EdgePoint Capital Hldgs, LLC v. Apothecare Pharmacy, LLC
6 F.4th 50
| 1st Cir. | 2021Background
- EPCH (EdgePoint Capital Holdings, LLC) is an unregistered advisory arm; EPCA is EdgePoint's registered broker-dealer affiliate. EdgePoint sometimes assigned engagements from EPCH to EPCA after work had begun.
- Apothecare entered a Sell‑Side Agreement in Sept. 2016 naming EdgePoint (signed by EPCH) to market and sell the company; the agreement provided a $350,000+ success fee and an 18‑month "tail" for transactions with "Transactional Partners."
- EdgePoint prepared a Confidential Information Memorandum that described EPCA (the registered arm) as the company’s advisor, and EPCH contacted several potential buyers (including Clearview) without disclosing Apothecare’s identity.
- Apothecare terminated the agreement in Aug. 2017; later Clearview and Starboard co‑sponsored a January–July 2018 acquisition of Apothecare.
- EPCH sued for breach seeking the Success Fee and indemnified attorneys’ fees; district court granted summary judgment to Apothecare, rejecting EPCH’s claims; First Circuit affirmed based on federal securities law grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Sell‑Side Agreement is voidable under Exchange Act §29(b) because EPCH (unregistered) induced a securities transaction | Contract enforceable; sale might be an asset sale and EPCH could assign contract to registered EPCA, so no securities‑law violation | EPCH solicited purchasers for a transaction that expressly contemplated equity (securities) sales; inducement occurred while EPCH was unregistered | Held: Agreement voidable under §29(b); EPCH's performance involved attempting to induce a securities transaction, so contract unenforceable |
| Whether Clearview and Starboard were "Transactional Partners" triggering the tail Success Fee | EPCH identified/contacted Clearview and Starboard (so fee due) | Listing among many potential buyers or passing mentions insufficient to qualify as identified/contacted Transactional Partners | District court held EPCH did not satisfy tail provision; First Circuit affirmed outcome on securities‑law grounds (so EPCH cannot recover) |
| Whether EPCH may recover attorneys’ fees under the contract indemnity provision | EPCH seeks indemnified litigation costs if it prevails | Apothecare argues EPCH cannot recover self‑inflicted costs and, here, contract is voidable so indemnity fails | Held: EPCH not entitled to fees because contract is voidable under §29(b); district court also found indemnity did not apply to self‑inflicted affirmative claims |
| Whether a possible assignment to registered EPCA or the possibility of an asset sale provides a safe harbor from registration requirements | Assignment/possibility of asset sale means no violation; registration not required during preliminary outreach | Registration requirement applies at inducement stage; assigning later does not cure unregistered solicitation of securities | Held: Rejected safe‑harbor argument; registration required when soliciting potential purchasers because inducement occurred while unregistered |
Key Cases Cited
- Mills v. Electric Auto‑Lite Co., 396 U.S. 375 (1970) (§29(b) makes offending contracts voidable at the innocent party's option)
- Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006) (test for when a contract "involves" a securities violation; violation must be directly related to contract performance)
- Reg'l Props., Inc. v. Fin. & Real Est. Consulting Co., 678 F.2d 552 (5th Cir. 1982) (§29(b) voids contracts illegal when made or in fact performed; need not be illegal on face)
- SEC v. Morrone, 997 F.3d 52 (1st Cir. 2021) (assisting issuer to identify potential purchasers can constitute "effecting" transactions)
- Affco Invs. 2001, LLC v. Proskauer Rose, LLP, 625 F.3d 185 (5th Cir. 2010) (LLC ownership interests can be securities under federal law)
- Eastside Church of Christ v. Nat'l Plan, Inc., 391 F.2d 357 (5th Cir. 1968) (unregistered broker liability and protections for issuers)
- Roth v. SEC, 22 F.3d 1108 (D.C. Cir. 1994) (importance of broker‑dealer registration and attendant regulatory duties)