Recently, the England and Wales High Court (Commercial Court) had the occasion in Cantor Fitzgerald & Co. v. Yes Bank Limited [2023] EWHC 745 (Comm) (31 March 2023) to consider contractual language in capital market transactions. While the contract itself was governed by English law, the ruling has implications on contractual interpretation more generally, in addition to its relevance to India, as the subject matter of the contract related to the follow-on public offering (FPO) of Yes Bank Limited.
The dispute arose out of an engagement letter under which Cantor Fitzgerald undertook to advise Yes Bank in finding suitable investors to enable the bank to raise further capital. After the parties executed the letter, the original transactions by which the capital raising was to occur were shelved. Subsequently, under a new management, Yes Bank proceeded with the FPO where, among others, three investors originally identified by Cantor also subscribed to shares worth total of INR 27.93 billion. Cantor was not part of the investment banking team for the FPO, nor did it possess a SEBI-registered merchant banking licence to be able to do so. At stake, therefore, was the legal question of whether Cantor was entitled to fees under the engagement letter for the capital contribution made by these investors in the FPO.
The High Court, speaking through Mr. Justice Bright, was primarily concerned with the specific language of the engagement letter, which read:
“[Cantor] have been advised by [Yes Bank] that it contemplates one or more financing(s) through the private placement, offering or other sale of equity instruments in any form, including, without limitation, preferred or common equity, or instruments convertible into preferred or common equity or other related forms of interests or capital of [Yes Bank] in one or a series of transactions (a “Financing”).”
In particular, the specific question was “whether the adjective “private” qualifies only the word immediately following, “placement”, or whether it also qualifies the terms that come next, i.e., “offering” and “other sale of equity instruments …”. If the qualifier “private” extends to all the ensuing terms, then a public offering such as an FPO is not covered with in the scope of Cantor’s engagement, thereby disentitling it to fees. On the other hand, if the expression “private” were to extend only to the term “placements” and not to “offering” and “other sale of equity instruments”, then Cantor is very well eligible to the fees.
Although the term “private placement” is a term of art and legislatively incorporated under Indian law in the Companies Act, 2013 and various regulations issued by the Securities and Exchange Board of India (SEBI), the Court decided to eschew the specifics and rather ascribe a broader generic interpretation to the relevant clause in the engagement letter. Mr. Justice Bright observed (at paragraphs 86 to 89):
“Where an adjective or determiner is followed by a series of nouns in a list, the conventional understanding is that it modifies all the nouns in that list (unless a discordant adjective or determiner breaks the pattern).
This is not an abstruse rule or pattern known only to specialist grammarians. It is familiar to people in general; or, as it may more appropriately be put in order to illustrate the point: to every Tom, Dick and Harry.
It is certainly widely observed and followed by lawyers. Both in practice and as a tribunal, I have frequently come across the formula “… negligent act or omission” and sometimes “negligent act, error or omission”. I do not think it has ever occurred to me or to anyone else involved that the word “negligent” might arguably be said only to modify “act”.
Above all, this way of using and understanding words was undoubtedly familiar to the parties to the Engagement Letter. …
Accordingly, as a matter of the ordinary meaning of the words, “private” in the first sentence of clause 1 modifies “offering” and “other sale of equity instruments”. It follows that the defined term “Financing” only relates to private placements, private offerings and private sales. It does not extend to an FPO. This is necessarily a provisional view, because it is also necessary to consider the first sentence of clause 1 in the context of the contract as a whole and against the background of the overall context, including the factual matrix and broader considerations of business common sense. I do this under the series of headings that follow.”
In assessing the context, the Court examined the various types of securities offerings permissible under Indian law. While some types of offerings, such as preferential offerings and qualified institutional placements (QIPs) are private placements, other types such as public offerings (whether initial or follow-on) and rights offerings are not within the scope of private placements. Hence, judging by the context, the Court found that “the surrounding circumstances make it unlikely that the parties intended Cantor to be involved in an FPO. They are more consistent with the word “private” modifying not only “placement” but also “offering” and “other sale”.
This decision raises concerns regarding possible ambiguities in contract drafting that make it more difficult for courts to discern the intention of the parties. Ultimately, much depends upon both the grammatical as well as contractual construction of the ambiguous clauses, which might have the effect of creating uncertainty for the parties. While the broad outcome of the decision is understandable, it has not been devoid of criticism.
From a pure drafting perspective, one way to address the issue and enhance specificity would be to delineate the coverage of the engagement letter more optimally by splitting it into separate transaction forms. Admittedly, this exercise is with the benefit of 20/20 hindsight. In the first instance (Illustration 1), if the clause were to read “(i) private placement, (ii) offering or (ii) other sale of equity instruments in any form”, Cantor’s fee would clearly have become payable. On the other hand (Illustration 2), if the clause read “(i) private placement, (ii) private offering or (iii) other private sale of equity instruments in any form”, the outcome would have been the same as in this case. There is some amount of awkwardness in the manner of drafting in Illustration 2, which leaves the question of whether the parties to the Cantor/Yes Bank dispute indeed intended the outcome generated in Illustration 1.
Hi Umakanth – for someone who has drafted several investment banking engagement letters, this judgement is intriguing, particularly as “private placement” is a term of art, and it is unlikely the word “private” modifies “offering” or “other sale of equity instruments.” However, shouldn’t the court have considered whether Cantor Fitzgerald (CF) had solicited public investors in the FPO to determine the parties’ intent or explore whether the investors that CF contacted for the private offering participated in the public offering? If none of the investors that CF solicited participated in the public offering, it is possible that this is a good example of a case where an incorrect interpretation of the engagement letter has led to the right outcome. If Lord Denning were presiding, he might have emphasized the parties’ conduct rather than strict adherence to grammatical rules of contract drafting and precedent.
Hi Salil, I agree that a plain interpretation of the term “private placement” could have very well resulted in an outcome that is the opposite of what the court arrived at. On the facts though, Cantor was involved in capital raising at an early stage where several options were on the cards, although no deal was actually carried out. Subsequently, significant events occurred in Yes Bank, including RBI’s intervention and a change in the management of the company. It is only thereafter that Yes Bank went ahead with an FPO, in which it did not involve Cantor. The question, therefore, was whether investment in the FPO by three investors who were previously (before the significant events in Yes Bank) canvassed by Cantor would give rise to obligations on Yes Bank to pay Cantor fees even though Cantor was not admittedly involved in the FPO.