final decision, bear the risk and take responsibility for the transaction, and that B (the M&A advisor) shall not guarantee the implementation of the transaction.


It is preferable to include a provision regarding jurisdiction in the M&A advisor agreement in order to clarify in which court disputes between the client and the M&A advisor will be resolved in the event of a dispute.
(Example of a contractual provision)
If any dispute arising out of or in connection with this Agreement cannot be settled through consultation between the parties, the Tokyo District Court shall have exclusive jurisdiction as the court of first instance.

Compensation of M&A Advisors

Compensation of M&A Advisors

There is no set rule as to how advisors must be compensated. Therefore, each advisor determines his or her own advisor compensation, taking into consideration the nature of the case and other factors. If the advisor’s fee is too high, the client should negotiate for a lower fee, or if the advisor’s fee cannot be agreed upon, the client should give up the transaction with the advisor and seek another advisor. In many cases, advisor fees are determined based on an initiation fee and a contingency fee. For example, the initial fee is set at 2 million yen and the contingency fee is set at 5% of the consideration for the transfer of shares. The retainer fee may be paid in installments, or the retainer fee may be paid in addition to monthly consulting fees based on the progress of the case. In this case, the client pays 2,000,000 yen as the starting fee, followed by monthly payments of 1,000,000 yen for the duration of the contract, during which the outsourcing agreement continues. The fixed monthly fee is sometimes referred to as a monthly fee. There are also cases where the monthly payment is not a fixed amount, but a time charge method in which the amount of remuneration is calculated based on the number of hours worked. In this case, the hourly rate is set for each staff member, for example, 30,000 yen per hour, and the monthly billing is calculated by multiplying the hours worked by the hourly rate. The amount of remuneration and the method of payment are determined by negotiation between the parties concerned, so the client should carefully examine whether the amount proposed by the advisor is satisfactory, and if not, should negotiate to lower the amount.

The Lehmann Method as Compensation for M&A Advisors

In many cases, contingency fees for M&A advisory services are determined by the Lehmann method. The Lehmann method is based on the transaction price of securities or assets, which determines the compatibility of contingency fees. In the case of the Lehmann method, a minimum fee is usually set. In most cases, the minimum fee is set at 20 or 30 million yen. The following is an example of the terms and conditions of a Lehmann method contract.
(Example of a contract clause)
If a definitive agreement is concluded between the client and the target company or shareholders of the target company, the client shall pay to the M&A advisor an amount calculated based on the following fee schedule as a contingency fee. However, if the amount calculated based on the following fee schedule is less than 30 million yen, the fee shall be 30 million yen.

Transaction value of securities, assets, etc. Rate
For the portion of 1 billion yen or less 5.0%
Over 1 billion yen and up to 2 billion yen 4.0%
Excess of 2 billion yen to 5 billion yen 3.0%
Over 5 billion yen to 10 billion yen 2.0%
Over 10 billion yen 1.0%

Fulfillment of Terms of Contingency Fees

Advisors are eligible to receive a contingency fee when an M&A agreement is concluded. In the real estate brokerage business, this is the same as a contingency fee being paid when a real estate sales contract is concluded. This situation is legally called the fulfillment of a condition of suspension. From the client’s point of view, it is sometimes thought that in order to avoid paying a high contingency fee, the client should just skip the advisor and negotiate a contract, or cancel the contract with the advisor just before the M&A contract is concluded. However, if the advisor files a lawsuit against the court in the future, terminating the advisory agreement without a reason may be considered as intentionally preventing the fulfillment of the standstill condition, and the compensation may be considered as the fulfillment of the standstill condition as a matter of good faith. Therefore, it is not possible to terminate the advisory agreement in a manner that violates the letter of faith and exempts the advisor from paying the contingent fee. It may also violate the rule of faith to avoid avoid payment of the contingency fee by concluding an M&A agreement with a potential counterparty introduced by the advisor after the term of the advisor agreement has expired. Therefore, it is often stipulated in the advisory agreement that if an M&A agreement is concluded with a candidate introduced by the advisor within one year (or three years) after the expiration of the advisory agreement, the advisory service is deemed to have been successful and a contingency fee will be paid.
(Examples of contract clauses)
In the event that the First Party (the Client) concludes the transaction in question in violation of Article ● (prohibition of direct negotiation), the transaction shall be deemed to have been concluded and the First Party (the Client) shall pay to the Second Party (the M&A Advisor) the contingency fee stipulated in the preceding paragraph for the transaction in question. If, within one year after the expiration of the effective term of this Agreement, the First Party consummates the Transaction between the Subject Company or its shareholders introduced or mediated by the Second Party, the Transaction shall be deemed completed and the First Party shall pay to the Second Party the contingency fee stipulated in this Agreement with respect to such Transaction.