The First Circuit affirmed that summary judgment properly was granted to Conn Kavanaugh’s client, a long-term care pharmacy business based in Massachusetts, after it had been sued by an investment banking firm in Ohio. The First Circuit’s decision is EdgePoint Capital Holdings, LLC v. Apothecare Pharmacy, LLC, No. 20-1810.
The First Circuit held that Section 29(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) voided the plaintiff’s ability to recover a success fee because EdgePoint Capital Holdings had failed to register as a securities broker-dealer with the Financial Industry Regulatory Authority (“FINRA”). EdgePoint maintained two separate affiliate companies: EdgePoint Capital Advisors, which was a registered broker-dealer, and EdgePoint Capital Holdings, which was not. The contract was with the unregistered entity. EdgePoint argued that its contract was nonetheless enforceable because the contemplated transaction could have been performed legally if it was structured as an asset sale, rather than a sale of equity. Further, EdgePoint argued that it could have assigned the contract to its registered arm in the event of an equity sale. The First Circuit rejected those arguments, and held that uncertainty regarding the ultimate deal structure (asset sale vs. equity sale) does not excuse the requirement to register at the outset of the engagement.
The First Circuit’s decision appears to be the first circuit-level decision holding that a mergers and acquisitions broker (“M&A Broker”)’s contract may be voided due to a failure to register as a broker-dealer. In a prior “no action” letter from 2014, the Securities and Exchange Commission had stated that it would not recommend civil enforcement actions against unregistered M&A brokers handling certain types of “bespoke” private transactions (See https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf). The First Circuit’s EdgePoint Capital Holdings decision nonetheless underscores that the courts may interpret the securities laws differently than the SEC, and that a M&A broker does indeed risk forfeiting a success fee if it chooses not to register. The First Circuit’s recent decision stresses the importance of the registration requirement in protecting investors and promoting proper supervision in the securities industry.
About Conn Kavanaugh
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