the aspects relating to ‘real property’ or ‘leasehold’ carved
out and treated as exclusive of the underlying transaction on
which the M&A advisor is providing services.
There is additional practical guidance to be derived from
these principles which may indicate ways in which M&A advisors
can mitigate their regulatory and financial risk, as discussed
further below.
Two problematic aspects of the available decisions should
be noted. As there are relatively few reported Court decisions
(though there are no doubt many more instances where the matter
was settled out of Court), and the cases arise in the context of
actions for success fees and often turn on their particular facts,
it is difficult to make reliable generalizations to other contexts or
circumstances. Additionally, the M&A advisor is rarely awarded
any commissions in respect of the ‘parts’ of the transaction
relating to real property or leasehold, despite that such success
fees are often negotiated with the client in the engagement
agreement through the application of enterprise value or Lehman
Scale success based fee formulas.
Statutory Exemptions for Capital-Raisers and M&A Advisors
The Act sets out a number of exemptions from the requirement
to be registered as a REBBA broker in respect of certain trades
in real estate, certain of which exemptions are critically useful to
EMDs engaging in capital raising for real property issuers and for
EMDs providing M&A advisory services in relation to the sale of
business in any sector: (a) in minimizing the risk their services
could be deemed to require such registration; and (b) which give
registered EMDs a competitive advantage over their non-EMD-registered M&A advisor competitors.
These exemptions are available for use without the
requirement to make any filings or notifications.
1. For our purposes, perhaps the most relevant exemption in
Section 5(c) of the Act, which is available to a person registered
under the Securities Act (Ontario), if the trade in real estate
in question is made in the course of the person’s business in
connection with a trade in securities.
One hugely evident benefit of the EMD registration in Ontario
is the availability of this exemption to EMDs. An EMD can raise
funding for issuers in the real property sector or otherwise, and
can, to the extent its business model encompasses it, advise on
the sale of previously issued securities (whether shares, convertible
securities, limited partnership interests, trust units or otherwise) in
any sector in connection with the sale of a business and collect
their success fees in full (i.e. without the financial risk of having a
Court invalidate that portion of the success fee associated with the
real property or leasing portion of the transaction) without worry.
While it is not definitive whether the exemption under the
Act is broader (we think it most certainly is) than the common law
carve-out discussed above with respect to transactions effected
entirely by way of a purchase and sale of shares of a business, or
simply a codification thereof, it could be argued that it is reasonable
for an EMD to avail itself of the exemption in respect of certain
transactions structured primarily as a sale of assets but which
also involve a trade in securities or which are initially offered in the
Confidential Information Memorandum as either a sale or shares or
assets, though the transaction ultimately closes as a sale of assets,
on the two-pronged basis: (a) of taking a broad interpretation of
the Section 5(c) wording “in connection” with a trade in securities;
and (b) given that EMDs have voluntarily submitted to the
jurisdiction and oversight of the Securities Commissions and the
comprehensive regulatory regime of securities legislation, it makes
little theoretical sense that EMD’s would be permitted to advise on
sales of businesses structured as sales of securities (of any kind),
but not those structured as sales of assets, given the purpose and
end result of either structure are the same.
It is in this context that the somewhat paradoxical
approaches of Canadian regulators to a ‘trade in securities’ vs.
a ‘trade in real estate’ is apparent. The absurdity of ‘form over
substance’ in regulating a sale transaction is one area, at least,
that securities regulators tend to get right. For them, there is no
meaningful difference whether the sale of a business is effected
as a sale of shares or assets – a ‘trade in securities’ effected in
connection with the sale of a business is purely ‘incidental to
the acquisition transaction’. In this respect, it appears securities
regulators have recognized the importance of ‘substance over
form’ in determining the scope of regulation. It is curious that a
similarly pragmatic approach has not explicitly been developed in
the context of REBBA.
It may also be possible for an EMD to take the position that
the sale of a business as a going concern, which is structured
purely as a sale of assets, could in certain circumstances
constitute a trade in an ’investment contract’ within the meaning
of ’security’ under applicable securities laws, bringing such an
asset sale transaction squarely within the ambit of the Section
5(c) exemption.
2. There is also an exemption available to lawyers licensed in
Ontario if the trade in real estate is a legal service or is incidental
to and directly arises out of a legal service. In this regard, an
M&A advisor may, with a view to protecting the enforceability
of its success fee, wish to assign to its or its client’s legal
counsel the sole responsibility and oversight of any aspects of
a proposed transaction involving real property or leasehold (in
keeping with the ‘bifurcated transaction approach developed
by the Courts). Put accurately, but inelegantly, to the M&A
advisor: “Don’t touch real property!” – whether land, leases
or otherwise, and in the context of M&A transactions there is
virtually always some real property interest involved, whether
the physical plant, the land the plant sits on, or the lease.
The use of exemptions 1 or 2 in conjunction with the additional
practical measures suggested below is likely to further reduce an
M&A advisor’s risk exposure.
3. There is an exemption available “in respect of any mine or mining
property within the meaning of the Mining Act or… mining claim
or mineral lands under the Mining Act or any predecessor of
that Act”. While this exemption may offer comfort for M&A
advisors acting in the mining and mineral exploration context, it
would be advisable to consult with legal counsel regarding the
drafting and scope of this exemption prior to its use.
