Court Of Appeal Looks Past Unregistered Trading In Ordering Payment To Investment Finder

For many junior resource company executives, deciding whether to engage investment "finders" can be like considering whether to breathe air. Such companies tend to have early-stage projects that don't warrant debt financing and therefore need equity injections, but lack the profile to attract traditional investment dealers. Working with finders, however, requires navigating the "exempt" market - so named because it involves transactions that are exempt from the prospectus requirement and (in most cases) the registration requirement of securities law - which can be hazardous to the ill-informed. One company recently found itself in a catch-22 when a finder it had engaged demanded a fee: sanction a potential breach of securities law and stock exchange policies by paying it, or be liable for unjust enrichment and legal costs (the eventual result) by declining.

This resulting court case, Birch v. GWR Resources Inc.,1 is of interest to issuers and their advisers for several reasons, including the rare occasion it presented for British Columbia's highest court to consider the junior capital market. It also contains guidance for issuers and finders in respect of when a fee will be payable. Above all, it highlights that engaging investment finders can attract legal and regulatory headaches, along with needed capital. Diligence and informed advice are critical to managing risks in this area, and to avoiding noxious side effects of an exempt financing.

Facts and background

Ron Birch, the finder in this case, had been involved in the securities industry since the 1980s, and was registered as an investment adviser for several years before apparently giving up his registration in the 1990s. In "about 2009 or 2010",2 he was approached to locate investors for GWR Resources (GWR), a mineral exploration company. Birch was not an employee of GWR at the time, and the arrangement was informal. The President of GWR told him to "find us some money and we'll look after you."3 There was no written agreement, but Birch took the statement to mean he would receive a finder's fee if he located investors. Not surprisingly, when meetings Birch had arranged resulted in a $1.8 million investment in GWR, he expected to get paid.

The TSX Venture Exchange (TSXV), on which GWR was listed, allows finder's fees to be paid to certain persons but generally not to employees.4

When the payment was raised by Birch, GWR purportedly considered paying him a finder's fee, but determined that there had been no agreement in that respect, and that in any event it was prohibited from making such a payment under the applicable regulatory framework.

The main problem it cited was that between the date of Birch's informal retainer and the date of the investment, Birch had become an employee of GWR and was, therefore, ineligible to receive any finder's fee or commission under TSXV policy. Moreover, the TSXV requires that before paying any compensation to a finder, an issuer must provide a copy of the finder's agreement. No such agreement existed in writing, so, GWR reasoned, it was doubly precluded from paying Birch as a finder. Further still, GWR argued that the verbal commitment was not sufficient to create a contract, and it cited expert evidence (uncontested by Birch) that finder's agreements are put in writing "in almost every instance."5

Finally, and most importantly, securities law prohibits payments to unregistered persons for brokering an investment, absent an exemption, as described under the heading Regulatory Backdrop below.

The chronology of events is worth emphasizing:

Birch was informally engaged as an outside finder, and arranged several meetings that did not bear fruit in the short term; He then became a part-time investor relations employee of GWR with, he claimed, a mandate to liaise with existing shareholders rather than to find new investors; During the course of Birch's employment, his efforts as a finder continued; The President of GWR, who had informally engaged Birch as a finder and who later hired him, was terminated; and 10 months after becoming an employee, Birch's continuing finding efforts resulted in a significant investment in GWR. Decision

The Court of Appeal's decision, which upheld the decision of the lower court (together, the Decisions), stated that although GWR had no contractual obligation to pay Birch a finder's fee, it still should have done so, for two reasons: (1) the TSXV may have...

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