The purchase, sale, or merger of a business involves numerous complex issues across various disciplines. Consequently, a variety of advisors, each with their own expertise, are often involved in acquisition processes, such as accountants, tax consultants, corporate finance advisors, and lawyers.
It’s not uncommon for an advisor from an accounting or tax advisory firm to play a prominent role in the transaction. This preference may arise for several reasons. Often, an existing long-standing relationship of trust with the client is a key factor. Another reason may be cost reduction, as engaging a separate advisor for each specialty can lead to higher acquisition expenses.
Regardless of the reason, this approach is entirely valid. However, there are instances where things can go wrong for the advisor.
Risks and Key Considerations for Intermediaries
Bert Schaareman and Bas van den Broek are experienced specialists in mergers, acquisitions, and valuations at Aeternus Corporate Finance (with 50 employees across offices in Eindhoven, Amsterdam, and Venlo). Bert is also a member of the Disciplinary Council of the Dutch Institute for Register Valuators (NiRV).
In addition to buy- and sell-side guidance for entrepreneurs, Bert and Bas provide valuation expertise in areas such as conflict valuations, economic damages, intellectual property valuation, employee and management participation plans, and second opinions on valuation matters. Their experience in mergers and acquisitions adds significant value to these processes.
Sophie Brouwers and Debbie Liem, both lawyers at VDB Advocaten, bring complementary expertise. Sophie specializes in mergers and acquisitions, while Debbie frequently represents accountants and (tax) advisors in professional liability and disciplinary cases.
Together, Bert, Bas, Sophie, and Debbie have combined their expertise to inform intermediaries—such as tax advisors and accountants—about liability risks and potential pitfalls in their professional roles during acquisitions. Drawing on their practical experiences, they will present a series of blogs addressing critical aspects of acquisition processes from various perspectives. Topics such as the duty of care and earn-outs will be discussed, but this first part focuses on engagement letters, as that is where everything begins.
Part I: Engagement Letters
Engagement Letters and Liability
In this initial blog, here’s an important tip: "Clearly and unequivocally define the scope of the engagement." While this may seem obvious, it is often poorly executed in practice. Even in cases involving significant financial stakes, advisors sometimes fail to document agreements with clients due to longstanding relationships. In some cases, there may be an old engagement letter, but it does not cover the specific engagement for which advice is now being given.
A second tip: "Also document what you will not do or advise on." Issues often arise when advice strays outside the scope of the engagement or the advisor’s area of expertise. While an advisor may have basic knowledge of multiple topics, it’s essential to recognize the limits of one’s expertise and communicate this clearly to the client, preferably in the engagement letter.
Risk
Without a clear engagement letter, clients may not understand what the advisor is specifically responsible for.
Case Study 1: Tax Advisor X is involved in a complex restructuring project with cross-border aspects. Several experts are engaged, including a German tax advisor. Tax Advisor X did not confirm his specific role in writing. As a result, the client assumed that X was ultimately responsible. When no one identified the German transfer tax issue, the court deemed this a professional error on X’s part.
This highlights the importance of drafting an engagement letter to clarify who is responsible for what and to avoid being held accountable for others’ mistakes.
Defining the Engagement
In addition to involving other specialists, it is often debated whether an advisor should have proactively raised certain issues. This makes it critical to carefully define the engagement’s scope.
Case Study 2: A 15% shareholder, A, wants to sell their shares. Under the statutory agreements, the parties appoint an independent expert whose valuation is binding, and a purchase obligation applies. In their engagement letter, the expert specifies that they will determine the "value of the shares" and prepare a valuation report indicating the "fair market value" of the shares, applying a 20% minority discount to the calculated economic value. However, the statutes specify that only the "economic value of the shares" must be determined.
Shareholder A files a disciplinary complaint against the expert, arguing that no minority discount should have been applied. A is upheld in this claim, and in a subsequent civil lawsuit, they seek damages from the independent expert.
This example illustrates that, from a liability perspective, it is crucial to specify as clearly as possible which valuation concept is being applied in a valuation assignment.
Case Study 3: Advisor A agrees during an initial consultation to assess only a specific subtopic. However, A seeks to secure more work and therefore drafts a broadly worded engagement letter, stating that they will also provide additional tax advisory services.
Later, a dispute arises. The client accuses A of failing to spontaneously point out a tax-saving facility. A defends themselves by claiming that they were only tasked with assessing the specific subtopic. However, the broadly worded engagement letter undermines A’s defense, as it implies that A had committed to providing broader services than just addressing the subtopic.
This example shows that, from a liability perspective, it is better to define the scope of the assignment as specifically as possible.
Tip
In short, think carefully before you start. A clearly defined engagement letter provides a solid foundation for any advisory process.
Questions?
Drafting a clear and detailed engagement letter is essential to managing both the client’s expectations and the advisor’s responsibilities. As these case studies demonstrate, ambiguities in the assignment description can lead to significant legal and financial risks. By making clear agreements about what is and is not included in the advisory scope, unnecessary conflicts can be avoided.
If you have questions about this topic or need tailored advice, do not hesitate to contact the specialists at Aeternus Corporate Finance and VDB Advocaten. They are ready to support you with your acquisition processes and other complex valuation and legal matters.