The sale of shares: Do you have the right?

Licence holders are sometimes called upon to act as intermediaries for the sale or purchase of an enterprise. In this type of transaction, various scenarios are taken into account, including the sale of assets or the sale of shares, to determine which path is the most advantageous both for the seller and the buyer. The option chosen can also have important repercussions on the real estate broker's or agency’s right to receive compensation. The court cases commented upon below are a good illustration. That is why licence holders must remain vigilant, because some transactions could fall under the jurisdiction of the Securities Act.

The Real Estate Brokerage Act and the Securities Act

The Real Estate Brokerage Act is applied within the framework of the operations provided for in its Sections 1 and 1.1:

1) For the purposes of this Act, a real estate brokerage contract means:

1. a contract by which a party, the client, for the purpose of entering into an agreement for the sale or lease of an immovable, asks the other party to act as its intermediary in dealing with persons who might be interested in purchasing or leasing the immovable and, possibly, in bringing about an agreement of wills between the client and a buyer, promisor-buyer or promisor-lessee;

2. a contract by which a party, the client, for the purpose of entering into an agreement for the purchase or lease of an immovable, asks the other party to act as its intermediary in dealing with persons who are offering an immovable for sale or lease and, possibly, in bringing about an agreement of wills between the client and a seller, promisor-seller or promisor-lessor.

A contract by which an intermediary obligates himself or herself without remuneration is not a real estate brokerage contract under this Act.

1.1) For the purposes of section 1,

1. the following are considered to be immovables:

a) promise of sale of an immovable;

b) an enterprise, if the enterprise’s property, according to its market value, consists mainly of immovable property;

c) a  mobile  home  placed  on  a  chassis,  with  or  without   a  permanent foundation;

2. an exchange is considered to be a sale.

Section 148 of the Securities Act states that no person may act as a dealer or adviser unless the person is registered as such with the Autorité des marchés financiers. Pursuant to section 149 of this Act, natural persons acting for the account of a dealer or adviser must be registered as representatives. Section 5 of this Act defines the dealer as:

“a person engaging in or holding himself out as engaging in the business of:
(1) trading in securities as principal or agent;
(2) distributing a security for his own account or for another's account; or
(3) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of an activity described in paragraph 1 or 2; (...)”

These two Acts are of public record, which means that their stipulations may not be set aside, even with the agreement of the parties. That is why anyone, who acts as an intermediary in the sale of an enterprise of which the assets, according to their market value, consists mainly of immovable property, must hold a licence issued under the Real Estate Brokerage Act. In fact, the sale of an enterprise, under these circumstances, is provided for in Section 1 of this Act, quoted above. As for the right of the real estate broker or agency to receive compensation upon the sale of a company's capital shares, the courts have analyzed two typical situations that I will present here. It should be noted that when these judgments were made, the definition of the scope of application read differently.

The case of a brokerage contract including a sale of shares

The Court of Appeal has ruled on the issue of the sale of shares by a real estate agency. This was in the Pouliot v. Royal Trust case. In this case, Royal Trust's real estate broker had been directed by Pouliot to sell all the shares he held in Air Gaspé Inc. The broker carried out the transaction, and the end result was a sale of the shares to the Québecair company.

Following this sale, Royal Trust claimed a compensation payment from Michel Pouliot. The Court of Appeal decided that the agency did not have a right to this compensation, since it was not registered under the Securities Act. A second ruling, made by the Superior Court in Gagnon v. Robert Girard et Ass. Inc., reiterated the arguments adopted in the Pouliot affair.

The case of a brokerage contract including a sale of assets... ending in a sale of shares

The Court of Appeal's decision in the Kurtz v. Tingley Ltd. case is a good illustration of this type of transaction. The parties had signed an agreement under which Kurtz agreed to pay Tingley Ltd. 50% of the total compensation as a finder's fee, to thank the company for introducing it to Robin Hood Multifoods Ltd., a company that was interested in purchasing S. Coorsh & Sons Ltd. In the end, the transaction took place in the form of a sale of shares.

In this case, the Court awarded Tingley Ltd. the right to receive compensation, even though it was not registered with the Securities Commission, predecessor of Autorité des marchés financiers. The judge considered that, although the transaction involved securities and the Securities Act did apply, the contract agreed upon by the two parties was of a wholly different type. In fact, the object of the agreement between the parties was the sale of a commercial enterprise. The fact that the purchase was negotiated through a transfer of shares rather than of assets was merely incidental. In short, the company's services were used not for the purpose of a sale of securities but in order to find a buyer for the business.

A 1984 ruling of the Superior Court, Berger v. Saint-Jean, also takes the side of the agency. In this case, Saint-Jean had been directed to sell the immovable and equipment of a brewery. A promise to purchase was signed, but the parties decided to convert the sale of immovable into a sale of shares, because of the financial implications.

As in the previously-mentioned case, the Court awarded the real estate agency the right to receive compensation for similar reasons. The Court decided that the fact that shares were sold in lieu of assets was no more than a particular method of executing the promise to purchase. The promise to purchase provided for the sale of the immovable and equipment, not of shares. Finally, the judge added that the role that the real estate broker had actually played must be taken into consideration. The same principles were applied in 1995 and 1997 in the Immeubles Action Ltée v. Perron and 2945-9609 Québec inc. v. Leblond cases.

Conclusion

To render their decisions concerning the right to compensation of licence holders in question, the courts have taken into account that the Securities Act states that no person may act as a broker or advisor unless he or she is registered as such with the Autorité des marchés financiers. The situation seems less clear when a brokerage contract already agreed upon by a real estate broker or agency and a company includes assets and is ultimately executed through a sale of shares.

The courts that have examined the question of the right that a real estate agency has to receive compensation upon the sale of shares concentrated their attention on the tasks related to the contract agreed upon with the real estate agency, regardless of the fact that the transaction ended with a sale of shares.

The true nature of the legal transaction engaged in by the real estate broker or agency must be determined. Brokerage contracts must therefore be drafted in a clear and precise manner, for in the case of a dispute, as we have seen, the court will use this document as a basis for ruling on the nature of the services rendered and therefore on the right of the broker or agency to receive compensation.

As for the application and interpretation of the Securities Act, it is important to check the website of the Autorité des marchés financiers, which is responsible for the administration of this Act, at www.lautorite.qc.ca.