CLIENT ALERT
SJC Looks Into Terms and Context of Consulting Agreement to Determine Whether it Requires a “Transaction in Securities.”
By: Michael Lambert and Deniz Harrison
March 30, 2020
The Supreme Judicial Court recently took a hard look into the terms of, and context surrounding, a contract for consulting and advisory services in connection with sourcing capital for a business transaction. In deciding whether to overturn the seven-figure jury verdict, the SJC asked whether the contract in question required effecting transactions in securities, thus requiring the appellant to register as a broker-dealer.
Lightship Global Ventures, LLC (“Lightship”) contracted with NTV Management, Inc. (“NTV”) to provide “consulting and advisory services” in connection with Lightship’s efforts to acquire “the business and assets” of salary.com from IBM. NTV was to “source capital” from “agreed upon target investors and/or lenders” and to assist Lightship, in a “mutually agreed” manner, in “structur[ing] financing transactions” and “facilitat[ing] and participat[ing] in meetings and due diligence with capital sources.” If NTV succeeded in finding sources of capital that ultimately were accepted by Lightship and provided capital for the final acquisition, NTV would earn a commission commensurate with that amount of capital. If NTV did not introduce any sources of capital that actually were used in the purchase, but introduced at least ten “qualified sources of capital,” it would earn an “advisory fee” of $330,000.
Ultimately, Lightship terminated the contract with NTV and worked with another partner not introduced by NTV. Lightship took the position that NTV did not earn a commission or an advisory fee.
NTV sued Lightship for: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; and (3) violation of Chapter 93A, arguing that NTV was entitled to commissions, or alternatively, the advisory fee. Lightship moved for summary judgment and the Superior Court judge determined that NTV had failed to present sufficient evidence that it would have introduced capital and earned a commission. NTV’s only surviving claim, therefore, was for breach of contract due to Lightship’s failure to pay NTV the $330,000 advisory fee.
A Superior Court jury subsequently found Lightship liable for breach of contract and breach of the implied covenant of good faith and fair dealing, and awarded NTV damages of $330,000. The jury also found that Lightship had knowingly or willfully engaged in unfair or deceptive practices in violation of G. L. c. 93A, and awarded NTV treble damages.
Lightship moved to invalidate the verdict on the basis of a previously-asserted affirmative defense, arguing that NTV could not enforce the contract because it had not registered as a broker-dealer under G. L. c. 110A, § 201 (a), and the Federal Securities Exchange Act of 1934 (Federal act), 15 U.S.C. § 78o(a). The trial judge concluded that NTV was in fact required to register, and thus vacated the jury award entirely. NTV appealed.
The issue on appeal was whether the contract requiring NTV to “source capital and structure financing transactions from agreed-upon target investors and/or lenders” for Lightship triggered an obligation for NTV to register as a securities broker-dealer under MA and Federal securities laws. If so, the contract would be invalid and unenforceable.
Under both the MA and Federal acts a broker-dealer is any person engaged in the business of effecting transactions in securities for the account of others or himself. Thus, in assessing whether NTV should have registered as a broker-dealer in order to carry out the contract, the Court considered two questions to determine whether the contract required that transactions in securities be effected: (1) whether the instrument that is the subject of the transaction is a “security” and, if so, (2) whether the conduct required by the contract amounts to “effecting transactions.” In analyzing the first question, the Court noted that various examples of securities enumerated in the statutory definition of a security under both state and federal law are to be considered securities “unless the context otherwise requires.” See G. L. c. 110A, § 401; 15 U.S.C. § 78c(a). Accordingly, determining whether a particular instrument is a security is context dependent. Where, as in this case, the precise character of an instrument is unclear, the Court considered whether the instrument is an “investment contract” – defined as an “investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” United Hous. Found., Inc. v. Forman, 421 U.S. 837, 852 (1975).
In the instant case, the contract provided that NTV was to “source capital and structure financing transactions from agreed-upon target investors and/or lenders” and that “NTV expect[ed] to introduce and facilitate investment from third party sources collectively able to finance all levels of the transactions (i.e., both equity and debt).” However, Lightship retained the right to determine “whether or not to enter into a definitive arrangement,” and agreed to “act in good faith with NTV to determine the capital structure and sources of capital” that were in its best interest. Accordingly, the SJC found that the terms of the contract did not require NTV to facilitate any particular form of transaction and instead allowed Lightship to determine what types of transactions to pursue. In addition, the Court noted that the contract clearly states that financing obtained could be from “investors and/or lenders,” implying that different forms of financing are possible. Moreover, the contract states that NTV would solicit such financing only from “agreed-upon” sources, over which Lightship retained the rights of “coordination, oversight, and direction,” making the specific types of transactions indeterminate and subject to future agreement. Ultimately, the SJC found that because Lightship retained an active role in the solicitation of financing as well as managerial responsibilities, the instrument could not be considered an “investment contract” and is thus not a “security.” As a result, NTV was not required to register as a broker-dealer and the contract was enforceable. Accordingly, the Court reinstated the jury verdict.
The SJC’s decision highlights the importance of properly outlining the managerial responsibilities and the scope of the work to be performed in a given arrangement. Had Lightship delegated all financing decisions to NTV and retained less control, NTV would have been considered a broker-dealer and, having failed to register, would have been prevented from enforcing the contract. Instead, the Court found that the investment contract did not require the transaction of securities and upheld NTV’s seven-figure recovery against Lightship. Specific contract language, as well as the context of the parties’ relationship and responsibilities, drove the result, highlighting the importance of evaluating both at the outset of a consulting and advisory relationship.