RBC Dominion Securities Inc v Crew Gold Corporation: Seeking Contractual Clarity in M&A Engagement Letters

In merger and acquisition (“M&A”) transactions, investment banks are tasked with guiding their clients through a successful sale of their company.

Similar to a real estate agent, an investment bank may undertake a number of tasks to ensure a successful sale, including: preparing a timetable, identifying purchasers, soliciting offers, and providing financial analysis. In return, investment banks receive a success fee, typically payable upon the successful completion of the transaction.

Such financial advisory services are often a critical factor in completing a successful deal. But what happens when they are not? Should fees payable to a financial advisor be denied when the investment bank plays no role in an otherwise successful transaction? This question is at the heart of the Ontario Court of Court of Appeal’s (“ONCA”) decision in RBC Dominion Securities Inc v Crew Gold Corporation, 2017 ONCA 648 [Crew Gold, ONCA].

Case Background: Show Me The Money

The appellants, RBC Dominion Securities Inc. and Royal Bank of Canada Europe Limited (together “RBC”), contracted with the respondent, Crew Gold Corporation (“Crew”), to provide investment-banking services under an engagement letter (the “Agreement”) in October 2009.  Under the agreement, RBC agreed to provide services “in connection with the Transaction,” which included financial analysis and advice on structuring, planning and negotiating the Transaction. The Agreement also stipulated that RBC was entitled to a Success Fee “if a Transaction [was] completed involving any party, whether or not solicited by RBC, pursuant to an agreement to effect or otherwise complete a Transaction entered into during the term of its engagement or for a period of twelve months after termination of its engagement” (RBC Dominion Securities Inc v Crew Gold Corporation, 2016 ONSC 5529, para 10 [Crew Gold, ONSC]).

A “Transaction” was defined in the Agreement as follows:

i) a sale of all or a substantial portion of the shares, business or assets of the Company to a third party, (ii) an investment by a third party in the Company that results in a change of control of the Company or (iii) an amalgamation, arrangement or other business transaction involving the Company and a third party to effect such sale or disposition.” (Crew Gold, ONSC, para 10).

Unbeknownst to either RBC or Crew, third-party bidders not included on RBC’s purchase list were prepared to purchase control stakes in Crew without the benefit of RBC’s assistance, analysis or due diligence. In particular, Endeavour Financial Corporation (a Vancouver-based investment bank) and OAO Severstal (a Russian mining company) both purchased minority stakes in Crew Gold with the intention of eventually acquiring a control position in the company.  While this third-party takeover process was unfolding, RBC offered to assist Crew with these new developments, but its assistance was rebuked. Instead, Crew engaged another investment bank to assist with the transaction. Crew terminated its agreement with RBC in April 2010. In July 2010, OAO Severstal succeeded in acquiring a majority stake in Crew.

In late August 2010, RBC sent the first in a series of Success Fee invoices to Crew, claiming an amount in excess of US$5,700,000. After Crew refused to pay the Success Fee invoices, RBC commenced the underlying action.

The ONCA Decision: No Free Lunch (As Per This Contract)

At trial, the Ontario Superior Court rejected RBC’s claim. The trial judge ruled that the intention of the engagement letter was for RBC to be the “orchestra leader” of the Transaction, and that this was the basis for which it would be paid for services rendered.  The case was subsequently appealed to the ONCA where RBC advanced three grounds of appeal, arguing that:

  1. The trial judge failed to consider the plain words of the Agreement in the context of the contract as a whole, and in a manner that gave meaning to all of its terms and avoided an interpretation that would render one or more of its terms ineffective.
  2. The trial judge failed to correctly consider the objective evidence of the surrounding circumstances and relied on his findings as to the parties’ subjective intentions or the lack thereof, and allowed those findings to overwhelm the wording of the Agreement.
  3. The trial judge failed to consider the commercial reasonableness of the interpretation of the Agreement advanced by RBC (Crew Gold, ONCA, para 31).

On appeal, the ONCA disposed of each claim in turn. The court characterized the grounds of appeal as issues of contractual interpretation involving mixed fact and law and accordingly applied the “palpable and overriding error” standard of review (Sattva Capital Corp. v Creston Moly Corp, 2014 SCC 53, para 50 [Sattva]). Furthermore, the court emphasized the need to interpret a contract as a whole and in a way that gives meaning to all of its terms (Salah v Timothy’s Coffees of the World Inc, 2010 ONCA 673, para 16 [Salah]).

RBC’s interpretation was that the language of the Agreement was so broad and general as to permit the claim even though there was no causal link between RBC and either of Endeavour Financial Corporation or OAO Severstal’s investments in Crew. Applying the principles of Sattva and Salah to the case at bar, the ONCA found RBC’s interpretation to be incorrect, focusing too much on the term “Transaction” within the Agreement without considering the context of the deal as a whole. Instead, the ONCA adopted Crew’s position that the provision of a very large “Success Fee” to be paid on completion of the Transaction was presumably meant to reward RBC for its success in completing the Transaction (Crew Gold, ONCA, para 39). As RBC was unable to provide most of the anticipated advisory services, the ONCA ruled that they were not privy to such a Success Fee.

The ONCA also disagreed with RBC’s claim that the trial judge relied on subjective intention rather than objective evidence. The court found that the trial judge did no more than review the objective intent of Agreement and made no reliance on RBC or Crew’s subjective intent.

Lastly, the ONCA found that there was commercial reasonableness in the trial judge’s ruling. Indeed the court found that the alternative interpretation advocated by RBC “would have resulted in a significant windfall, with RBC receiving a very large Success Fee where there was no association between any services it provided Crew and the transaction” (Crew Gold, ONCA, para 55).

Final Thoughts: Put It In Writing

Crew Gold could spark a revision of the terms by which companies engage with investments banks and financial advisors. In particular, investment banks may seek to specify that “no causal link” is required between their actions and a successful closing and instead make explicit in contractual terms that they shall nonetheless be paid for a transaction in which they provided services connected to the goals of the transaction even if their services did not lead to the eventual success of the transaction in its final form. Moreover, more modest characterizations of “Success Fees” with alternative wordings such as “Completion Fees” may temper the expectation that such payouts need necessarily be linked to a financial advisor’s actions.

Given the unpredictable outcomes in M&A transactions, companies engaging in deals and their respective counsel should pay closer attention to so-called boilerplate language present in such engagement letters.



Scott Lin

Scott is currently a JD/MBA student at Osgoode Hall Law School and the Schulich School of Business. Prior to law school, he worked a lecturer at the University of Western Ontario, where he taught first-year Introduction to Business. He will be completing his articles at a firm in Toronto, with interests in the areas of corporate/commercial and competition law.

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